<PAGE>
As filed with the Securities and Exchange Commission on March 10, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
THE PANTRY, INC.
(Exact name of registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 5411 56-1574463
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or
organization) Classification Code Number) Identification No.)
</TABLE>
P.O. Box 1410
1801 Douglas Drive
Sanford, North Carolina 27331-1410
(919) 774-6700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
WILLIAM T. FLYG
Chief Financial Officer
P.O. Box 1410
1801 Douglas Drive
Sanford, North Carolina 27331-1410
(919) 774-6700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
CYNTHIA M. DUNNETT, ESQ. VALERIE FORD JACOB, ESQ.
CARRIE WALKER, ESQ. Fried, Frank, Harris, Shriver & Jacobson
Riordan & McKinzie One New York Plaza
300 South Grand Avenue, Twenty-Ninth Floor New York, New York 10004
Los Angeles, California 90071 (212) 859-8000
(213) 629-4824
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]__________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]__________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]_________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]_________
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Title of Each Class of Proposed Maximum Amount of
Securities to be Registered Aggregate Offering Price(1) Registration Fee(1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.01 per share......... $100,000,000 $27,800
- ------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) based upon an estimate of the maximum offering
price.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated March 10, 1999
PROSPECTUS
Shares
The Pantry, Inc.
Common Stock
-------------
This is The Pantry's initial public offering of common stock. All of the
shares of common stock are being sold by The Pantry.
The Pantry expects the public offering price to be between $ and $ per
share. Currently, no public market exists for the shares. We will apply to have
the common stock quoted on the Nasdaq National Market under the symbol "PTRY."
Investing in our common stock involves risks which are described in the
"Risk Factors" section beginning on page 12 of this prospectus.
-------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price........................... $ $
Underwriting discount........................... $ $
Proceeds, before expenses, to The Pantry........ $ $
</TABLE>
The underwriters may also purchase up to an additional shares from The
Pantry, at the public offering price less the underwriting discount, within 30
days from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
-------------
Merrill Lynch & Co. NationsBanc Montgomery Securities LLC
-------------
The date of this prospectus is , 1999.
<PAGE>
1. Map of southeast region showing store locations
2. Interior/exterior pictures of convenience stores
3. Financial performance graphs depicting
quarterly revenues, quarterly EBITDA
and store growth
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 5
Risk Factors............................................................. 12
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial Data.................................................. 22
Unaudited Pro Forma Financial Data....................................... 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 35
Industry Overview........................................................ 54
Business................................................................. 56
Management............................................................... 71
Certain Relationships and Related Transactions........................... 78
Security Ownership of Certain Beneficial Owners and Management........... 79
Description of Capital Stock............................................. 81
Shares Eligible for Future Sale.......................................... 82
Material U.S. Tax Considerations Applicable to Non-U.S. Holders of the
Common Stock............................................................ 84
Underwriting............................................................. 88
Legal Matters............................................................ 91
Experts.................................................................. 91
Additional Information................................................... 92
Index to Financial Statements............................................ F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
----------------
Industry data included in this prospectus is derived primarily from the
National Association of Convenience Stores 1998 State of the Industry report
and other sources generally relied upon within the convenience store industry.
The Pantry has not independently verified this data.
3
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
4
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including the
"Risk Factors" section and our consolidated financial statements. Unless
otherwise indicated, all information in this prospectus reflects our for
stock split which will occur prior to the completion of the offering and
assumes that the underwriters will not exercise their over-allotment option.
The Pantry
The Pantry is a leading convenience store operator in the southeastern
United States and the third largest independently operated convenience store
chain in the country. Our stores offer a broad selection of merchandise and
gasoline as well as ancillary services designed to appeal to the convenience
needs of our customers. Since the arrival of our current management team in
1996, we have experienced significant growth through a combination of
management initiatives and strategic acquisitions. As of February 28, 1999, we
operated 1,151 stores located in Florida, North Carolina, South Carolina,
Kentucky, Indiana, Tennessee and Virginia.
Our stores are generally situated in suburban areas of rapidly growing
markets, coastal/resort areas and smaller towns. Over 90% of our stores are
located in northern and central Florida, North Carolina and South Carolina,
which are among the fastest growing states in terms of population, employment
and gross state product. We believe that we have the number one market share in
each of our principal regions based on number of stores. On a pro forma basis
for fiscal 1998 we generated total revenue of $1.7 billion and EBITDA of $93.2
million.
Industry Overview
The United States convenience store industry is large and growing. In
1997 over 95,700 convenience stores operating throughout the United States
generated sales of $156.2 billion. The convenience store industry is larger in
size than many other retail sectors, including the home improvement, drug store
and department store sectors, which had 1997 sales of approximately $150
billion, $100 billion and $76 billion, respectively. Over the last ten years,
industry sales have grown at a 6.4% compound annual growth rate (CAGR),
outpacing the 3.1% CAGR in the consumer price index, a measure of retail
inflation. We believe the convenience store industry exhibits several
characteristics that have historically tended to insulate it from seasonality
and global and domestic economic trends. These characteristics include: (1) a
high percentage of sales from necessity items, including gasoline, consumables
and food, (2) a small average transaction size and (3) the industry's
convenience format.
The convenience store industry provides opportunities for a large, well-
managed operator to realize economies of scale and increase sales and
profitability due to the industry's high degree of fragmentation, lack of
merchandising focus and insufficient capital investment. Since the arrival of
our current management team in 1996, we have capitalized on these opportunities
and have grown from 379 stores in fiscal 1996 to 1,151 stores as of February
28, 1999 and from $384.8 million in total revenue in fiscal 1996 to $1.7
billion in total pro forma revenue for fiscal 1998.
5
<PAGE>
Operating Strategy
In February 1996, Freeman Spogli, our majority shareholder, recruited our
current management team headed by Peter Sodini, an experienced food retailing
executive. Mr. Sodini and his team, with an average of 32 years of food
retailing experience, implemented an operating strategy that contributed to the
following financial results:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------
Sept. 26, Sept. 25, Sept. 24,
1996 1997 1998 CAGR
--------- --------- --------- -----
<S> <C> <C> <C> <C>
Total revenue (in millions)............. $384.8 $427.4 $984.9 60.0%
EBITDA(a) (in millions)................. $ 16.3 $ 20.3 $ 60.5 93.0%
Income from operations (in millions).... $ 1.9 $ 10.8 $ 31.8 312.2%
EBITDA margin........................... 4.2% 4.7% 6.1% --
Operating margin........................ 0.5% 2.5% 3.2% --
Average merchandise sales per store (in
thousands)............................. $479.8 $525.8 $532.1 5.3%
Average gallons sold per store (in
thousands)............................. 448.8 501.2 582.8 14.0%
Same store merchandise sales growth..... 2.8% 8.5% 5.3% --
Same store gasoline gallon growth....... (4.3)% 7.2% 4.8% --
Number of stores (end of period)........ 379 390 953 --
</TABLE>
- --------
(a) EBITDA represents income from operations before depreciation and
amortization, merger integration costs, restructuring charges and
impairment of long-lived assets.
We have achieved these results through implementation of a five-pronged
operating strategy. Specific elements of our operating strategy include the
following:
Focus on Merchandise. Since 1996, we have increased same store
merchandise sales and gross profit dollars by focusing on four key areas:
. increasing the merchandise SKU count in stores from 3,900 to 4,750
currently
. keeping fully stocked positions of and prominently displaying brand
name, high volume destination items
. adding impulse items that carry higher than average margins
. improving promotional displays, signage and overall store presentation
Improve Gasoline Offering. We believe that gasoline is an essential
product offering and have implemented a number of initiatives that have
increased gasoline volume and gasoline gross profit dollars. These initiatives
include:
. increasing the competitiveness of our gasoline pricing while
maintaining acceptable profit margins
. upgrading gasoline facilities and equipment
. consolidating our gasoline purchases with a concentrated group of
suppliers
. optimizing our mix of locations selling branded and unbranded gasoline
. entering into strategic branding agreements that provide volume rebates
and vendor allowances
6
<PAGE>
Reduce Expenses Through Strengthened Vendor Relationships and Tightened
Expense Controls. We have developed strong relationships with our merchandise
and gasoline suppliers. As a result, we have reduced our purchasing costs and
received greater allowances for retail displays, targeted marketing and
facility and gasoline equipment upgrades. In addition, since 1996, we have
adhered to a disciplined cost-savings program that has allowed us to reduce
operating expenses without sacrificing customer service. Total operating
expenses as a percentage of total revenue have declined from 23.2% in fiscal
1996 to 20.5% in fiscal 1998.
Increase Capital Expenditures. Since fiscal 1996, we have implemented a
capital expenditure program focused on upgrading store facilities and gasoline
equipment. Based on data from more than 100 of our stores that have been
remodeled, average merchandise sales increased 10.3%, gasoline gallons
increased 17.8% and EBITDA increased 35.3% during the twelve months following
remodeling. In addition, we are currently upgrading our management information
systems, including store, corporate accounting and management reporting
systems. We have also invested approximately $12.8 million since fiscal 1995 to
comply with environmental requirements and are in substantial compliance with
EPA requirements and regulations.
Grow Through Acquisitions and New Store Development. From April 1997
through February 1999, we acquired 892 convenience stores in 11 major and
numerous smaller transactions. We have materially improved the results of
operations in our acquired stores and believe there are opportunities to
continue to improve results at these locations. Our acquisition strategy is
complemented by a disciplined new store development program in select markets.
Growth Strategy
We believe that there is significant opportunity to continue to increase
sales, productivity and profitability through both the continued implementation
of our operating strategy at existing and newly acquired stores and our
strategy to double our store base in existing markets and expand into
contiguous markets. Specific elements of our growth strategy include the
following:
Improve Same Store Merchandise Sales and Gasoline Volume Growth. We focus
on continuous improvement of same store sales and profit growth at existing and
newly acquired stores through (1) key merchandising initiatives, (2)
competitive gasoline prices, (3) upgraded facilities, (4) new service
offerings, (5) improved technology, (6) improved customer service and (7)
targeted cost savings initiatives. Our merchandise and gasoline gallon sales
also benefit from the location of our operations, which are largely in some of
the fastest growing demographic markets in the United States.
Invest in Technology and Store Automation. Over the next two years, we
will invest over $15 million on new technology in three areas: (1) at the
gasoline pump, (2) in the store and (3) in our corporate offices. We believe
these investments will increase transaction speed at the pump and in the store
and improve customer transaction information which will allow us to optimize
merchandise mix, gross margin and inventory control at each of our stores.
Pursue Acquisitions and New Store Growth. The Pantry believes that growth
through acquisition is currently more economically attractive than growth
through new store development because: (1) acquired stores provide an instant
installed base of revenue and cash flow, (2) we are
7
<PAGE>
able to grow more rapidly, thus providing increased benefits of economies of
scale, (3) we are able to enter new markets without adding merchandise square
footage or additional gasoline outlets to these markets, (4) acquisitions
provide access to established high quality locations and to markets that
restrict new store development through stringent environmental and zoning
regulations and (5) acquiring stores is a lower cost alternative to developing
new stores.
We believe there are enough attractive acquisition opportunities in our
markets to double our store base in existing markets and expand into contiguous
markets. There are approximately 25,000 convenience stores operating in our
existing and contiguous markets. From April 1997 through February 1999, we have
acquired 892 convenience stores whose results should improve as we continue to
implement our operating strategy at these stores. We also believe that the
creation of a public market for our common stock through this offering will
enable us to offer our common stock as consideration for acquisitions and will
further enhance our ability to make acquisitions on favorable terms.
Our strategy is to continue to realize significant growth and cost
savings from acquisitions through (1) remerchandising acquired stores, (2)
upgrading store facilities and gasoline equipment, (3) selectively rebranding
sites, (4) negotiating better terms with our suppliers and (5) leveraging our
existing infrastructure to realize economies of scale and eliminate duplicative
overhead.
Our acquisition strategy is complemented by a new store development
program in existing and contiguous markets. In opening new stores, we have
focused on selecting store sites on highly traveled roads in coastal/resort and
suburban markets or near highway exit and entrance ramps that provide
convenient access to store locations. We opened seven new stores in fiscal 1998
and expect to open eight to ten new stores annually.
Recent Developments
ETNA Acquisition. On February 25, 1999, we acquired 60 convenience stores
operated under the trade name ETNA located throughout North Carolina and
Virginia. Many of these convenience stores are located in markets where we are
underrepresented, including Virginia. Gasoline is sold at all locations with 50
stores offering unbranded gasoline and 10 selling gasoline under the CITGO
brand.
Handy Way Acquisition. On January 28, 1999, we acquired 121 convenience
stores operated under the name Handy Way located in central Florida. The stores
are strategically located in rural and urban fringe market areas with
relatively limited competition from major convenience store chains and
supermarkets. Gasoline is sold at all Handy Way stores under the brand name
CITGO. In addition, Handy Way has developed a food service operation, including
82 quick service restaurants with nationally branded food franchises such as
Subway, Church's, Taco Bell and Hardee's.
----------------
The Pantry was founded in North Carolina in 1967. Affiliates of Freeman
Spogli & Co. Incorporated and affiliates of Chase Manhattan Capital, L.P.
acquired interests in our equity securities in November 1995, and have made
several subsequent equity investments. Our principal executive offices are
located at 1801 Douglas Drive, Sanford, North Carolina 27331-1410. Our
telephone number is (919) 774-6700.
8
<PAGE>
The Offering
Common stock offered by
The Pantry............. shares
Shares outstanding
after the offering..... shares(a)
Use of proceeds......... We estimate that the net proceeds from the offering
will be approximately $ million. We intend to use
these net proceeds to:
. repay outstanding debt
. redeem outstanding preferred stock and pay accrued
dividends
Risk factors............ See "Risk Factors" and the other information included
in this prospectus for a discussion of factors you
should carefully consider before deciding to invest
in shares of the common stock.
Proposed Nasdaq
National Market
symbol................. PTRY
- --------
(a) Excludes shares of our common stock reserved for issuance pursuant to
options outstanding under our stock option and stock subscription plans, of
which shares were subject to outstanding options as of December 24,
1998, and shares of our common stock reserved for issuance pursuant to
warrants held by certain of our stockholders. This number also assumes that
the underwriters do not exercise their over-allotment option. If the over-
allotment option is exercised in full, we will issue and sell an additional
shares.
9
<PAGE>
Summary Financial Data
The following table presents summary consolidated financial and store
operating data which is derived from our consolidated financial statements. Our
financial results in the periods presented below reflect the operating strategy
implemented by our current management team that joined The Pantry in 1996. The
summary pro forma financial data gives effect to the redemption of our senior
notes, certain acquisitions and the application of the proceeds of the offering
as if these events occurred on December 24, 1998 with respect to pro forma
balance sheet items and at the beginning of the pro forma period for the
statement of operations items. The financial position and results of operations
for the quarters ended December 25, 1997 and December 24, 1998 have been
derived from The Pantry's unaudited financial statements and, in our opinion,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation. They are not necessarily indicative of the
results that may occur for the full fiscal year. Since the information in this
table is only a summary, you should read "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Unaudited Pro Forma
Financial Data" and our consolidated financial statements and related notes.
<TABLE>
<CAPTION>
Fiscal Year Ended Quarter Ended
--------------------------------------------- ------------------------------
Pro Forma Pro Forma
Sept. 26, Sept. 25, Sept. 24, Sept. 24, Dec. 25, Dec. 24, Dec. 24,
1996 1997 1998 1998 1997 1998 1998
---------- --------- --------- ---------- --------- -------- ---------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenue........... $384,807 $427,393 $ 984,884 $1,659,695 $ 195,171 $315,607 $413,149
Gross profit............ 91,218 97,279 233,351 364,340 45,365 72,380 94,542
Income from operations.. 1,874(a) 10,771 31,843(a) 50,397(a) 4,877 10,493 13,966
Interest expense........ (11,992) (13,039) (28,946) (37,369) (5,817) (8,912) (9,477)
Net income (loss) before
extraordinary item..... (8,114) (975) 4,673 9,422 (89) 1,065 2,638(a)
Extraordinary loss(b)... -- -- (7,998) -- (6,800) --
Net income (loss)....... (8,114) (975) (3,325) -- (6,889) 1,065
Earnings per share
before extraordinary
loss(c):
Basic..................
Diluted................
Weighted-average number
of shares outstanding (c):
Basic..................
Diluted................
Other Financial Data:
EBITDA(d)............... $ 16,250 $ 20,275 $ 60,501 $ 93,151 $ 10,028 $ 18,683 $ 24,508
Net cash provided by
(used in):
Operating activities... $ 5,415 $ 7,338 $ 48,032 -- $ (928) $ (3,510) --
Investing activities... (7,204) (25,079) (286,493) -- (139,103) (34,508) --
Financing activities... (3,872) 15,750 269,518 -- 168,506 18,683 --
Store operating expenses
as a percentage of
sales.................. 15.0% 14.1% 14.2% 13.3% 14.4% 13.9% 13.8%
General and
administrative expenses
as a percentage of
sales.................. 4.5% 3.9% 3.3% 3.1% 3.7% 3.2% 3.1%
Operating income as a
percentage of sales.... 0.5% 2.5% 3.2% 3.0% 2.5% 3.3% 3.4%
Store Operating Data:
Number of stores (end of
period)................ 379 390 953 -- 867 973 --
Average sales per store:
Merchandise sales...... $ 479.8 $ 525.8 $ 532.1 -- $ 123.1 $ 144.7 --
Gasoline gallons (in
thousands)............ 448.8 501.2 582.8 -- 132.2 184.5 --
Comparable store sales
growth(e):
Merchandise sales...... 2.8% 8.5% 5.3% -- 3.6% 10.5% --
Gasoline gallons....... (4.3)% 7.2% 4.8% -- 7.9% 5.1% --
</TABLE>
(continued on following page)
10
<PAGE>
<TABLE>
<CAPTION>
December 24, 1998
------------------------
Actual As Adjusted(f)
-------- --------------
(dollars in thousands)
<S> <C> <C>
Balance Sheet Data:
Working capital (deficiency)........................... $(18,120) $(16,374)
Total assets........................................... 568,560 707,409
Total debt and capital lease obligations............... 358,345 409,953
Shareholders' equity (deficit)......................... 40,745 112,001
</TABLE>
- --------
(a) During fiscal 1996, we recorded restructuring charges of $2.2 million
pursuant to a formal plan to restructure our corporate offices and
impairment of assets of $3.0 million. During fiscal 1998, we recorded an
integration charge of approximately $1.0 million for costs of combining our
existing business with the acquired business of Lil' Champ.
(b) During the year ended September 24, 1998, The Pantry incurred an
extraordinary loss of $8.0 million, $6.8 million of which was incurred in
the quarter ended December 25, 1997. This loss related to the cost of the
redemption of $51.0 million of senior notes and related consent fee
payments and write-off of deferred financing costs. Pro forma net income
before extraordinary loss for the year ended September 24, 1998 and for the
quarter ended December 24, 1998, excludes an extraordinary loss of
approximately $3.2 million (net of a tax benefit of $2.2 million) related
to the refinancing of existing bank debt and the redemption of $49.0
million of senior notes.
(c) Amounts exclude shares of common stock reserved for issuance under our
stock option and stock subscription plans, of which shares were subject
to outstanding options as of December 24, 1998, and shares of common
stock reserved for issuance pursuant to warrants held by certain of our
shareholders.
(d) EBITDA represents income from operations before depreciation and
amortization, merger integration costs, restructuring charges and
impairment of long-lived assets. EBITDA is not a measure of performance
under generally accepted accounting principles, and should not be
considered as 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 Pantry has included information
concerning EBITDA as one measure of our 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 our operating
performance. EDITDA as defined may not be comparable to similarly-titled
measures reported by other companies.
(e) The stores included in calculating comparable store sales growth are stores
that were under our management and in operation for both fiscal periods
during the comparable period.
(f) As adjusted reflects (1) all acquisitions completed after December 24,
1998, (2) redemption of our senior notes on January 28, 1999, (3)
borrowings under our bank credit facility and (4) the application of the
net proceeds of the offering, which are expected to be approximately $92
million.
11
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties not presently known to
us, or that we currently deem immaterial, may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In that case, the trading price of our common stock could decline,
and you may lose all or part of your investment.
Our dependence on gasoline sales makes us susceptible to interruptions in the
supply of gasoline and to increases in the cost of gasoline
Gasoline revenue has increased as a percentage of our total revenue over
the past three fiscal years and has averaged 51.4% of our total revenue during
this period. As a result, gasoline profit margins have a significant impact on
our earnings. The volume of gasoline sold by us and our gasoline profit margins
are affected by numerous factors outside of our control, including the supply
and demand for gasoline, volatility in the wholesale gasoline market and the
pricing policies of competitors in local markets.
We typically have no more than a seven-day supply of gasoline. Our
gasoline contracts do not guarantee an uninterrupted, unlimited supply in the
event of a shortage. These contracts do provide that we would receive the same
percentage of our normal supply as any other customer of a particular oil
company. We have not to date experienced a serious interruption in the supply
of gasoline. Although we can rapidly adjust our pump prices to reflect higher
gasoline costs, we can be adversely affected by a material, sudden increase in
the cost of gasoline if gasoline sales volume is reduced. A material increase
in the price of gasoline could adversely affect demand for gasoline. Reductions
in volume of gasoline sold or our gasoline profit margins could have a material
adverse effect on our results of operations. In addition, gasoline sales
generate customer traffic to our stores and as a result decreases in gasoline
sales could impact merchandise sales.
We depend on tobacco sales and may not be able to pass along price increases to
customers
Sales of tobacco products have averaged approximately 13% of our total
revenue over the past three fiscal years. National and local campaigns to
discourage smoking in the United States, as well as increases in taxes on
cigarettes and other tobacco products, may have a material impact on our sales
of tobacco products. The consumer price index for fiscal 1998 on tobacco
products increased approximately 15%. In November 1998, major cigarette
manufacturers that supply The Pantry increased prices by $0.45 per pack.
However, during December 1998, major cigarette manufacturers offered a rebate
to retailers of $0.45 per pack to offset the November 1998 price increase. We
passed along this rebate to our customers. Major cigarette manufacturers
offered no rebate in January 1999 and a $0.30 per pack rebate in February 1999.
In addition, these manufacturers announced a $0.55 per pack rebate for March
1999. We cannot assure you that major cigarette manufacturers will continue to
offer these rebates or that any resulting increase in prices to our customers
will not have a material adverse effect on our cigarette sales and gross profit
dollars. A reduction in the amount of cigarettes sold by The Pantry could
adversely affect our results. See "Business--Our Operations--Merchandise
Sales."
12
<PAGE>
Our acquisition strategy may not succeed due to competition for convenience
stores and lack of financing
A significant part of The Pantry's growth strategy is to acquire other
convenience stores that complement our existing stores or that broaden our
geographic presence. From April 1997 through February 1999, we acquired 892
convenience stores in 11 major and numerous smaller transactions. We expect to
continue to acquire convenience stores as an element of our growth strategy.
Acquisitions involve certain risks that could cause our actual growth or
operating results to differ from our expectations or the expectations of
security analysts. For example:
. We may not be able to identify suitable acquisition candidates or
acquire additional convenience stores on favorable terms. We compete
with others to acquire convenience stores. We believe that this
competition may increase and could result in decreased availability
or increased price for suitable acquisition candidates. It may be
difficult to anticipate the timing and availability of acquisition
candidates.
. We may not be able to obtain the necessary financing, on favorable
terms or at all, to finance any of our potential acquisitions.
. We may fail to successfully integrate or manage acquired convenience
stores.
. Acquired convenience stores may not perform as we expect or we may
not be able to obtain the cost savings and financial improvements we
anticipate.
In addition, during the acquisition process we may fail or be unable to
discover some of the liabilities of companies or businesses which we acquire.
These liabilities may result from a prior owner's noncompliance with applicable
federal, state or local laws. While we will try to minimize our potential
exposure by conducting investigations during the acquisition process, we cannot
assure you that we will identify all existing or potential liabilities.
Restrictive covenants contained in our existing bank credit facility and
indenture could limit our ability to finance future acquisitions, new locations
and other expansion of our operations. Credit facilities entered into in the
future likely will contain similar restrictive covenants. These covenants
require us to achieve specific financial ratios and to obtain lender consent
prior to completing certain acquisitions. Any of these covenants could become
more restrictive in the future. Our ability to respond to changing business
conditions and to secure additional financing may be significantly restricted
by these covenants. We may be prevented from engaging in transactions including
acquisitions which are important to our growth strategy. Any breach of these
covenants could cause a default under our debt obligations and result in our
debt becoming immediately due and payable.
Our rapid growth since 1996 presents management, administrative and operational
challenges
The Pantry is growing rapidly. We have grown from total revenue of $384.8
million in fiscal 1996 to total pro forma revenue of $1.7 billion in fiscal
1998. Our growth presents numerous managerial, administrative, operational and
other challenges. Our ability to manage the growth of our operations will
require us to continue to improve our operational, financial and human resource
management information systems and our other internal systems and controls.
The Pantry is in the process of upgrading its management information
systems. The new systems will fully automate our inventory and management
reporting processes. We expect that this upgrade will cost approximately $9
million over the next two fiscal years. We expect that the upgrade will be
completed prior to the end of fiscal 2000. Any failure to complete our
transition to these new systems may inhibit our growth plans.
13
<PAGE>
In addition, our growth will increase our need to attract, develop,
motivate and retain both our management and professional employees. The
inability of our management to manage our growth effectively, or the inability
of our employees to achieve anticipated performance or utilization levels,
could have a material adverse effect on our business.
We depend on one principal wholesaler for the majority of our merchandise
The Pantry purchases over 50% of its general merchandise, including most
tobacco products and grocery items, from a single wholesale grocer, McLane
Company, Inc., a wholly-owned subsidiary of Wal-Mart. In addition, McLane
supplies health and beauty aids, toys and seasonal items to all of our stores.
We have a contract with McLane until 2003, and we may not be able to renew the
contract upon expiration. We believe that our arrangements with vendors,
including McLane, have enabled us to decrease the operating expenses of
acquired companies after we complete an acquisition. Although we believe there
are adequate alternative supply sources, a change of suppliers could have a
material adverse affect on our cost of goods and results of operations.
Competition is intense in the convenience store and retail gasoline industries,
including competition with major oil companies
The convenience store and retail gasoline industries are highly
competitive. Changes in traffic patterns and the type, number and location of
competing stores could affect the performance of individual stores. Major
competitive factors include, among others, location, ease of access, gasoline
brands, pricing, product and service selections, customer service, store
appearance, cleanliness and safety. In addition, inflation, increased labor and
benefit costs and the lack of availability of experienced management and hourly
employees may adversely affect the convenience store industry.
The Pantry competes with numerous other convenience stores and
supermarkets. In addition, our stores offering self-service gasoline compete
with gasoline service stations, including service stations operated by major
oil companies and, more recently, supermarkets. Our stores also compete to some
extent with supermarket chains, drug stores, fast food operations and other
similar retail outlets. In some of our markets, certain competitors,
particularly major oil companies, have been in existence longer and have
substantially greater financial, marketing and other resources than us.
All of our stores are located in the southeastern United States, making us
dependent on the economic health of that region
Substantially all of our stores are located in the Southeast region of
the United States. As a result, our results of operations are subject to
general economic conditions in that region. In the event of an economic
downturn in the Southeast, our financial condition could be adversely impacted.
We depend on favorable weather conditions in the spring and summer months
Weather conditions in our operating area have a significant effect on our
operating results. During the spring and summer vacation season, customers are
more likely to purchase higher profit margin items at our stores, such as fast
foods, fountain drinks and other beverages, and more gasoline at our gasoline
locations. As a result, we typically generate higher revenues and gross margins
during warmer weather months in the Southeast, which fall within our third and
fourth quarters. If weather conditions are not favorable during these periods,
our operating results and cash flow from operations
14
<PAGE>
could be adversely affected. In addition, we have a significant number
(approximately 37%) of stores concentrated in coastal areas in the southeastern
United States, and are therefore exposed to damages associated with hurricanes,
tropical storms and other weather conditions in these areas. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Quarterly Results of Operations."
We have a history of losses
We have experienced losses during the most recent three fiscal years. Our
net losses were $8.1 million in fiscal 1996, $1.0 million in fiscal 1997 and
$3.3 million in fiscal 1998. We incurred interest expense of $12.0 million in
fiscal 1996, $13.0 million in fiscal 1997 and $28.9 million in fiscal 1998. We
also incurred an extraordinary loss of $8.0 million in fiscal 1998 related to
the early extinguishment of debt. We had net income of $1.1 million in the
first fiscal quarter of 1999. We cannot assure you that we will be profitable
in future periods or that we will not realize significant losses.
We are subject to extensive environmental regulation, including laws governing
underground storage tanks
Our business is subject to extensive environmental requirements,
particularly environmental laws regulating underground storage tanks or USTs.
Federal, state and local regulatory authorities have adopted regulations
governing USTs, a portion of which were phased in over a period ending in
December 1998. These regulations required us to make significant expenditures
for compliance with corrosion protection and leak detection requirements and
required spill/overfill equipment by December 1998. We are in substantial
compliance with the December 1998 upgrade requirements. Failure to comply with
any such laws or regulations could have a material adverse effect on us.
Under various federal, state and local laws, ordinances and regulations,
we may, as the owner or operator of our locations, be liable for the costs of
removal or remediation of contamination at these or our former locations,
whether or not we knew of, or were responsible for, the presence of such
contamination. The failure to properly remediate such contamination may subject
us to liability to third parties and may adversely affect our ability to sell
or rent such property or to borrow money using such property as collateral.
Additionally, persons who arrange for the disposal or treatment of certain
hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at sites where they are located, whether or not
such site is owned or operated by such person. Although we do not typically
arrange for the treatment or disposal of such hazardous substances, we may be
considered as having arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, may be liable for removal or remediation
costs, as well as certain other related costs, including governmental fines,
and injuries to persons, property and natural resources.
We estimate that our future expenditures for remediation of current
locations (net of reimbursements) will be approximately $4.5 million for which
reserves have been established on our financial statements. In addition, a
substantial amount will be expended for remediation on our behalf by state
trust funds established in our operating areas or other responsible third
parties (including insurers). To the extent third parties do not pay for
remediation as we anticipate, we will be obligated to make these payments,
which could materially adversely affect our financial condition and results of
operations. Reimbursements from state trust funds will be dependent on the
continued viability of these funds. The State of Florida trust fund ceased
accepting new claims for reimbursement for releases discovered after December
31, 1998. However, the State of Florida trust fund will continue
15
<PAGE>
to reimburse claims for remedial work performed on sites that were accepted
into its program before December 31, 1998. We have obtained private coverage
for remediation and third party claims arising out of releases reported after
December 31, 1998. We meet federal and Florida financial responsibility
requirements with respect to USTs in Florida through a combination of private
insurance and qualified self insurance.
As of December 24, 1998, The Pantry had a net reserve of $4.5 million to
address anticipated remediation obligations at its current facilities. However,
we may incur additional substantial expenditures for remediation of
contamination that has not been discovered at existing locations or locations
which we may acquire in the future. We cannot assure you that we have
identified all environmental liabilities at all of our current and former
locations; that material environmental conditions not known to us do not exist;
that future laws, ordinances or regulations will not impose material
environmental liability on us; or that a material environmental condition does
not otherwise exist as to any one or more of our locations. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Liquidity and Capital Resources" and "Business--Government Regulation and
Environmental Matters."
Government regulation could adversely impact wage rates and other aspects of
our business
Convenience stores, including stores that sell tobacco and alcohol
products, are subject to federal and state laws governing such matters as wage
rates, overtime, working conditions, citizenship requirements and alcohol and
tobacco sales. At the federal level, there are proposals under consideration
from time to time to increase minimum wage rates and to introduce a system of
mandated health insurance. A violation or change of these laws, or adoption of
any these proposals, could have a material adverse effect on our financial
condition. See "Business--Government Regulation and Environmental Matters."
The Pantry is controlled by one principal stockholder
After this offering, Freeman Spogli will control approximately % of our
common stock on a fully diluted basis ( % if the underwriters exercise their
over-allotment option). Freeman Spogli has and will continue to have the
ability to control our management, policies and financing decisions. The
interests of Freeman Spogli as a majority shareholder could in the future
conflict with the interest of our public or minority shareholders, including
with respect to our ability to effect a change in control. See "Management."
We depend on certain key personnel and would be materially affected if senior
management left The Pantry
We depend to a large extent on our ability to attract, motivate and
retain an adequate labor force, including management, sales, merchandising and
other personnel. We are also dependent on the continued efforts of our senior
management team, including our President and Chief Executive Officer, Peter
Sodini. Mr. Sodini's employment contract terminates in September 2000. If, for
any reason, our senior executives do not continue to be active in management,
our operations could be materially adversely affected. We cannot assure you
that we will be able to attract and retain additional qualified personnel as
needed in the future. We do not maintain key personnel life insurance on our
senior executives and other key employees.
16
<PAGE>
The price of common stock in the current market may be volatile
The securities markets have fluctuated significantly in price and volume.
Investors may be unable to resell their shares of our common stock at or above
the initial public offering price. In the past, companies with volatile stock
prices have been the object of securities class action litigation. If we were
the object of securities class action litigation, it could be costly and divert
management's attention and resources.
Future sales of additional shares into the market may adversely affect the
market price of the common stock
If our existing shareholders sell substantial amounts of our common stock
in the public market following the offering, including shares issued upon the
exercise of outstanding options and warrants, or if the market perceives such
sales could occur, the market price of our common stock could fall. These sales
also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate or to use
equity as a portion of the consideration for future acquisitions.
Upon completion of the offering, we will have outstanding shares of
common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants. Of these shares, the
shares sold in the offering are freely tradable. Of the remaining shares,
shares are held by Freeman Spogli and Chase Capital, who may be deemed to be
affiliates of The Pantry. Pursuant to Rule 144 under the Securities Act,
affiliates of The Pantry can resell up to 1% of the aggregate outstanding
common stock during any three month period. For more details, see "Shares
Eligible for Future Sale."
No market currently exists for the common stock
There was no public market for the common stock prior to the offering,
and an active public market for the common stock may not develop or be
sustained after the offering. Negotiations between us and representatives of
the underwriters will determine the initial public offering price. The price at
which the common stock will trade after the offering may be unrelated to the
initial public offering price. You may not be able to resell your common stock
at favorable prices. The price at which the common stock will trade will depend
upon a number of factors, including, but not limited to, our historical and
anticipated quarterly and annual operating results, variations between such
results and analyst and investor expectations, investor perceptions of us and
comparable public companies, changes in the industries in which we operate or
in the industries of our significant suppliers, and general market and economic
conditions. Some of these factors are beyond our control. In addition, the
stock market has from time to time experienced extreme price and volume
fluctuations.
Purchasers of our common stock will experience immediate and substantial
dilution in the book value of the common stock
If you purchase common stock in the offering, you will experience
immediate and substantial dilution of $ per share in the net tangible book
value of the common stock from the initial public offering price. See
"Dilution."
17
<PAGE>
We do not expect to pay dividends and are prohibited from paying dividends by
the instruments governing our indebtedness
We do not expect to pay dividends in the foreseeable future. In addition,
the terms of our outstanding indebtedness restrict our ability to pay dividends
on the common stock. See "Dividend Policy."
Our charter includes provisions which may have the effect of preventing or
hindering a change in control
Our certificate of incorporation gives our board of directors the
authority to issue up to million shares of preferred stock and to determine
the rights and preferences of the preferred stock without obtaining shareholder
approval. The existence of this preferred stock could make more difficult or
discourage an attempt to obtain control of The Pantry by means of a tender
offer, merger, proxy contest or otherwise. Furthermore, this preferred stock
could be issued with other rights, including economic rights, senior to our
common stock, and, therefore, issuance of the preferred stock could have an
adverse effect on the market price of our common stock. We have no present
plans to issue any shares of our preferred stock.
We may, in the future, adopt other measures that may have the effect of
delaying, deferring or preventing an unsolicited takeover, even if such a
change in control were at a premium price or favored by a majority of
unaffiliated shareholders. Certain of these measures may be adopted without any
further vote or action by our shareholders.
The failure of The Pantry, third party vendors or acquired entities to be Year
2000 compliant could adversely impact our operations
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
We use a combination of hardware devices run by computers at our support
centers and retail locations to process transactions and other data which are
essential to our business operations. We have completed the assessment phase of
our Year 2000 vulnerability with respect to these systems. We also conducted a
formal assessment of Year 2000 issues of third parties critical to our
operations. Based on this assessment, we believe all system modifications,
hardware and software replacements or upgrades, as well as related testing,
will be completed with respect to our internal systems in September 1999. We
believe that once these actions are completed our major internal systems will
be Year 2000 compliant. However, because of the overall complexity of the Year
2000 issues and the uncertainty surrounding third party responses to Year 2000
issues, we may experience material unanticipated negative consequences and/or
material costs caused by undetected errors or defects in our or third party
systems or by our failure to adequately prepare for the results of such errors
or defects, including costs of related litigation.
We believe that the worst case scenario in the event of a Year 2000-
related failure would be delays in the receipt of payment from credit card
processing companies utilized by us and a return to manual accounting
processing at our individual stores. The impact of such consequences could have
a material adverse effect on our business, financial condition or results of
operations. For more details see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Initiative."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock at
an assumed price of $ per share are estimated to be approximately $
million, after deducting the underwriting discount and estimated offering
expenses payable by us. Net proceeds will be $ million if the over-allotment
option is exercised in full.
We expect to use the net proceeds of the offering to repay indebtedness
under our bank credit facilities ($ million) and to redeem our outstanding
preferred stock (including accrued dividends) ($ million). The $ million
used to repay indebtedness under the bank credit facility will be applied to
the Tranche A term loan facility ($ million), the Tranche B term loan
facility ($ million) and the acquisition term facility ($ million). The
Tranche A term loan and acquisition term facilities each have a maturity of
January 2004 and the acquisition Tranche B term loan facility matures in 2006.
Borrowings under the Tranche A term loan facility, the Tranche B term loan
facility and the acquisition term facility bear interest, as of March 1, 1999,
at rates of 7.94%, 8.44% and 7.94%, respectively. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Liquidity and
Capital Resources."
DIVIDEND POLICY
We do not expect to pay cash dividends on our common stock for the
foreseeable future. We intend to retain earnings to support operations and to
finance expansion. The payment of cash dividends in the future will depend upon
our earnings, operations, capital requirements, financial condition and other
factors deemed relevant by the board of directors. The payment of any cash
dividends is prohibited by the indenture relating to the senior subordinated
notes and our bank credit facility.
19
<PAGE>
CAPITALIZATION
The following table describes our capitalization as of December 24, 1998
(1) on an actual basis, (2) on a pro forma basis to reflect the acquisitions
and related financings made subsequent to December 24, 1998 and (3) on a pro
forma as adjusted basis to reflect our receipt of the estimated net proceeds
from the sale of shares of common stock by us at the assumed price of $
per share. The following should be read together with our consolidated
financial statements and related notes, "Unaudited Pro Forma Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
At December 24, 1998
-----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Current debt:
Current maturities of long-term debt....... $ 39 $ 39 $ 39
Current maturities of capital lease
obligations............................... 1,240 1,240 1,240
Revolving credit .......................... 2,000 7,000 7,000
-------- -------- --------
Total current debt...................... 3,279 8,279 8,279
-------- -------- --------
Long-term debt:
Senior notes............................... 48,995 -- --
Senior subordinated notes.................. 200,000 200,000 200,000
Bank credit facility....................... 94,000 259,000 189,603
Other long-term debt....................... 265 265 265
Capital lease obligations.................. 11,806 11,806 11,806
-------- -------- --------
Total long-term debt.................... 355,066 471,071 401,674
-------- -------- --------
Total debt............................ 358,345 479,350 409,953
Shareholders' equity:
Series B preferred stock, par value $.01
per share; 150,000 shares authorized,
17,500 issued and outstanding, actual and
pro forma; no shares issued and
outstanding, pro forma as adjusted....... -- -- --
Common stock, par value $.01 per share;
300,000 shares authorized, actual and pro
forma; shares authorized pro forma
as adjusted; 232,701 shares issued and
outstanding, actual and pro forma;
shares issued and outstanding, pro forma
as adjusted(a)........................... 2 2 2
Additional paid-in capital................ 69,925 69,925 144,425
Shareholder loans......................... (937) (937) (937)
Retained earnings (deficit)............... (28,245) (31,489)(b) (31,489)
-------- -------- --------
Total shareholders' equity.............. 40,745 37,501 112,001
-------- -------- --------
Total capitalization.................. $399,090 $516,851 $521,954
======== ======== ========
</TABLE>
- --------
(a) Does not include shares issuable upon exercise of outstanding stock
options or warrants.
(b) Includes an extraordinary charge of approximately $3,244, net of income tax
benefit of $2,162, related to the redemption of $48,995 of our senior notes
and the amendment of our bank credit facility.
20
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 24, 1998 was a
deficit of $41.2 million or $( ) per share of common stock. Pro forma net
tangible book value per share represents the amount of our pro forma total
tangible assets (which excludes pro forma goodwill of $153.3 million) less our
pro forma total liabilities, divided by the total number of outstanding shares
of common stock outstanding after giving effect to the Handy Way and ETNA
acquisitions and the 1999 financing transactions as described in "Unaudited Pro
Forma Financial Data" as if these transactions had occurred on December 24,
1998.
After giving effect to the sale of shares at an assumed initial public
offering price of $ per share and the receipt and application of the net
proceeds (after deducting the underwriting discount and offering expenses) our
adjusted pro forma net tangible book value as of December 24, 1998 would have
been approximately $ million or approximately $ per share. This represents
an immediate increase in such pro forma net tangible book value of $ per
share to existing shareholders and an immediate dilution of $ per share to
new shareholders purchasing shares in the offering. If the initial public
offering price is higher or lower, the dilution to the new shareholders will be
greater or less. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
Pro forma net tangible book value per share as of December 24,
1998............................................................... $
Increase per share attributable to new shareholders.................
----
Adjusted pro forma net tangible book value per share as of December
24, 1998 after the offering........................................
----
Dilution per share to new investors................................. $
====
</TABLE>
The calculations in the table set forth above assume that the
underwriters will not exercise their over-allotment option. The calculations do
not reflect shares of common stock reserved for issuance pursuant to options
outstanding under our stock option plan and shares of common stock reserved
for issuance pursuant to common stock warrants issued to Freeman Spogli. See
"Certain Relationships and Related Transactions" and "Management--Stock Option
Plan."
The following table describes, as of December 24, 1998, the difference
between the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid by the existing
shareholders and by the new investors, before deducting the underwriting
discount and estimated offering expenses payable by us, at the assumed initial
public offering price of $ per share.
<TABLE>
<CAPTION>
Shares Purchased Average Price
----------------- Total Consideration --------------------
Number Percentage Paid (in thousands) Percentage Per Share
------ ---------- ------------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders... % $ % $
New investors(a)........
--- ----- ---- -----
Total................. 100.0% $ 100.0%
=== ===== ==== =====
</TABLE>
- --------
(a) The number of shares held by new public investors will be or
approximately % of the total number of shares outstanding after the
offering. If the underwriters exercise their over-allotment option in
full, public investors will own shares, or approximately % of the
total number of shares of common stock outstanding after the offering.
21
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial
data and store operating data that is derived from our consolidated financial
statements. Our financial results for the 1996 fiscal year and subsequent
periods reflect the operating strategy implemented by our current management
team in 1996. The financial position and results of operations for the quarters
ended December 25, 1997 and December 24, 1998 have been derived from our
unaudited financial statements and, in our opinion, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation. They are not necessarily indicative of the results that may occur
for the full fiscal year. Since this table contains only selected financial
data, you should read "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes.
<TABLE>
<CAPTION>
Fiscal Year Ended Quarter Ended
---------------------------------------------------------- ----------------------
Sept. Sept. Sept. Sept. Sept. 24, Dec. 25, Dec. 24,
29, 1994 28, 1995 26, 1996 25, 1997 1998 1997 1998
-------- -------- -------- -------- --------- --------- --------
(dollars in thousands, except operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Merchandise sales...... $189,244 $187,380 $188,091 $202,440 $ 460,798 $ 89,360 $139,390
Gasoline sales......... 175,083 187,165 192,737 220,166 509,958 103,022 171,789
Commissions............ 4,466 4,516 3,979 4,787 14,128 2,789 4,428
-------- -------- -------- -------- --------- --------- --------
Total revenue........... 368,793 379,061 384,807 427,393 984,884 195,171 315,607
Cost of sales:
Merchandise............ 123,142 121,976 125,979 132,846 303,968 58,897 94,453
Gasoline............... 153,476 161,179 167,610 197,268 447,565 90,909 148,774
-------- -------- -------- -------- --------- --------- --------
Gross profit............ 92,175 95,906 91,218 97,279 233,351 45,365 72,380
Store operating
expense................ 53,201 56,206 57,841 60,208 140,089 28,165 43,729
General and
administrative
expenses............... 17,893 18,159 17,127 16,796 32,761 7,172 9,968
Unusual charges......... -- -- 5,218 (a) -- 1,016 (b) -- --
Depreciation and
amortization........... 10,164 11,470 9,158 9,504 27,642 5,151 8,190
-------- -------- -------- -------- --------- --------- --------
Income from operations.. 10,917 10,071 1,874 10,771 31,843 4,877 10,493
Interest expense........ (12,047) (13,240) (11,992) (13,039) (28,946) (5,817) (8,912)
Income (loss) before
income taxes and other
items.................. (181) (3,639) (10,778) (975) 4,673 (501) 1,397
Income (loss) before
other items............ 191 (3,285) (8,114) (975) 4,673 (89) 1,065
Extraordinary loss...... -- -- -- -- (7,998)(c) (6,800)(c) --
Net income (loss)....... $ (480)(d) $ (4,245)(e) $ (8,114) $ (975) $ (3,325)(c) $ (6,889)(c) $ 1,065
Earnings Per Share
Before Extraordinary
Loss(f):
Basic..................
Diluted................
Weighted-Average Number
of Shares
Outstanding(f):
Basic..................
Diluted................
Other Financial Data:
EBITDA(g)............... $ 21,081 $ 21,541 $ 16,250 $ 20,275 $ 60,501 $ 10,028 $ 18,683
Net cash provided by
(used in):
Operating activities... $ (4,120) $ 11,903 $ 5,415 $ 7,338 $ 48,032 $ (928) $ (3,510)
Investing activities... (10,612) (15,281) (7,204) (25,079) (286,493) (139,103) (34,508)
Financing activities... 25,955 (950) (3,872) 15,750 269,518 168,506 18,683
Capital
expenditures(h)........ 9,862 16,650 7,084 14,749 43,153 5,932 9,540
</TABLE>
(continued on following page)
22
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended Quarter Ended
------------------------------------------------ -----------------
Sept. Sept. Sept. Sept. Sept. Dec. 25, Dec. 24,
29, 1994 28, 1995 26, 1996 25, 1997 24, 1998 1997 1998
-------- -------- -------- -------- -------- -------- --------
(dollars in thousands, except operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
Store Operating Data:
Number of stores (end of
period)................ 406 403 379 390 953 867 973
Average sales per store:
Merchandise sales....... $ 460.4 $ 462.7 $ 479.8 $ 525.8 $ 532.1 $ 123.1 $ 144.7
Gasoline gallons (in
thousands)............. 423.7 440.3 448.8 501.2 582.8 132.2 184.5
Comparable store sales
growth(i):
Merchandise............ 3.3% (0.8)% 2.8% 8.5% 5.3% 3.6% 10.5%
Gasoline gallons....... 5.2% 0.2% (4.3)% 7.2% 4.8% 7.9% 5.1%
Operating Data:
Merchandise gross
margin................. 34.9% 34.9% 33.0% 34.4% 34.0% 34.1% 32.2%
Gasoline gallons sold
(in millions).......... 158.5 160.3 160.7 179.4 466.8 87.5 169.0
Average retail gasoline
price per gallon....... $ 1.10 $ 1.17 $ 1.20 $ 1.23 $ 1.09 $1.18 $ 1.02
Average gasoline gross
profit per gallon...... $ 0.136 $ 0.162 $ 0.156 $ 0.128 $ 0.134 $0.138 $ 0.136
Store expenses as a
percentage of sales.... 14.4% 14.8% 15.0% 14.1% 14.2% 14.4% 13.9%
General and
administrative expenses
as a percentage of
sales.................. 4.9% 4.8% 4.5% 3.9% 3.3% 3.7% 3.2%
Operating income as a
percentage of sales.... 3.0% 2.7% 0.5% 2.5% 3.2% 2.5% 3.3%
Balance Sheet Data (end
of period):
Working capital......... $ 6,652 $ (761) $ (6,513) $ (8,245) $ (8,983) $ 5,758 $(18,120)
Total assets............ 124,015 127,720 120,880 142,799 554,828 383,549 568,560
Total debt and capital
lease obligations...... 102,382 101,798 101,431 101,302 340,683 262,818 358,345
Shareholders' equity
(deficit).............. (12,087) (16,332) (27,547) (17,873) 39,304 12,744 40,745
</TABLE>
- --------
(a) During 1996, we recorded restructuring charges of $2.2 million pursuant to
a formal plan to restructure our corporate offices. The costs include: $1.4
million for employee severance; $0.4 million for employee moving costs; and
$0.4 million for charges associated with the investment by Freeman Spogli
and Chase Capital. Substantially all of these amounts were expended during
fiscal 1996. Also during fiscal 1996, we early-adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Pursuant to SFAS No. 121, we evaluated our long-
lived assets for impairment on a store-by-store basis by comparing the sum
of the projected future undiscounted cash flows attributable to each store
to the carrying value of the long-lived assets (including an allocation of
goodwill, if appropriate) of that store. Based on this evaluation, we
determined that certain long-lived assets were impaired and recorded an
impairment loss of (1) $0.4 million for property and equipment and (2)
$2.6 million for goodwill.
(b) During 1998, we recorded an integration charge of approximately $1.0
million for costs of combining our existing business with the acquired
business of Lil' Champ. The charge includes $0.3 million for relocation
costs and $0.7 million for consolidation and related expenses.
(c) On October 23, 1997 in connection with the Lil' Champ acquisition, we
completed the offering of our senior subordinated notes and, in a related
transaction, redeemed $51.0 million in principal amount of our senior notes
at a purchase price of 110% of the aggregate principal amount plus accrued
and unpaid interest, a consent fee and other related fees. In connection
with this redemption, we incurred an extraordinary loss of $8.0 million
during the year ended September 24, 1998, $6.8 million of which was
incurred during the quarter ended December 25, 1997, related to the cost of
the redemption of $51.0 million of our senior notes and related consent fee
payments and write-off of deferred financing costs.
(d) In fiscal 1994, we recorded an extraordinary loss of $0.7 million, net of
taxes, related to the early extinguishment of debt.
(e) In fiscal 1995, we adopted SFAS No. 112, "Employer's Accounting for Post
Retirement Benefits," and as a result, recorded a cumulative effect for a
change in accounting principle of $1.0 million, net of taxes.
(f) Amounts exclude shares of common stock reserved for issuance under our
stock option and stock subscription plans, of which shares were subject
to outstanding options as of December 24, 1998, and shares of common
stock reserved for issuance pursuant to warrants held by certain of our
shareholders.
23
<PAGE>
(g) EBITDA represents income from operations before depreciation and
amortization, merger integration costs, restructuring charges, impairment
of long-lived assets and extraordinary loss. EBITDA is not a measure of
performance under generally accepted accounting principles, and should not
be considered as 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. We have included information concerning
EBITDA as one measure of a company'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 our operating
performance. EDITDA as defined may not be comparable to similarly-titled
meaures reported by other companies.
(h) Purchases of assets to be held for sale are excluded from these amounts.
(i) The stores included in calculating same store sales growth are stores that
were under our management and in operation for both comparable fiscal years
or both comparable fiscal quarters.
24
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma consolidated financial data have been
derived by the application of pro forma adjustments to the historical financial
statements of The Pantry for the periods indicated. The adjustments are
described in the accompanying notes.
The unaudited pro forma financial data give effect to the following:
Fiscal 1998 Acquisitions:
<TABLE>
<CAPTION>
Number
of
Date Acquired Company Locations Stores
------------- ---------- ------------------------------------------------ ------
<S> <C> <C> <C>
July 15, 1998 Zip Mart Central North Carolina, Virginia 42
July 2, 1998 Quick Stop Southeast North Carolina, Coastal South Carolina 75
April 3, 1998 Sprint Gainesville, Florida 10
March 19, 1998 Kwik Mart Eastern North Carolina 23
October 23, 1997 Lil' Champ Northeast Florida 441(a)
</TABLE>
--------
(a) Net of the disposition of 48 convenience stores located throughout
eastern Georgia.
The aggregate cost of these acquisitions was $240 million, and was funded
with:
. proceeds from the issuance of our senior subordinated notes
. borrowings under our bank credit facility
. equity investments by existing shareholders
. cash on hand
Fiscal 1998 Financing Transactions:
. October 23, 1997--we issued $200.0 million of senior subordinated
notes at an interest rate of 10 1/4%
. October 23, 1997--we repurchased $51.0 million of senior notes and
paid related costs including a 10% repurchase premium, consent fee,
accrued interest and other expenses
. March 19, 1998 through July 15, 1998--we borrowed $78.0 million under
our bank credit facility
Fiscal 1999 Acquisitions:
<TABLE>
<CAPTION>
Number
of
Date Acquired Company Locations Stores
------------- ------------ ------------------------------------------------ ------
<S> <C> <C> <C>
February 25, 1999 ETNA North Carolina, Virginia 60
January 28, 1999 Handy Way North-central Florida 121
November 5, 1998 Express Stop Southeast North Carolina, Eastern South Carolina 22
October 22, 1998 Dash-N East-central North Carolina 10
</TABLE>
The aggregate cost of these acquisitions was $140 million and was funded
with borrowings under our bank credit facility and cash on hand.
25
<PAGE>
Fiscal 1999 Financing Transactions:
. January 28, 1999--we amended our bank credit facility and used the
proceeds to (1) refinance $94.0 million of existing bank debt, (2)
redeem $49.0 million of senior notes and pay approximately $2.0
million of related premium costs, (3) finance the fiscal 1999
acquisitions and (4) pay related fees and accrued and unpaid
interest.
Pro Forma Adjustments:
The unaudited pro forma balance sheet gives effect to the Handy Way and
ETNA acquisitions and the fiscal 1999 financing transactions. The fiscal 1998
acquisitions, the Dash-N and Express Stop acquisitions and the 1998 financing
transactions are reflected in our historical unaudited balance sheet data as of
December 24, 1998.
The unaudited pro forma statement of operations for the quarter ended
December 24, 1998 gives effect to the fiscal 1999 acquisitions and the fiscal
1999 financing transactions as if such events occurred at the beginning of
fiscal 1998. The fiscal 1998 acquisitions and fiscal 1998 financing
transactions are included in our historical results of operations for the
quarter.
The unaudited pro forma statement of operations for the year ended
September 24, 1998 gives effect to the 1998 acquisitions and disposition, the
1998 financing transactions, the fiscal 1999 acquisitions and the fiscal 1999
financing as if such events occurred at the beginning of fiscal 1998.
The unaudited pro forma financial data are provided for informational
purposes only and do not represent our results of operations or financial
position had the transactions occurred on such dates, nor are they indicative
of our results of operations or financial position as of any future date or
period.
The unaudited pro forma financial data and accompanying notes should be
read in conjunction with the financial statements and accompanying notes
thereto and the other financial information included elsewhere in this
prospectus. The financial statements of certain immaterial acquired entities
were not audited or reviewed by independent public accountants, and, therefore,
the information relating to these immaterial acquired entities is generally
based on internally prepared financial statements by the entity.
26
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET DATA
December 24, 1998
<TABLE>
<CAPTION>
Historical
-------------------------
The Pantry ETNA and 1999 ETNA and
December 24, Handy Way Financing Handy Way IPO Total
1998 Acquisitions Adjustments Adjustments Adjustments Pro Forma
------------ ------------ ----------- ----------- ----------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents........... $ 15,069 $ 13,672 $95,711 (a) $(95,000)(c) $ -- $ 22,906
(3,046)(d)
(3,500)(d)
Receivables, net....... 13,393 6,225 -- (443)(d) -- 19,175
Inventories............ 53,546 8,569 -- -- -- 62,115
Prepaid expenses....... 1,338 1,299 -- (158)(d) -- 2,479
Property held for
sale.................. 2,971 -- -- -- -- 2,971
Deferred income taxes.. 3,521 -- -- -- -- 3,521
-------- -------- ------- -------- ----- --------
Total current
assets............... 89,838 29,765 95,711 (102,147) -- 113,167
-------- -------- ------- -------- ----- --------
Property and equipment,
net.................... 328,037 85,420 -- (5,964)(d) -- 407,493
Other assets:
Goodwill, net.......... 119,534 -- -- 33,757 (e) -- 153,291
Deferred lease cost,
net................... 258 -- -- -- -- 258
Deferred financing
cost, net............. 14,025 -- 3,210 (a) -- -- 13,829
(3,406)(b)
Environmental
receivables, net...... 12,783 -- -- -- -- 12,783
Other.................. 4,085 14,003 -- (11,500)(d) -- 6,588
-------- -------- ------- -------- ----- --------
Total other assets.... 150,685 14,003 (196) 22,257 -- 186,749
-------- -------- ------- -------- ----- --------
Total assets........ $568,560 $129,188 $95,515 $(85,854) $ -- $707,409
======== ======== ======= ======== ===== ========
</TABLE>
See Notes to Unaudited Pro Forma Balance Sheet Data
27
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET DATA
December 24, 1998
<TABLE>
<CAPTION>
Historical
-------------------------
The Pantry ETNA and 1999 ETNA and
December 24, Handy Way Financing Handy Way IPO Total
1998 Acquisitions Adjustments Adjustments Adjustments Pro Forma
------------ ------------ ----------- ----------- ----------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Liabilities and
Shareholders' Equity
Current liabilities:
Current maturities of
long-term debt......... $ 39 $ 1,822 $ -- $ (1,822)(d) $ -- $ 39
Current maturities of
capital lease
obligations............ 1,240 -- -- -- -- 1,240
Revolving credit........ 2,000 -- 5,000 (a) -- -- 7,000
Accounts payable........ 55,320 14,875 -- (2,680)(d) -- 67,515
Accrued expenses........ 49,359 9,337 (630)(a) (1,703)(d) -- 53,747
(454)(a)
(2,162)(f)
-------- -------- -------- -------- -------- --------
Total current
liabilities........... 107,958 26,034 1,754 (6,205) -- 129,541
-------- -------- -------- -------- -------- --------
Senior subordinated
notes.................. 200,000 -- -- -- -- 200,000
Senior notes payable ... 48,995 -- (48,995)(a) -- -- --
Credit facility......... 94,000 -- (94,000)(a) -- -- --
Amended credit
facility............... -- 11,694 240,000 (a) (11,694)(d) (69,397)(g) 189,603
19,000 (c)
Other long-term debt.... 265 -- -- -- -- 265
-------- -------- -------- -------- -------- --------
Total long-term debt... 343,260 11,694 97,005 7,306 (69,397) 389,868
-------- -------- -------- -------- -------- --------
Other non-current
liabilities:
Environmental reserve... 17,291 -- -- -- -- 17,291
Capital lease
obligations............ 11,806 -- -- -- -- 11,806
Employment obligations.. 842 -- -- -- -- 842
Accrued dividends on
preferred stock........ 5,103 -- -- -- (5,103)(g) --
Deferred income taxes... 19,927 -- -- -- -- 19,927
Other non-current
liabilities............ 21,628 4,505 -- -- -- 26,133
-------- -------- -------- -------- -------- --------
Total other non-current
liabilities........... 76,597 4,505 -- -- (5,103) 75,999
-------- -------- -------- -------- -------- --------
Shareholders' equity:
Preferred stock......... -- -- -- -- --
Common stock............ 2 5,831 -- (5,831) -- 2
Additional paid-in
capital................ 69,925 2,383 -- (2,383) 92,000 (g) 144,425
(17,500)(g)
Shareholder loan........ (937) -- -- -- -- (937)
Retained earnings....... (28,245) 78,741 (2,000)(a) (78,741) -- (31,489)
(3,406)(b)
2,162 (f)
-------- -------- -------- -------- -------- --------
Total shareholders'
equity................ 40,745 86,955 (3,244) (86,955)(e) 74,500 112,001
-------- -------- -------- -------- -------- --------
Total liabilities and
shareholders' equity.. $568,560 $129,188 $ 95,515 $(85,854) $ -- $707,409
======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Balance Sheet Data
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET DATA
(dollars in thousands)
(a) Sources and Uses
<TABLE>
<S> <C>
Sources:
Revolving credit ................................................. $ 5,000
Amended credit facility........................................... 240,000
--------
Total sources.................................................... $245,000
========
Uses:
Redemption of senior notes........................................ $ 48,995
Refinance credit facility......................................... 94,000
Accrued interest--senior notes.................................... 630
Accrued interest--credit facility................................. 454
Redemption premium................................................ 2,000
Deferred financing cost........................................... 3,210
--------
Total uses...................................................... $149,289
========
Increase in cash and cash equivalents............................. $ 95,711
========
</TABLE>
(b) Write-off of $3,406 of unamortized deferred financing costs related to our
bank credit facility and our senior notes.
(c) Reflects acquisition costs funded by cash of $95,000 and borrowings under
our bank credit facility of $19,000 (see note a).
(d) Reflects the elimination of certain assets and liabilities we did not
acquire in connection with the ETNA and Handy Way acquisitions:
<TABLE>
<S> <C>
Cash............................................................. $ (3,046)
Receivables...................................................... (443)
Prepaid expenses................................................. (158)
Property and equipment........................................... (5,964)
Other assets..................................................... (11,500)
Current maturities of long-term debt............................. 1,822
Accounts payable................................................. 2,680
Other accrued liabilities........................................ 1,703
Other long-term debt............................................. 11,694
--------
Total.......................................................... $ (3,212)
========
</TABLE>
Additionally, we used approximately $3,500 of cash on hand to partially
fund the ETNA and Handy Way acquisitions.
(e) Goodwill related to the ETNA and Handy Way acquisitions has been determined
as follows:
<TABLE>
<S> <C>
Aggregate purchase price......................................... $117,500
Less shareholders' equity........................................ (86,955)
Elimination of certain net assets not acquired by The Pantry (see
note d)......................................................... 3,212
--------
Total.......................................................... $ 33,757
========
</TABLE>
(f) Reflects a $2,162 tax benefit related to the premium paid in connection
with the redemption of our senior notes and the write-off of unamortized
deferred financing costs (see notes a and b).
(g) Reflects estimated net proceeds from the offering of $92,000 and the
application of such proceeds to (1) repay outstanding indebtedness under
our bank credit facility of $69,397 and (2) redeem preferred stock of
$17,500 and pay accrued dividends of $5,103.
29
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
Quarter Ended December 24, 1998
<TABLE>
<CAPTION>
Historical
-------------------------
Quarter
Ended Acquisition
December 24, Fiscal and
1998 1999 Financing IPO Total
The Pantry Acquisitions Adjustments Adjustments Pro Forma
------------ ------------ ----------- ----------- ---------
(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales...... $139,390 $36,863 $ -- $ -- $176,253
Gasoline sales......... 171,789 59,859 -- -- 231,648
Commissions............ 4,428 820 -- -- 5,248
-------- ------- ------- ------ --------
Total revenue......... 315,607 97,542 -- -- 413,149
-------- ------- ------- ------ --------
Cost of Sales:
Merchandise............ 94,453 22,901 -- -- 117,354
Gasoline............... 148,774 52,479 -- -- 201,253
-------- ------- ------- ------ --------
Total cost of sales... 243,227 75,380 -- -- 318,607
-------- ------- ------- ------ --------
Gross profit............ 72,380 22,162 -- -- 94,542
-------- ------- ------- ------ --------
Store operating
expenses............... 43,729 14,570 (1,106)(a) -- 57,193
General and
administrative
expenses............... 9,968 2,873 -- -- 12,841
Impairment of long-lived
assets................. -- 55 -- -- 55
Depreciation and
amortization........... 8,190 1,513 428 (b) -- 10,487
418 (c)
(62)(d)
-------- ------- ------- ------ --------
Total operating
expense............... 61,887 19,011 (322) -- 80,576
-------- ------- ------- ------ --------
Income from operations.. 10,493 3,151 322 -- 13,966
-------- ------- ------- ------ --------
Other Income (Expense):
Interest............... (8,912) (109) (2,341)(e) 1,418 (h) (9,477)
531 (e)
(64)(e)
Miscellaneous.......... (184) 104 (13)(a) -- (93)
-------- ------- ------- ------ --------
Total other expense... (9,096) (5) (1,887) 1,418 (9,570)
-------- ------- ------- ------ --------
Income (loss) before
income taxes........... 1,397 3,146 (1,565) 1,418 4,396
Income tax expense
(benefit).............. 332 632 227 (f) 567 (f) 1,758
-------- ------- ------- ------ --------
Net income (loss) before
extraordinary item..... $ 1,065 $ 2,514 $(1,792)(g) $ 851 $ 2,638
======== ======= ======= ====== ========
Earnings Per Share
Before Extraordinary
Loss(g):
Basic.................. $
========
Diluted................ $
========
Weighted-Average Number
of Shares Outstanding:
Basic..................
========
Diluted................
========
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations Data
30
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
Year Ended September 24, 1998
<TABLE>
<CAPTION>
Historical
---------------------------------------
Year Ended 1998
September 24, Acquisitions Fiscal Acquisition and
1998 and 1999 Financing IPO Total
The Pantry Disposition Acquisitions Adjustments Adjustments Pro Forma
------------- ------------ ------------ --------------- ----------- ----------
(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales...... $460,798 $ 75,593 $156,227 $ (402)(a) $ -- $ 692,216
Gasoline sales......... 509,958 181,814 269,019 (15,823)(a) -- 944,968
Commissions............ 14,128 3,633 5,217 (467)(a) -- 22,511
-------- -------- -------- -------- ------ ----------
Total revenues...... 984,884 261,040 430,463 (16,692) -- 1,659,695
-------- -------- -------- -------- ------ ----------
Cost of Sales:
Merchandise............ 303,968 54,219 102,847 (207)(a) -- 460,827
Gasoline............... 447,565 161,074 238,893 (13,004)(a) -- 834,528
-------- -------- -------- -------- ------ ----------
Total cost of
sales.............. 751,533 215,293 341,740 (13,211) -- 1,295,355
-------- -------- -------- -------- ------ ----------
Gross profit............ 233,351 45,747 88,723 (3,481) -- 364,340
-------- -------- -------- -------- ------ ----------
Store operating
expenses............... 140,089 27,164 59,996 (3,015)(a) -- 220,098
(4,424)(a)
288 (i)
General and
administrative
expenses............... 32,761 7,506 11,222 (356)(a) -- 51,091
(42)(j)
Restructuring charges... 1,016 -- -- -- -- 1,016
Impairment of long-lived
assets................. -- -- 219 -- -- 219
Depreciation and
amortization........... 27,642 5,189 6,104 (169)(a) -- 41,519
3,193 (b)
144 (b)
(403)(c)
(181)(d)
-------- -------- -------- -------- ------ ----------
Total operating
expense................ 201,508 39,859 77,541 (4,965) -- 313,943
-------- -------- -------- -------- ------ ----------
Income from operations.. 31,843 5,888 11,182 1,484 -- 50,397
-------- -------- -------- -------- ------ ----------
Other Income (Expense):
Interest............... (28,946) (1,687) (485) (13,787)(e) 5,670 (h) (37,369)
2,122 (e)
(256)(e)
Miscellaneous.......... 1,776 137 955 (193)(a) -- 2,675
-------- -------- -------- -------- ------ ----------
Total other
expense............ (27,170) (1,550) 470 (12,114) 5,670 (34,694)
-------- -------- -------- -------- ------ ----------
Income (loss) before
income taxes........... 4,673 4,338 11,652 (10,630) 5,670 15,703
Income tax expense...... -- 364 1,376 2,273 (f) 2,268 (f) 6,281
-------- -------- -------- -------- ------ ----------
Net income (loss) before
extraordinary item..... $ 4,673 $ 3,974 $ 10,276 $(12,903)(g) $3,402 $ 9,422
======== ======== ======== ======== ====== ==========
Earnings Per Share
Before Extraordinary
Loss (g):
Basic.................. $
==========
Diluted................ $
==========
Weighted-Average Number
of Shares Outstanding:
Basic..................
==========
Diluted................
==========
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations Data
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
(dollars in thousands)
(a) Reflects the elimination of certain operations not acquired as follows:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
December 24, September 24,
1998 1998
------------------ ------------------
Decrease in expenses (decrease in income)
<S> <C> <C>
Fiscal 1998 Acquisitions:
Merchandise sales............ $ -- $ (402)
Gasoline sales............... -- (15,823)
Commissions.................. -- (467)
Merchandise cost of sales.... -- 207
Gasoline cost of sales....... -- 13,004
Store operating expenses..... -- 3,015
General and administrative
expenses.................... -- 356
Depreciation and
amortization................ -- 169
Fiscal 1999 Acquisitions:
Store operating expenses..... 1,106 4,424
Miscellaneous income......... (13) (193)
</TABLE>
(b) The 1998 and 1999 acquisitions have been accounted for using the purchase
method of accounting. Purchase price allocations for the Lil' Champ
acquisition, the Kwik Mart acquisition, and the Sprint acquisition have
been finalized. Purchase price allocations for the Quick Stop acquisition,
the Zip Mart acquisition, the Dash-N acquisition, the Express Stop
acquisition, the Handy Way acquisition, and the ETNA acquisition are based
on available information and certain assumptions we believe are reasonable.
For each acquisition, the purchase price will be allocated to the tangible
and intangible assets acquired and liabilities assumed based upon their
respective fair values as of the time the acquisitions were consummated
pending completion of appraisals of property and equipment acquired; the
excess of the purchase price over the historical basis of the net assets
acquired has not been allocated in the accompanying unaudited pro forma
financial data. The actual allocation of the purchase cost, however, and
the resulting effect on income from operations may differ significantly
from the pro forma amounts included herein. For purposes of the pro forma
information, the excess of the purchase price over the historical net
assets acquired has been considered to be goodwill and other intangible
assets, pending the completion of appraisals and other purchase price
allocation adjustments. The following table summarizes the additional
amortization expense to be incurred in connection with the various 1998 and
1999 transactions described above:
32
<PAGE>
<TABLE>
<CAPTION>
Estimated Quarter Ended Year Ended
Recorded Useful Life December 24, September 24,
Acquisitions Goodwill (years) 1998 1998
------------ -------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
1998 acquisitions.......... $101,567 30 $ -- $1,527
1999 acquisitions.......... 51,801 30 428 1,726
---- ------
Subtotal.................. 428 3,253
Less historical recorded
predecessor amounts....... -- 60
---- ------
Adjustment................. $428 $3,193
==== ======
</TABLE>
Additionally, depreciation and amortization for the year ended September
24, 1998 includes $144 for deferred loan cost amortization related to the
issuance of our $200,000 senior subordinated notes and our bank credit
facility entered into in October 1997.
(c) Reflects additional depreciation expense in connection with the various
1998 and 1999 acquisition and financing transactions as follows:
<TABLE>
<CAPTION>
Recorded
Fair Value of
Property and Estimated Quarter Ended Year Ended
Equipment Useful Life December 24, September 24,
Acquisitions Acquired (in years) 1998 1998
------------ ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
1998 acquisitions....... $203,695 10-35 $ -- $ 3,454
1999 acquisitions....... 84,206 10-35 1,921 7,115
------ -------
Subtotal............... 1,921 10,569
Less historical recorded
amounts................ 1,503 10,972
------ -------
Adjustment.............. $ 418 $ (403)
====== =======
</TABLE>
(d) Reflects reduction in amortization of deferred financing costs related to
our bank credit facility, net of amortization recorded related to our
senior notes and our bank credit facility, of $62 for the three months
ended December 24, 1998 and $181 for the year ended September 24, 1998. The
financing costs, which approximate $3,210, are being amortized over the
weighted-average life of our bank credit facility of 6 years.
(e) Reflects additional interest expense in connection with the various 1998
and 1999 financing and acquisitions transactions as follows:
<TABLE>
<CAPTION>
Quarter
Principal Interest Ended Year Ended
Borrowed Rate December 24, September 24,
Acquisition/Financing (Retired) (per annum) 1998 1998
--------------------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Issuance of senior
subordinated notes........ $200,000 10.25% $ -- $ 1,708
Redemption of senior
notes..................... (51,000) 12.50 -- (531)
1998 acquisitions.......... 78,000 8.17 -- 4,148
1999 acquisitions.......... 130,000 8.17-8.19 2,437 10,621
------ -------
Subtotal.................. 2,437 15,946
Less historical recorded
amounts related to
indebtedness not assumed.. 96 2,159
------ -------
Adjustment................. $2,341 $13,787
====== =======
</TABLE>
Also reflects additional interest expense related to the cost of the
financing transactions of $64 for the quarter ended December 24, 1998 and
$256 for the year ended September 24, 1998.
Additionally, reflects reduction in interest expense related to the
redemption of our senior notes of $531 for the quarter ended December 24,
1998 and $2,122 for the year ended September 24, 1998.
33
<PAGE>
Assuming a 0.125% increase or decrease in the variable rate bank credit
facility, interest expense, net of taxes, would increase or decrease by $60
for the quarter ended December 24, 1998 and $240 for the year ended
September 24, 1998.
(f) Adjusts income tax expense for an assumed tax rate of 40% for each of the
periods presented.
(g) For each period presented, net income (loss) excludes extraordinary
charges of approximately $3,244, net of income tax benefit of $2,162,
related to the redemption of $48,995 of senior notes and the amendment of
our bank credit facility. Net income (loss) before extraordinary items for
the year ended September 24, 1998 excludes charges of approximately $7,998
incurred related to the costs of the redemption of $51,000 of senior
notes.
(h) Reflects the application of net proceeds of approximately $69,397 to repay
outstanding indebtedness at the weighted-average rate of 8.17%.
(i) Reflects an increase in store rental expense of $288 for the year ended
September 24, 1998 in connection with an obligation to lease certain
stores from the former owners of Quick Stop, a fiscal 1998 acquisition.
The rent increase was effective concurrent with the Quick Stop
acquisition.
(j) Historically, Lil' Champ paid Docks U.S.A., Inc., Lil' Champ's parent
company, service agreement fees. The service agreement was terminated
concurrent with the acquisition of Lil' Champ. Consequently, $42 of
service agreement fees have been eliminated for the year ended September
24, 1998.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Pantry is a leading convenience store operator in the southeastern
United States and the third largest independently operated convenience store
chain in the country. Our stores offer a broad selection of merchandise and
gasoline as well as ancillary services designed to appeal to the convenience
needs of our customers.
Since the arrival of our current management team in fiscal 1996, we have
experienced significant growth through a combination of management initiatives
and strategic acquisitions including:
. enhancing our merchandising to increase same store merchandise sales
growth and margins
. improving our gasoline offering in order to increase customer traffic
and same store gasoline volume growth
. reducing expenses through strengthened vendor relationships and
tightened expense controls
. increasing expenditures for facilities improvement and store
automation
. growing through acquisitions and new store development
As a result, we have experienced increases in total revenue, same store
merchandise sales and gasoline volume growth and income from operations.
Additionally, we have expanded the geographic scope of our operations which we
believe will result in less seasonality from period to period. We intend to
continue our acquisition strategy and, accordingly, future results may not be
necessarily comparable to historic results.
We believe that there is significant opportunity to continue to increase
profitability at our existing and new stores. We continue to focus on same
store sales and profit growth through upgraded facilities, improved technology,
new service offerings, competitive merchandise and gasoline prices and cost
savings initiatives. We are upgrading our management information systems and
continue to remodel our stores. Finally, we continue to seek acquisitions and
believe that there is a large number of attractive acquisition opportunities in
our markets.
Acquisition History
Our acquisition strategy focuses on acquiring convenience stores within
or contiguous to our existing market areas. We believe acquiring locations with
demonstrated revenue volumes involves lower risk and is an economically
attractive alternative to traditional site selection and new store development.
35
<PAGE>
The table below provides certain information concerning the eleven
largest acquisitions we have completed since fiscal 1996:
<TABLE>
<CAPTION>
Number of
Date Acquired Company Locations Stores
----------------- ------------ --------------------------------- ---------
<C> <C> <S> <C>
February 25, 1999 ETNA North Carolina, Virginia 60
January 28, 1999 Handy Way North-central Florida 121
November 5, 1998 Express Stop Southeast North Carolina, Eastern 22
South Carolina
October 22, 1998 Dash-N East-central North Carolina 10
July 15, 1998 Zip Mart Central North Carolina, Virginia 42
July 2, 1998 Quick Stop Southeast North Carolina, Coastal 75
South Carolina
April 3, 1998 Sprint Gainesville, Florida 10
March 19, 1998 Kwik Mart Eastern North Carolina 23
October 23, 1997 Lil' Champ Northeast Florida 441(a)
June 12, 1997 Freshway Eastern North Carolina 15
April 17, 1997 Gregorie Oil Charleston, South Carolina 15
</TABLE>
- --------
(a) Net of the disposition of 48 convenience stores located throughout eastern
Georgia.
We seek to improve the productivity and profitability of acquired stores
by implementing our merchandising and gasoline initiatives, eliminating
duplicative costs, reducing overhead and centralizing certain functions such as
purchasing and information technology. For example, at Lil' Champ, we have,
among other things, expanded the merchandise offered at each store, upgraded
store and gasoline facilities and centralized merchandise purchasing. These
improvements have contributed to an increase in same store EBITDA of 44.1% and
a decrease in same store operating expenses of 6.3% at Lil' Champ stores during
the twelve month period following the Lil' Champ acquisition. We believe it
takes six to twelve months to fully integrate and achieve operational and
financial improvements at acquired locations. There can be no assurance,
however, that revenue increases or cost savings can be achieved with respect to
any acquisition.
Quarterly Results of Operations
The following table presents the unaudited quarterly net sales and
operating income for each of our fiscal quarters in fiscal 1996, 1997 and 1998.
In the opinion of our management, this quarterly information has been prepared
on the same basis as the audited consolidated financial statements appearing
elsewhere in this prospectus and includes all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the unaudited
quarterly results set forth herein.
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------- ------------------------------------- -----------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
------- ------- -------- -------- -------- ------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue... $90,677 $84,278 $103,650 $106,202 $100,331 $95,910 $111,032 $120,120 $195,171 $220,670 $254,577
Income from
operations..... 550 (1,359) 2,139 544 1,346 484 3,808 5,133 4,877 4,615 10,159
Net income
(loss)......... (1,827) (3,397) (1,098) (1,792) (1,383) (1,761) 833 1,336 (6,889) (1,580) 2,509
EBITDA.......... 2,716 1,016 4,472 8,046 3,609 2,719 6,118 7,829 10,028 11,239 16,909
EBITDA margin... 3.0% 1.2% 4.3% 7.6% 3.6% 2.8% 5.5% 6.5% 5.1% 5.1% 6.6%
<CAPTION>
1996 1997 1998
------------------------------------- ------------------------------------- -----------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
------- ------- -------- -------- -------- ------- -------- -------- -------- -------- --------
(percent of annual total)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue... 23.6% 21.9 % 26.9% 27.6% 23.5% 22.4% 26.0% 28.1% 19.8% 22.4% 25.8%
Income from
operations..... 29.3% (72.5)% 114.1% 29.1% 12.5% 4.5% 35.3% 47.7% 15.3% 14.5% 31.9%
EBITDA.......... 16.7% 6.3 % 27.5% 49.5% 17.8% 13.4% 30.2% 38.6% 16.6% 18.6% 27.9%
<CAPTION>
Q4
---------
<S> <C>
Total revenue... $314,466
Income from
operations..... 12,192
Net income
(loss)......... 2,635
EBITDA.......... 22,325
EBITDA margin... 7.1%
<CAPTION>
Q4
---------
<S> <C>
Total revenue... 32.0%
Income from
operations..... 38.3%
EBITDA.......... 36.9%
</TABLE>
36
<PAGE>
Results of Operations
The following table sets forth certain of our results in absolute dollars
and as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended Quarter Ended
------------------------------ -------------------
Sept. Sept. Sept. Dec. 25, Dec. 24,
26, 1996 25, 1997 24, 1998 1997 1998
-------- -------- -------- -------- --------
(unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales..... $188,091 $202,440 $460,798 $ 89,360 $139,390
Gasoline sales........ 192,737 220,166 509,958 103,022 171,789
Commissions........... 3,979 4,787 14,128 2,789 4,428
-------- -------- -------- -------- --------
Total revenue........... $384,807 $427,393 $984,884 $195,171 $315,607
======== ======== ======== ======== ========
Gross profit............ $ 91,218 $ 97,279 $233,351 $ 45,365 $ 72,380
Total operating
expenses............... 80,186 77,004 173,866 35,337 53,697
Depreciation and
amortization........... 9,158 9,504 27,642 5,151 8,190
-------- -------- -------- -------- --------
Income from operations.. $ 1,874 $ 10,771 $ 31,843 $ 4,877 $ 10,493
======== ======== ======== ======== ========
Net income (loss)....... $ (8,114) $ (975) $ (3,325) $ (6,889) $ 1,065
======== ======== ======== ======== ========
<CAPTION>
Fiscal Year Ended Quarter Ended
------------------------------ -------------------
Sept. 26, Sept. 25, Sept. 24, Dec. 25, Dec. 24,
1996 1997 1998 1997 1998
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales..... 48.9 % 47.4 % 46.8 % 45.8 % 44.2 %
Gasoline sales........ 50.1 51.5 51.8 52.8 54.4
Commissions........... 1.0 1.1 1.4 1.4 1.4
-------- -------- -------- -------- --------
Total revenue........... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
======== ======== ======== ======== ========
Gross profit............ 23.7 % 22.7 % 23.7 % 23.2 % 22.9 %
Total operating
expenses............... 20.8 18.0 17.7 18.1 17.0
Depreciation and
amortization........... 2.4 2.2 2.8 2.6 2.6
-------- -------- -------- -------- --------
Income from operations.. 0.5 % 2.5 % 3.2 % 2.5 % 3.3 %
======== ======== ======== ======== ========
</TABLE>
The Lil' Champ acquisition and other acquisitions have had a significant
impact on our financial condition and results of operations since their
respective transaction dates. Due to the method of accounting for fiscal 1998
acquisitions, the consolidated statements of operations for the fiscal year
ended September 24, 1998 include results from operations for each of the
acquisitions from the date of each acquisition only. Moreover, the consolidated
balance sheet as of September 24, 1998 and the consolidated statements of
operations for fiscal years ended September 25, 1997 and September 26, 1996 do
not include the assets, liabilities, and results of operations relating to
acquisitions completed during the first fiscal quarter 1999. As a result,
comparisons to prior operating results and prior balance sheets are impacted
materially.
First Quarter Ended December 24, 1998 Compared to the First Quarter Ended
December 25, 1997
Total Revenue. Total revenue for the first fiscal quarter 1999 was $315.6
million compared to $195.2 million during the comparable period ended December
25, 1997 (the "first fiscal quarter
37
<PAGE>
1998" or the "comparable period"), an increase of $120.4 million or 61.7% over
the comparable period. The increase in total revenue is primarily attributable
to the revenue from stores acquired or opened since December 25, 1997, as well
as a full quarter of Lil' Champ revenue and same store merchandise sales and
gasoline gallon growth. In the first fiscal quarter 1999, our gross revenue
increases were partially offset by lower average retail gasoline prices versus
the comparable period.
Merchandise Revenue. Merchandise revenue for the first fiscal quarter
1999 was $139.4 million compared to $89.4 million during the first fiscal
quarter 1998, an increase of $50.0 million or 56.0%. The increase in
merchandise revenue is primarily attributable to the revenue from stores
acquired or opened since December 25, 1997, as well as a full quarter of Lil'
Champ merchandise revenue and same store merchandise sales growth. Same store
merchandise revenue for the first fiscal quarter 1999 increased 10.5% over the
first fiscal quarter 1998. The increase in same store merchandise revenue is
primarily attributable to increased customer traffic, higher average
transaction size and general economic and market conditions. The increases in
store traffic and average transaction size are primarily attributable to store
merchandising, more competitive gasoline pricing, enhanced store appearance and
increased in-store promotional activity.
Gasoline Revenue and Gallons. Gasoline revenue for the first fiscal
quarter 1999 was $171.8 million compared to $103.0 million during the first
fiscal quarter 1998, an increase of $68.8 million or 66.8%. The increase in
gasoline revenue is primarily attributable to the revenue from stores acquired
or opened since December 25, 1997, as well as a full quarter of Lil' Champ
gasoline revenue and same store gallon sales growth. Gasoline revenue growth
was partially offset by a $0.16 or 13.6% decrease in average gasoline retail
prices versus the comparable period.
In the first fiscal quarter 1999, gasoline gallons sold were 169.0
million compared to 87.5 million during the first fiscal quarter 1998, an
increase of 81.5 million gallons or 93.1%. The increase is primarily
attributable to the gasoline gallons sold by stores acquired or opened since
December 25, 1997, as well as a full quarter of Lil' Champ gasoline gallons and
same store gallon growth. Same store gasoline gallon sales for the first fiscal
quarter 1999 increased 5.1% over the comparable period. The same store gallon
increase is primarily attributable to increased customer traffic resulting from
general economic and market conditions, more competitive gasoline pricing,
rebranding and promotional activity, gasoline equipment upgrades and enhanced
store appearance.
Commission Revenue. Commission revenue for the first fiscal quarter 1999
was $4.4 million compared to $2.8 million during the first fiscal quarter 1998,
an increase of $1.6 million or 58.8%. The increase in commission revenue is
primarily attributable to the revenue from stores acquired or opened since
December 25, 1997, as well as a full quarter of Lil' Champ lottery commissions
and same store commission revenue increases. Commission revenue includes
lottery commissions, video gaming income, money order commissions, telephone
income and revenue from other ancillary product and service offerings.
Total Gross Profit. Total gross profit for the first fiscal quarter 1999
was $72.4 million compared to $45.4 million during the first fiscal quarter
1998, an increase of $27.0 million or 59.6%. The increase in gross profit is
primarily attributable to the profits from stores acquired or opened since
December 25, 1997, as well as a full quarter of Lil' Champ gross profit and
same store profit increases.
38
<PAGE>
Merchandise Gross Profit and Margin. Merchandise gross profit was $44.9
million for the first fiscal quarter 1999 compared to $30.5 million for the
first fiscal quarter 1998, an increase of $14.5 million or 47.5%. This increase
is primarily attributable to the profits from stores acquired or opened since
December 25, 1997, as well as a full quarter of Lil' Champ merchandise gross
profit and same store profit increases. The decline in merchandise gross margin
from 34.1% for the first fiscal quarter 1998 to 32.2% for the first fiscal
quarter 1999 is attributable to the addition of several lower margin stores
acquired or opened since December 25, 1997 and lower gross margin on cigarettes
notwithstanding manufacturer rebates and other incentives.
Gasoline Gross Profit and Per Gallon Margin. Gasoline gross profit was
$23.0 million for the first fiscal quarter 1999 compared to $12.1 million for
the first fiscal quarter 1998, an increase of $10.9 million or 90.0%. This
increase is primarily attributable to the profits from stores acquired or
opened since December 25, 1997, as well as a full quarter of Lil' Champ
gasoline gross profit and same store profit increases. The gasoline gross
profit per gallon was $0.138 for the first fiscal quarter 1998 compared to
$0.136 in first fiscal quarter 1999.
Store Operating and General and Administrative Expenses. Store operating
expenses for the first fiscal quarter 1999 were $43.7 million compared to $28.2
million for the first fiscal quarter 1998, an increase of $15.6 million or
55.3%. The increase in store operating expenses is primarily attributable to
the personnel and lease expenses associated with the stores acquired or opened
since December 25, 1997, as well as a full quarter of Lil' Champ store
operating expenses. As a percentage of total revenue, store operating expenses
decreased from 14.4% in the first fiscal quarter 1998 to 13.9% in the first
fiscal quarter 1999.
General and administrative expenses for the first fiscal quarter 1999
were $10.0 million compared to $7.2 million during the first fiscal quarter
1998, an increase of $2.8 million or 39.0%. The increase in general and
administrative expenses is attributable to increased administrative expenses
associated with the stores acquired or opened since December 25, 1997, as well
as a full quarter of Lil' Champ general and administrative expenses. As a
percentage of total revenue, general and administrative expenses decreased from
3.7% in the first fiscal quarter 1998 to 3.2% in the first fiscal quarter 1999.
Income from Operations. Income from operations was $10.5 million for the
first fiscal quarter 1999 compared to $4.9 million during the first fiscal
quarter 1998, an increase of $5.6 million or 115.2% from the comparable period.
The increase is attributable to the factors discussed above and is partially
reduced by the $3.0 million increase in depreciation and amortization. As a
percentage of total revenue, income from operations increased from 2.5% in the
first fiscal quarter 1998 to 3.3% in the first fiscal quarter 1999.
EBITDA. EBITDA represents income from operations before depreciation and
amortization and extraordinary and unusual items. EBITDA for the first fiscal
quarter 1999 was $18.7 million compared to $10.0 million during the first
fiscal quarter 1998, an increase of $8.7 million or 86.3% over the comparable
period. The increase is attributable to the items discussed above.
EBITDA is not a measure of performance under generally accepted
accounting principles, and should not be considered as 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. We have included
information concerning EBITDA as one measure of an issuer's historical ability
to service debt. EBITDA should not be
39
<PAGE>
considered as an alternative to, or more meaningful than, income from
operations or cash flow as an indication of our operating performance. EBITDA
as defined may not be comparable to similarly-titled measures reported by other
companies.
Interest Expense. Interest expense is primarily interest on our senior
notes, senior subordinated notes and borrowings under our bank credit facility.
Interest expense for the first fiscal quarter 1999 was $8.9 million compared to
$5.8 million for the first fiscal quarter 1998, an increase of $3.1 million or
53.2%. The increase in interest expense is attributable to a full quarter of
interest on the senior subordinated notes and borrowings under our bank credit
facility, which was partially offset by the (1) interest savings related to the
October 23, 1997 redemption of $51.0 million in principal amount of senior
notes and (2) a 50 basis point reduction in the interest rate on the
$49.0 million outstanding senior notes. Subsequent to December 24, 1998, 100%
of the outstanding senior notes were redeemed and refinanced with proceeds from
term loan facilities under the terms of our bank credit facility.
Income Tax Benefit (Expense). The income tax benefit for the first fiscal
quarter 1998 was $0.4 million compared to income tax expense of $0.3 million
for the first fiscal quarter 1999. This decrease was primarily attributable to
the increase in income for operations. Income tax benefit (expense) is recorded
net of a valuation allowance to reduce federal and state deferred tax assets to
a net amount which we believe more likely than not will be realized based on
estimates of future earnings and the expected timing of temporary difference
reversals.
Extraordinary Item. In the first fiscal quarter 1998, we recognized an
extraordinary loss, net of taxes, of approximately $6.8 million in connection
with the October 23, 1997 redemption of $51.0 million in principal amount of
our outstanding senior notes and related consents obtained from the holders of
the senior notes to amendments and waivers to certain covenants contained in
the indenture. The loss was 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.
Net Income (loss). Net income for the first fiscal quarter 1999 was $1.1
million compared to a net loss of $6.9 million for the first fiscal quarter
1998. In the first fiscal quarter 1998 we recognized an extraordinary loss as
discussed above.
Fiscal 1998 Compared to Fiscal 1997
Total Revenue. Total revenue for fiscal 1998 was $984.9 million compared
to $427.4 million for fiscal 1997, an increase of $557.5 million or 130.4%. The
increase in total revenue is primarily attributable to Lil' Champ revenue of
$462.8 million for the eleven month period ended September 24, 1998, the
revenue from stores acquired or opened in fiscal 1998, a full year of revenue
from stores acquired or opened in fiscal 1997 and same store sales growth.
Merchandise Revenue. Merchandise revenue for fiscal 1998 was $460.8
million compared to $202.4 million for fiscal 1997, an increase of $258.4
million or 127.6%. The increase in merchandise revenue is primarily
attributable to Lil' Champ merchandise revenue of $215.4 million for the eleven
month period ended September 24, 1998, the revenue from stores acquired or
opened in fiscal 1998, a full year of revenue from stores acquired or opened in
fiscal 1997 and same store
40
<PAGE>
sales growth. Fiscal 1998 same store merchandise revenue growth increased 5.3%
over fiscal 1997. Same store sales increases at The Pantry locations are
primarily attributable to increased customer counts and average transaction
size resulting from more competitive gasoline pricing, enhanced store
appearance and store merchandising and increased in-store promotional activity.
Gasoline Revenue and Gallons. Gasoline revenue for fiscal 1998 was $510.0
million compared to $220.2 million for fiscal 1997, an increase of $289.8
million or 131.6%. The increase in gasoline revenue is primarily attributable
to Lil' Champ gasoline revenue of $240.1 million for the eleven month period
ended September 24, 1998, the revenue from stores acquired or opened in fiscal
1998, a full year of revenue from stores acquired or opened in fiscal 1997 and
same store gallon sales growth. Overall, gasoline revenue growth was partially
offset by lower average gasoline retail prices in fiscal 1998 versus fiscal
1997. In fiscal 1998, our average retail price of gasoline was $0.14 lower than
in fiscal 1997. The decrease in average retail price is primarily attributable
to lower wholesale gasoline pricing.
In fiscal 1998, total gasoline gallons were 466.8 million gallons
compared to 179.4 million gallons in fiscal 1997, an increase of 287.4 million
gallons or 160.2%, 212 million of which is attributable to Lil' Champ volume.
Fiscal 1998 same store gallon sales growth was 4.8% and is primarily
attributable to more competitive gasoline pricing, rebranding and promotional
activity, enhanced store appearance and local market and economic conditions.
Commission Revenue. Total commission revenue for fiscal 1998 was $14.1
million compared to $4.8 million for fiscal 1997, an increase of $9.3 million
or 195.1%. The increase in commission revenue is primarily attributable to Lil'
Champ revenue of $7.3 million for the eleven month period ended September 24,
1998 and revenue from stores acquired or opened in fiscal 1998. Lil' Champ's
commission revenue is principally lottery revenue in locations throughout
Florida and Georgia.
Total Gross Profit. Total gross profit for fiscal 1998 was $233.4 million
compared to $97.3 million for fiscal 1997, an increase of $136.1 million or
139.9%. The increase in gross profit is primarily attributable to Lil' Champ
gross profit of $111.7 million for the eleven month period ended September 24,
1998, the gross profit from stores acquired or opened in fiscal 1998, full year
revenue from stores acquired or opened in fiscal 1997 and same store gross
profit increases.
Merchandise Gross Margin. Merchandise gross margins in fiscal 1998
remained relatively constant compared to fiscal 1997, decreasing only 34 basis
points despite significant cost inflation in the tobacco category. Excluding
tobacco sales, merchandise gross margins rose due to improved purchasing.
Gasoline Gross Profit per Gallon. The gasoline gross profit per gallon
increased to $0.134 in fiscal 1998 from $0.128 in fiscal 1997 as the result of
general gasoline market conditions in Lil' Champ's markets and improved
gasoline market conditions in our other primary markets. This increase occurred
in spite of decreases in retail gasoline prices to $1.09 in fiscal 1998 from
$1.23 in fiscal 1997.
Store Operating and General and Administrative Expenses. Store operating
expenses for fiscal 1998 were $140.1 million compared to $60.2 million for
fiscal 1997, an increase of $79.9 million or 132.7%. The increase in store
expenses is primarily attributable to Lil' Champ expenses of $66.0 million for
the eleven month period ended September 24, 1998, the personnel and
41
<PAGE>
lease expenses associated with the stores acquired or opened in fiscal 1998 and
a full year of personnel and lease expenses associated with stores acquired or
opened in fiscal 1997. As a percentage of total revenue, store operating
expenses increased to 14.2% in fiscal 1998 from 14.1% in fiscal 1997.
General and administrative expenses for fiscal 1998 were $32.8 million
compared to $16.8 million for fiscal 1997, an increase of $16.0 million or
95.1%. The increase in general and administrative expenses is primarily
attributable to Lil' Champ expenses of $14.3 million for the eleven month
period ended September 24, 1998. Operating, general and administrative expenses
in total decreased as a percentage of total revenue. As a percentage of total
revenue, general and administrative expenses decreased to 3.3% in fiscal 1998
from 3.9% in fiscal 1997.
Income from Operations. Income from operations for fiscal 1998 was $31.8
million compared to $10.8 million for fiscal 1997, an increase of $21.1 million
or 195.6%. The increase is primarily attributable to Lil' Champ income from
operations of $16.6 million, earnings from stores acquired or opened in fiscal
1998, a full year of revenue from stores acquired or opened in fiscal 1997,
same store volume increases, and the margin impact as discussed above. The
increase is partially offset by the personnel and lease expenses associated
with the stores acquired or opened in fiscal 1998 and a full year of expenses
from stores acquired or opened in fiscal 1997. As a percentage of total
revenue, income from operations increased to 3.2% in fiscal 1998 from 2.5% in
fiscal 1997.
EBITDA. EBITDA for fiscal 1998 was $60.5 million compared to $20.3
million for fiscal 1997, an increase of $40.2 million or 198.4%. The increase
is primarily attributable to Lil' Champ EBITDA of $31.4 million for the eleven
month period ended September 24, 1998 and the items discussed above. Excluding
Lil' Champ, EBITDA increased 43.3% in fiscal 1998 compared to fiscal 1997.
Interest Expense. Interest expense in fiscal 1998 was $28.9 million
compared to $13.0 million for fiscal 1997, an increase of $15.9 million or
122.0%. This increase is attributable to interest on our senior notes, our
senior subordinated notes and borrowing under the bank credit facility, which
was partially offset by the interest savings related to the redemption of $51.0
million in principal amount of our senior notes.
Income Tax Benefit (Expense). We did not record an income tax benefit for
fiscal 1998 or fiscal 1997. Income tax benefit (expense) is recorded net of a
valuation allowance to reduce federal and stated deferred tax assets to a net
amount which we believe more likely than not will be realized based on
estimates of future earnings and the expected timing of temporary difference
reversals.
Extraordinary Item. We recognized an extraordinary loss, net of taxes, of
approximately $8.0 million in fiscal 1998 in connection with the redemption of
a portion of our senior notes and related 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 our 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 our senior notes.
Net Loss. Net loss for fiscal 1998 was $3.3 million compared to $1.0
million for fiscal 1997, an increase of $2.3 million or 241.0%. The increase is
primarily attributable to the extraordinary loss, net of taxes, of $8.0 million
in connection with the redemption of our senior notes and related consent fees.
42
<PAGE>
Fiscal 1997 Compared to Fiscal 1996
Total Revenue. Total revenue for fiscal 1997 was $427.4 million compared
to $384.8 million for fiscal 1996, an increase of $42.6 million or 11.1%. This
increase is attributable to significant revenue increases in merchandise,
gasoline and commissions despite a reduction in average store count compared to
the prior year.
Merchandise Revenue. Merchandise revenue for fiscal 1997 was $202.4
million compared to $188.1 million for fiscal 1996, an increase of $14.3
million or 7.6%, due to increased volume in major categories, a general
increase in the price of cigarettes and growth in new merchandising programs
and categories. Same store merchandise sales increased 8.5% over fiscal 1996
and average merchandise sales per store increased as we closed or sold 25 lower
volume stores while acquiring or opening 36 new stores.
Gasoline Revenue and Gallons. Total gasoline revenue for fiscal 1997 was
$220.2 million compared to $192.7 million for fiscal 1996, an increase of $27.4
million or 14.2%, primarily due to our competitive pricing strategy, the
closing of underperforming stores and acquiring or opening 36 new stores with
average gasoline volume greater than our overall average. Additionally, the
average retail price per gallon in fiscal 1997 was $1.23 versus an average
retail price per gallon in fiscal 1996 of $1.20. This average retail price is
indicative of our more competitive gasoline pricing strategy, general gasoline
market conditions and increased price competition from other gasoline marketers
in certain markets. In fiscal 1997 total gasoline gallons were 179.4 million
gallons compared to 160.7 million gallons for fiscal 1996, an increase of 18.8
million gallons or 11.7%. Our same store gasoline volume increase of 7.2% in
fiscal 1997 can be attributed to more competitive pricing and a relatively mild
1996-1997 winter season compared to the prior year.
Commission Revenue. Total commission revenue for fiscal 1997 was $4.8
million compared to $4.0 million for fiscal 1996, an increase of $0.8 million
or 20.3% due to the expansion and enhancement of existing commission related
programs and the introduction of new programs in selected markets.
Total Gross Profit. Total gross profit for fiscal 1997 was $97.3 million
compared to $91.2 million for fiscal 1996, an increase of $6.1 million or 6.6%
as a result of the increases in merchandise, gasoline and commission revenues
discussed above and an increase in merchandise gross profit margin to 34.4% in
fiscal 1997 from 33.0% in fiscal 1996. Overall gross profit margin declined to
22.8% in fiscal 1997 from 23.7% in fiscal 1996 due to the decrease in gasoline
margin per gallon to $0.128 in fiscal 1997 from $0.156 in fiscal 1996. The
decrease in gasoline gross profit margin is attributable to a shift in our
pricing practices and less favorable conditions in the wholesale and retail
gasoline markets.
Store Operating and General and Administrative Expenses. Store operating
expenses in fiscal 1997 were $60.2 million compared to $57.8 million in fiscal
1996, an increase of $2.4 million, or 4.1%, but decreased as a percentage of
merchandise sales. Store expenses increased due to increases in store personnel
related expenses of $1.0 million, real estate lease expense of $0.9 million and
equipment rental expense of $0.5 million. The increase in store personnel
related expenses is attributable to increased customer traffic and transaction
volume. The increase in real estate leases is attributable to the consummation
of several sale/leaseback transactions. The increase in equipment rental
expense is primarily attributable to our roll-out of a frozen drink program to
a majority of stores. As a percentage of total revenue, store operating
expenses decreased to 14.1% in fiscal 1997 from 15.0% in fiscal 1996.
General and administrative expenses for fiscal 1997 were $16.8 million
compared to $17.1 million in fiscal 1996, a decrease of $0.3 million, or 1.9%.
The decrease in both total dollar
43
<PAGE>
terms and as a percentage of merchandise sales is attributable to improved
fiscal management of major expense categories. As a percentage of total
revenue, general and administrative expenses decreased to 3.9% in fiscal 1997
from 4.5% in fiscal 1996.
Income from Operations. Income from operations for fiscal 1997 was $10.8
million compared to $1.9 million for fiscal 1996, an increase of $8.9 million
or 474.8%. The increase is attributable to the items discussed above, as well
as nonrecurring restructuring charges of $2.2 million and charges for
impairment of long-lived assets of $3.0 million in fiscal 1996 which were not
present in fiscal 1997. As a percentage of total revenue, income from
operations increased to 2.5% in fiscal 1997 from 0.5% in fiscal 1996.
EBITDA. EBITDA for fiscal 1997 was $20.3 million compared to $16.3
million in fiscal 1996, an increase of $4.0 million or 24.8%, due to the items
discussed above.
Interest Expense. Interest expense for fiscal 1997 was $13.0 million
compared to $12.0 million in fiscal 1996, an increase of $1.0 million or 8.7%,
due to (1) a temporary interest rate increase on our senior notes from 12% to
12 1/2% and (2) a nonrecurring decrease of $0.6 million related to an interest
accrual that was reversed in fiscal 1996 and did not occur in fiscal 1997. The
accrual had been recorded related to a potential income tax issue that was
resolved in our favor in fiscal 1996.
Income Tax Benefit (Expense). Our income tax benefit decreased in fiscal
1997 due to a $9.8 million decrease in pre-tax loss compared to the prior year
and the computation of our tax liability for fiscal 1997. Additionally, no
income tax benefit was recorded in fiscal 1997, which was principally
attributable to an increase in the valuation allowance for state deferred
income tax assets of approximately $325,000.
Net Loss. Net loss for fiscal 1997 was $1.0 million compared to $8.1
million for fiscal 1997, a decrease of $7.1 million or 87.7%. The decrease is
attributable to the items discussed above, as well as nonrecurring
restructuring charges of $2.2 million and charges for impairment of long-lived
assets of $3.0 million in fiscal 1996 not present in fiscal 1997.
Liquidity and Capital Resources
Cash Flows from Operations. Due to the nature of our business,
substantially all sales are for cash, and cash provided by operations is our
primary source of liquidity. Capital expenditures, acquisitions and interest
expense represent our primary uses of funds. We rely primarily upon cash
provided by operating activities, supplemented as necessary from time to time
by borrowings under our bank credit facility, sale-leaseback transactions,
asset dispositions and equity investments to finance our operations, pay
interest, and fund capital expenditures and acquisitions. Cash provided by
operating activities was $5.4 million in fiscal 1996, $7.3 million in fiscal
1997 and $48.0 million in fiscal 1998. Cash used in operating activities
increased from $0.9 million for the first fiscal quarter 1998 to $3.5 million
for the first fiscal quarter 1999, due to increases in inventory and
receivables and a decrease in accrued interest. We had $15.1 million of cash
and cash equivalents on hand at December 24, 1998.
1998 Acquisitions and Disposition. In fiscal 1998 we acquired a total of
645 convenience stores in eight transactions for approximately $240 million.
These acquisitions were funded with the proceeds from the sale of our senior
subordinated notes, borrowings under our bank credit facility, equity
investments by existing shareholders and management and cash on hand. In
addition, in
44
<PAGE>
September 1998, we sold 48 convenience stores, representing all of our
convenience store operations and idle property in Georgia.
1999 Acquisitions. To date in fiscal 1999, we have acquired a total of
214 convenience stores in five transactions for approximately $140 million.
These acquisitions were funded with borrowings under our bank credit facility
and cash on hand.
Capital Expenditures. Capital expenditures (excluding all acquisitions)
for fiscal 1998 were $48.4 million. Capital expenditures (excluding all
acquisitions) were approximately $5.9 million in the first fiscal quarter 1998
and approximately $9.6 million in the first fiscal quarter 1999. Capital
expenditures are primarily expenditures for existing store improvements, store
equipment, new store development, information systems and expenditures to
comply with regulatory statutes, including those related to environmental
matters.
We finance substantially all capital expenditures and new store
development through cash flow from operations, a sale-leaseback program or
similar lease activity, vendor reimbursements and asset dispositions. In fiscal
1998, we received approximately $20.7 million in sale-leaseback and vendor
reimbursements for capital improvements. As a result, net capital expenditures,
excluding all acquisitions, for fiscal 1998 were $27.7 million. In the first
fiscal quarter 1999, we received approximately $2.4 million from sale-
leaseback, asset dispositions, and other reimbursements for capital
improvements. Net capital expenditures, excluding all acquisitions, for the
first fiscal quarter 1999 were $7.2 million. We anticipate capital expenditures
for fiscal 1999 will be approximately $45.0 million.
Long-term Debt. At February 28, 1999, our long-term debt consisted
primarily of $200.0 million of senior subordinated notes and $244.0 million
outstanding under our bank credit facility. We are currently in compliance with
our debt covenants.
In January 1999, we substantially restructured and expanded our bank
credit facility in connection with the Handy Way acquisition and the redemption
of our senior notes. Our current bank credit facility consists of (1) a $45.0
million revolving credit facility available for working capital financing,
general corporate purposes and issuing commercial and standby letters of
credit, $5.0 million of which was drawn in connection with the Handy Way
transaction and under which $15.3 million of letters of credit are outstanding
as of March 1, 1999, (2) an $80.0 million Tranche A term loan facility and a
$160.0 million Tranche B term loan facility, both of which are borrowed, and
(3) a $50.0 million acquisition term facility which is available through
January 31, 2001 to finance acquisitions of related businesses, $19.0 million
of which was drawn in connection with the ETNA acquisition. On February 23,
1999, we repaid $1.0 million borrowed under the term loan facilities with the
proceeds of a sale-leaseback transaction. As of March 1, 1999, we had $20.0
million available for borrowing (or additional letters of credit) under the
revolving credit facility and $31.0 million available for borrowing under the
acquisition term facility.
On January 31, 2001, all amounts then outstanding under the acquisition
term loan facility convert into a three year term loan. The Tranche A and
acquisition term loan facilities mature in January 2004, and the Tranche B term
loan facility matures in January 2006. The Tranche A and Tranche B term loan
facilities require quarterly payments of principal beginning in April 1999,
with annual payments of principal totaling approximately $2.6 million in fiscal
1999, $10.3 million in fiscal 2000, $17.6 million in fiscal 2001, $20.6 million
in fiscal 2002, $23.9 in fiscal 2003, $44.1 million in fiscal 2004, $76.0
million in fiscal 2005, and $43.9 million in fiscal 2006. We are required
45
<PAGE>
to pay down our bank credit facility as follows: (1) with net proceeds from
asset sales, subject to exceptions for certain sale-leaseback transactions; (2)
with 50% of the proceeds from the issuance of any of our equity securities
other than sales of our equity securities to our management employees; (3) with
all of the proceeds from the issuance of any of our debt securities; and (4)
with 50% of our excess cash flow.The acquisition term facility requires
quarterly payments of principal beginning in April 2001 in an amount equal to
8.33%, or 8.37% with respect to the installment payable in January 2004, of the
aggregate acquisition term loans outstanding at January 31, 2001.
The loans under our bank credit facility are secured by a first priority
security interest in substantially all of our tangible and intangible assets
(including the stock of certain of our subsidiaries), whether we own these
assets now or acquire them in the future. In addition, certain of our
subsidiaries guaranteed our obligations under the bank credit facility and
these guarantees are secured by a first priority security interest in
substantially all of the tangible and intangible assets of each of the
guarantors.
The interest rates we pay on borrowings under our bank credit facility
are variable and are based, at our option, on either a eurodollar rate plus a
certain percentage or a base rate plus a certain percentage. If we choose the
eurodollar base rate, we pay 3.0% per year in addition to the eurodollar base
rate for our revolving credit facility, our acquisition term loan facility, and
our Tranche A term loan facility. For our Tranche B term loan facility, we pay
3.5% per year in addition to the eurodollar base rate. If we opt for the base
rate, we pay 1.5% per year in addition to the base rate for our revolving
credit facility, our acquisition term loan facility, and our Tranche A term
loan facility. For our Tranche B term loan facility, we pay 2.0% per year in
addition to the base rate. On March 2, 1999, we entered into an interest rate
swap arrangement to reduce our exposure to interest rate fluctuations with
respect to $45.0 million of pro rata borrowings under our Tranche A and Tranche
B term loan facilities. The interest rate swap arrangement fixes the interest
rate on these borrowings at 8.62% for the Tranche A facility and 9.12% for the
Tranche B facility for approximately two years.
The bank credit facility contains covenants restricting our ability to,
among other things, (1) incur additional indebtedness; (2) declare dividends or
redeem or repurchase capital stock; (3) prepay, redeem or purchase debt; (4)
incur liens; (5) make loans and investments; (6) make capital expenditures; (7)
engage in mergers, acquisitions or asset sales; and (8) engage in transactions
with affiliates. Our bank credit facility provides that the maximum amount we
can spend on any acquisition is $50 million. This amount includes any
assumption of debt which is part of the consideration for the acquisition. Our
bank credit facility also provides that our revenues and assets related to
gaming may not exceed 4% of our total revenues. Also, our bank credit facility
limits our capital expenditures to $46 million in fiscal 1999 and $34 million
each year thereafter. Our bank credit facility requires us to remain in
compliance with various financial ratios. Our EBITDA for any consecutive four-
quarter period must be at least $82 million in fiscal 1999 (increasing each
year to $100 million in fiscal 2004). Our debt to EBITDA ratio must not exceed
5 to 1 in fiscal 1999 (decreasing each year to 3.25 to 1 in fiscal 2004). Our
ratio of EBITDA plus rental payments, to interest expense plus rental payments,
must be at least 1.5 to 1 in fiscal 1999 (increasing each year to 2 to 1 in
fiscal 2004).
We also have outstanding $200.0 million of 10 1/4% senior subordinated
notes due 2007. Interest on the senior subordinated notes is due on October 15
and April 15 of each year. The senior subordinated notes are unconditionally
guaranteed, on an unsecured basis, as to the payment of principal, premium, if
any, and interest, jointly and severally, by certain of our subsidiaries. The
senior subordinated notes contain covenants that, among other things, restrict
our ability and any restricted subsidiary's ability to: (1) incur additional
indebtedness; (2) pay dividends or make
46
<PAGE>
distributions; (3) issue stock of subsidiaries; (4) make certain investments;
(5) repurchase stock; (6) create liens; (7) enter into transactions with
affiliates; (8) enter into sale-leaseback transactions and (9) engage in
mergers or consolidations. Our senior subordinated notes also place certain
conditions on the terms of asset sales or transfers and require us either to
reinvest the proceeds of an asset sale or transfer, or, if we do not reinvest
those proceeds, to pay down our bank credit facility or other senior debt or to
offer to redeem our senior subordinated notes with any asset sale proceeds not
so used. Up to 35% of the senior subordinated notes may be redeemed prior to
October 15, 2000 at a redemption price of 110.25% plus accrued interest with
the net proceeds of one or more public equity offerings. All of the senior
subordinated notes may be redeemed after October 15, 2002 at a redemption price
which begins at 105.125% and decreases to 100.0% after October 2005.
On January 28, 1999, we redeemed all remaining $49.0 million of our
senior notes at 104% of their principal amount plus accrued and unpaid
interest. These payments were financed with proceeds from the bank credit
facility. We recognized an extraordinary loss of approximately $5.5 million
resulting from the refinancing of our debt. This loss included the payment of
the call premium, fees paid in connection with the amendment of our bank credit
facility and the write-off of deferred financing costs.
Pro forma for the offering and the application of the net proceeds, our
long-term debt will consist of $200.0 million of senior subordinated notes and
approximately $199.4 million outstanding under our bank credit facility.
Cash Flows From Financing Activities. During fiscal 1998, we financed the
Lil' Champ acquisition purchase price, the refinancing of existing Lil' Champ
debt, the repurchase of a portion of the senior notes, the total purchase price
of all acquisitions and all related fees and expenses with the proceeds from
the offering of the senior subordinated notes, cash on hand and the net
proceeds of approximately $57.0 million from the sale of common stock to our
existing stockholders and management.
The first fiscal quarter 1999 acquisitions were partially financed with
$18.0 million in proceeds from the bank credit facility. In the first quarter
1999, we sold 3,184 shares of common stock for approximately $1.8 million to
certain employees under our stock subscription plan.
Cash Requirements. We believe that cash on hand, together with the
proceeds of this offering, cash flow anticipated to be generated from
operations, short-term borrowing for seasonal working capital and permitted
borrowings under our credit facilities will be sufficient to enable us to
satisfy anticipated cash requirements for operating, investing and financing
activities, including debt service, for the next twelve months.
Shareholders' Equity. As of December 24, 1998, our shareholders' equity
totaled $40.7 million. The increase in shareholders' equity is attributed to
the proceeds from the sale of additional common stock and our net income of
$1.0 million for the first fiscal quarter 1999.
Additional paid-in-capital is impacted by the accounting treatment
applied to the 1987 leveraged buyout of the outstanding common stock of our
predecessor which resulted in a debit to equity of $17.1 million. This debit
had the effect, among others, of offsetting $7.0 million of equity capital
invested by our former shareholders.
The accumulated deficit as of December 24, 1998 includes the cumulative
effect of (1) the accrued dividends on previously outstanding preferred stock
of $5.0 million, (2) the accrued
47
<PAGE>
dividends on the series B preferred stock of $4.4 million, (3) the net cost of
equity transactions and (4) 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
We are 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 our underground storage tank, or UST,
systems. In order to comply with this requirement, we maintain letters of
credit in the aggregate amount of $2.3 million issued by a commercial bank in
favor of state environmental enforcement agencies in the states of North
Carolina, South Carolina, Virginia, Tennessee, Indiana and Kentucky and rely on
reimbursements from applicable state trust funds. In Florida, we meet such
financial responsibility requirements by a combination of state trust fund
coverage and private commercial liability insurance and qualified self-
insurance.
All states in which we operate or have operated UST systems have
established trust funds for the sharing, recovering, and reimbursing of certain
cleanup costs and liabilities incurred as a result of releases from UST
systems. These trust funds, which essentially provide insurance coverage for
the cleanup of environmental damages caused by the operation of UST systems,
are funded by a UST registration fee and a tax on the wholesale purchase of
motor fuels within each state. We have paid UST registration fees and gasoline
taxes to each state where we operate to participate in these programs and have
filed claims and received reimbursement in North Carolina, South Carolina,
Kentucky, Indiana, Georgia, Florida and Tennessee. The coverage afforded by
each state fund varies but generally provides from $150,000 to $1.0 million per
site for the cleanup of environmental contamination, and most provide coverage
for third party liabilities.
Costs for which we do not receive reimbursement include but are not
limited to (1) the per-site deductible; (2) costs incurred in connection with
releases occurring or reported to trust funds prior to their inception; (3)
removal and disposal of UST systems; and (4) costs incurred in connection with
sites otherwise ineligible for reimbursement from the trust funds. The trust
funds require us to pay deductibles ranging from $10,000 to $100,000 per
occurrence depending on the upgrade status of our UST system, the date the
release is discovered/reported and the type of cost for which reimbursement is
sought. The Florida trust fund will not cover releases first reported after
December 31, 1998. We meet Florida financial responsibility requirements for
remediation and third party claims arising out of releases reported after
December 31, 1998 through a combination of private insurance and qualified self
insurance. In addition to immaterial amounts to be spent by us, a substantial
amount will be expended for remediation on our behalf by state trust funds
established in our operating areas and other responsible third parties
(including insurers). To the extent such third parties do not pay for
remediation as we anticipate, we will be obligated to make such payments, which
could materially adversely affect our financial condition and results of
operations. Reimbursement from state trust funds will be dependent upon the
maintenance and continued solvency of the various funds.
Environmental reserves of $17.3 million as of December 24, 1998 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)
48
<PAGE>
and are based on current regulations, historical results and certain other
factors. Although we can make no assurances, we anticipate that we will be
reimbursed for a portion of these expenditures from state insurance funds and
private insurance. As of December 24, 1998, these anticipated reimbursements of
$12.8 million are recorded as long-term environmental receivables. In Florida,
remediation of such contamination will be performed by the state and we expect
that substantially all of the costs will be paid by the state trust fund. We
will perform remediation in other states through independent contractor firms
that we have engaged. For certain sites the trust fund does not cover a
deductible or has a co-pay which may be less than the cost of such remediation.
We have reserved $500,000 to cover third party claims that are not
covered by state trust funds or by private insurance. This reserve is based on
management's best estimate of losses that may be incurred over the next several
years based on, among other things, the fact that remediation standards and
expectations are evolving, the legal principles regarding the right to and
proper measure of damages for diminution in real property value, lost profit,
lost opportunity and damage to soil and subsurface water that may be owned by
the state, the absence of controlling authority of the limitation period, if
any, that may be applicable and the possibility that remediation (which will be
funded by state trust funds, private insurance or is included within the
reserve described above for remediation) may be sufficient. Although we are not
aware of releases or contamination at other locations where we currently
operate or have operated stores, any such releases or contamination could
require substantial remediation costs, some or all of which may not be eligible
for reimbursement from state trust funds.
Several of our locations identified as contaminated are being cleaned up
by third parties who have assumed responsibility for such clean up matters.
Additionally, we are awaiting closure notices on several other locations which
will release us from responsibility related to known contamination at those
sites.
Year 2000 Initiative
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year in respective
date fields. We use a combination of hardware devices run by computer programs
at our support centers and retail locations to process transactions and other
data which are essential to our business operations. The Year 2000 issue and
its impact on data integrity could result in system interruptions,
miscalculations or failures causing disruption of operations.
We completed our assessment phase of Year 2000 vulnerability early in
fiscal 1998, after a formal third-party assessment was completed in November
1997. Based on this third-party assessment, internal assessment, and project
results as of January 27, 1999, we believe all system modifications, hardware
and software replacements or upgrades and related testing will be completed by
September 1999. In order to meet this date, we have engaged outside consultants
and contractors to assist in the overall project and remediation effort. In
addition, we are currently reviewing the Handy Way operations for Year 2000
compliance and believe that Handy Way will be Year 2000 compliant by December
1999. We do not believe either the direct or indirect costs of Year 2000
compliance will be material to our operations or operating results.
We have tested, replaced, or plan to replace significant portions of our
existing systems and related hardware which did not properly interpret dates
beyond December 31, 1999. In addition, we have tested, modified, or plan to
modify the remaining systems and related hardware to ensure Year
49
<PAGE>
2000 compliance. Our testing methodology includes, but is not limited to,
rolling dates forward to critical dates in the future and simulating
transactions, inclusion of several critical date scenarios, and utilizing
software programs which test for compliance on certain equipment. Our
expenditures to date have been immaterial and consist primarily of internal
costs and expenses associated with third-party contractors.
We have initiated communications with our significant vendors, suppliers,
and financial institutions to determine the extent to which we are vulnerable
to those third-parties' failure to be Year 2000 compliant. Based on these
communications and presently available information, we do not anticipate any
material effects related to vendor, supplier, third-party credit card
processing company or financial institution compliance. Additionally, due to
the nature of our business, Year 2000 compliance with respect to our customers
is not relevant. Noncompliance by venders, suppliers, credit card processing
companies and financial institutions utilized by us could result in a material
adverse effect on our financial condition and results of operations. We believe
that the worst case scenario in the event of a Year 2000-related failure would
be delays in the receipt of payment from credit card processing companies and a
return to manual accounting processing at our individual stores.
While we believe our planning efforts are adequate to address our Year
2000 concerns, there can be no assurances that the systems of other companies
on which our systems and operations rely will be converted on a timely basis
and will not have a material impact on us. We are in the process of formulating
a contingency plan to address possible noncompliance by our vendors, suppliers,
financial institutions and credit card processors.
Recently Issued Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for the first fiscal
quarter of fiscal 2000. Earlier application of all of the provisions of SFAS
No. 133 is encouraged. As of December 24, 1998, we have not determined the
effect of SFAS No. 133 on our consolidated financial statements.
Inflation
General inflation has not had a significant impact on The Pantry over the
past three years. As reported by the Bureau of Labor Statistics for the
calendar quarter ended December 31, 1998, the consumer price index increased
less than one percent. For the same period, the producer price index, a measure
of wholesale cost inflation, also increased less than one percent. We do not
expect general inflation to have a significant impact on our results of
operations or financial condition in the foreseeable future.
As reported by the Bureau of Labor Statistics for the calendar quarter
ended December 31, 1998, the consumer price index for the category labeled
"cigarettes" increased approximately 17.8%. For the same period, the producer
price index for the category labeled "cigarettes" increased 31.0%. On November
23, 1998, major cigarette manufacturers that supply The Pantry increased
50
<PAGE>
prices by $0.45 per pack. During the first fiscal quarter 1999, the cigarette
cost increase was directly offset by cigarette manufacturer support, including
cigarette rebates and other incentives. Since December 24, 1998, these
increases have been passed on in higher retail prices throughout the chain.
Because The Pantry expects to pass cigarette cost increases on to its
customers through higher retail prices, these cost increases are expected to
reduce our gross margin percentage for the cigarette category, but are not
expected to have a material impact on the cigarette category gross profit
dollars. Although it is too early to determine the potential impact on
cigarette unit volume, management believes it can pass along these and other
cost increases to our customers over the long term and, therefore, does not
expect cigarette inflation to have a significant impact on our results of
operations or financial condition in the foreseeable future.
Quantitative and Qualitative Disclosures about Market Risk
Quantitative Disclosures. We are exposed to certain market risks
inherent in our financial instruments. These instruments arise from
transactions entered into in the normal course of business and, in some cases,
relate to our acquisitions of related businesses. Certain of our financial
instruments are fixed rate, short-term investments which are held-to-maturity.
We are subject to interest rate risk on our existing long-term debt (including
without limitation, the senior subordinated notes) and any future financing
requirements. Our fixed rate debt consists primarily of outstanding balances
on our senior subordinated notes and our variable rate debt relates to
borrowings under our bank credit facility.
The following table presents the future principal cash flows and
weighted-average interest
rates expected on our existing long-term debt instruments.
<TABLE>
<CAPTION>
Expected Maturity Date (as of September 24, 1998)
-------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000 Fiscal 2001 Fiscal 2002 Fiscal 2003 Thereafter Total
----------- ----------- ----------- ----------- ----------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt.......... $ 45 $ 45 $49,040 $ 45 $78,045 $200,049 $327,269
Weighted average
interest rate.......... 10.59% 10.29% 10.25% 10.25% 10.25% 10.25%
</TABLE>
<TABLE>
<CAPTION>
Expected Maturity Date (as of December 24, 1998)
-------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000 Fiscal 2001 Fiscal 2002 Fiscal 2003 Thereafter Total
----------- ----------- ----------- ----------- ----------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt.......... $ 39 $ 39 $49,034 $ 39 $94,039 $200,109 $343,299
Short-term debt......... 2,000 -- -- -- -- -- 2,000
Weighted average
interest rate.......... 9.87% 9.88% 9.53% 9.53% 9.53% 10.25%
</TABLE>
On January 28, 1999, we refinanced our senior notes and outstanding
borrowings under our previous bank credit facility with proceeds from new term
loan facilities under our amended bank credit facility. On January 28, 1999 and
in connection with the Handy Way acquisition and debt refinancing, we borrowed
approximately $97.0 million under the term loan facilities and $5.0 million
under the revolving credit facility. The term loan facilities requires
quarterly principal and interest payments with interest based on a spread over
LIBOR, a variable interest rate. This refinancing and the additional borrowings
increased our annual principal and interest requirements. However, the lower
borrowing rates under our term loan facilities reduced our weighted average
interest rate.
51
<PAGE>
The following table updates the expected principal cash flows and
expected weighted average interest rates for these transactions, as of January
28, 1999.
<TABLE>
<CAPTION>
Expected Maturity Date (as of January 28, 1999)
-------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000 Fiscal 2001 Fiscal 2002 Fiscal 2003 Thereafter Total
----------- ----------- ----------- ----------- ----------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt.......... $2,595 $10,395 $17,645 $20,645 $23,895 $365,134 $440,309
Short-term debt......... 5,000 -- -- -- -- -- 5,000
Weighted average
interest rate.......... 9.19% 9.22% 9.26% 9.32% 9.40% 9.44%
</TABLE>
On March 2, 1999, we entered into an interest rate swap arrangement with
respect to $45.0 million of borrowings under our outstanding Tranche A and
Tranche B term loan facilities. The interest rate swap arrangement fixes the
interest rate on these borrowings at 8.62% for the Tranche A facility and 9.12%
for the Tranche B facility for approximately two years. Also, we expect to use
approximately $69 million in proceeds from this public offering to repay
indebtedness under our bank credit facility with a weighted average interest
rate of 8.96%. The following table updates the expected principal cash flows
and expected weighted average interest rates for the interest rate swap
arrangement and the expected repayments, as of March 2, 1999, assuming
completion of the offering and application of offering proceeds.
<TABLE>
<CAPTION>
Expected Maturity Date (as of March 2, 1999 pro forma for the offering)
-------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000 Fiscal 2001 Fiscal 2002 Fiscal 2003 Thereafter Total
----------- ----------- ----------- ----------- ----------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt.......... $2,595 $10,395 $17,645 $20,645 $18,731 $319,323 $389,334
Weighted average
interest rate.......... 9.62% 9.64% 9.67% 9.73% 9.79% 9.83%
</TABLE>
Qualitative Disclosures. Our primary exposure relates to (1) interest
rate risk on long-term and short-term borrowings, (2) our ability to pay or
refinance long-term borrowings at maturity at market rates, (3) the impact of
interest rate movements on our ability to meet interest expense requirements
and exceed financial covenants and (4) the impact of interest rate movements on
our ability to obtain adequate financing to fund future acquisitions. We manage
interest rate risk on our outstanding long-term and short-term debt through our
use of fixed and variable rate debt. The interest rate swap mentioned above
will reduce our exposure to short-term interest rate fluctuations. While we can
not predict or manage our ability to refinance existing debt or the impact
interest rate movements will have on our existing debt, management evaluates
our financial position on an ongoing basis.
Forward-Looking Statements
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements, which are subject to numerous
risks, uncertainties, and assumptions about The Pantry, include, among other
things:
. our anticipated acquisition and growth strategies, including our
strategy to double our store base,
. anticipated trends in our businesses,
. future expenditures for capital projects including the cost of
environmental compliance,
. our ability to pass along cigarette price increases to our customers
without a decrease in cigarette sales,
52
<PAGE>
. our ability to successfully deal with Year 2000 issues that may arise
in our or third party operations and
. our ability to control costs, including our ability to achieve
significant cost savings in connection with our acquisitions.
These forward-looking statements are subject to numerous risks and
uncertainties, including risks related to our dependance on gasoline and
tobacco sales, our acquisition strategy, our rapid growth since 1996, our
dependence on one principal wholesaler, the intense competition in the
convenience store and retail gasoline industries, our dependence on favorable
weather conditions in spring and summer months, the concentration of our stores
in the southeastern United States, our history of losses, extensive
environmental regulation of our business, governmental regulation, control of
The Pantry by one principal stockholder, our dependence on certain key
personnel, the failure of The Pantry and others to be year 2000 compliant and
other risk factors identified in this prospectus under the caption "Risk
Factors." As a result of these risks actual results may differ from these
forward looking statements included in this prospectus.
53
<PAGE>
INDUSTRY OVERVIEW
The United States convenience store industry is large and growing. In
1997 over 95,700 convenience stores operating throughout the United States
generated sales of $156.2 billion. The convenience store industry is larger in
size than many other retail sectors, including the home improvement, drug store
and department store sectors, which had 1997 sales of approximately $150
billion, $100 billion, and $76 billion, respectively. Over the last ten years,
industry sales have grown at a 6.4% CAGR, outpacing the 3.1% CAGR in the
consumer price index. We believe the convenience store industry exhibits
several characteristics that have historically tended to insulate it from
seasonality and global and domestic economic trends. These characteristics
include: (1) a high percentage of sales from necessity items, including
gasoline, consumables and food, (2) a small average transaction size and (3)
the industry's convenience format.
The convenience store business consists of two primary categories:
merchandise, with 1997 sales of $72.4 billion, and gasoline, with 1997 sales of
$83.8 billion. The trend to combine gasoline, a key necessity item, with
merchandise-selling stores has played an important role in the growth of the
industry. Major merchandise categories include cigarettes, beer, packaged
beverages, food service and candy. Average merchandise margins have remained
relatively stable over the last five years, but have increased approximately 2%
as a percentage of merchandise revenue. The convenience store industry has
steadily increased its market share of gasoline sales from 36.5% in 1988 to
56.6% in 1997. This trend can be attributed to an increase in the number of
convenience stores selling gasoline, consumer preferences and a decrease in the
number of gasoline service stations. Gasoline margins have remained relatively
stable over the past three years despite fluctuations in retail gas prices.
Other sources of revenue at convenience stores include lottery commissions,
money order commissions, and public telephone income.
The convenience store industry provides opportunities for a large, well-
managed operator to realize economies of scale and increase sales and
profitability due to the industry's high degree of fragmentation, lack of
merchandising focus and insufficient capital investment.
. Highly Fragmented Industry. The convenience store industry is highly
fragmented. The five largest operators represent approximately 20% of
the total store base and the 50 largest operators represent
approximately 50% of the total store base. Industry participants have
historically consisted of oil and gas operators, smaller independent
chains, "mom-and-pop" stores and sole proprietorships. Several
factors will continue to drive consolidation in the industry. These
factors include:
. independent operators' desire for liquidity
. oil and gas operators' divestiture of retail assets as a result of
oil industry consolidation
. noncompetitiveness of small operators due to lack of scale as
other industry participants become larger and efficiently leverage
their infrastructure over a greater store base
. increasing environmental regulations that have resulted in higher
capital costs
. higher new-store development costs
. Lack of Merchandising Focus. The background of many convenience store
operators has been in the gasoline business, with little focus on
merchandising. Major oil companies control nine of the ten largest
convenience store operators and are focused primarily on gasoline
sales. Smaller independent chains and "mom-and-pop" operators
54
<PAGE>
generally lack sophisticated merchandising capabilities due to their
limited size, capital constraints and technological limitations.
These smaller chains and operators are further constrained by low
sales volume, which limits their ability to obtain discounts, vendor-
paid store fixtures and promotional displays and vendor advice on
merchandising trends.
. Insufficient Capital Investment. Many convenience store operators
have made only limited capital investments in facility improvements
and technological advances. Such improvements and innovations, which
can increase sales and profits, include:
. Attractive Well-Lit Facilities. Improvements to signage, lighting,
canopies, paint, in-store restrooms, interior decor and fixtures
and overall exterior appearance enhance store visibility and
create a greater sense of security, which attract customers.
. Pay-at-the-Pump Credit Card Readers. Pay-at-the pump credit card
readers enable the customer to refuel and pay automatically at the
pump. We believe that pay-at-the-pump credit card readers improve
customer traffic because of increased safety and convenience and
increase both gasoline and merchandise sales. While pay-at-the-
pump credit card readers have gained popularity with customers,
they were installed at only 37% of convenience stores by 1997.
. Multi-Product Dispensers. Multi-product dispensers allow customers
to access all fuel options at one pump, and consequently increase
traffic throughput and gasoline volume potential. We also believe
that convenience stores with multi-product dispensers typically
sell a higher percentage of higher grade, higher margin gasoline
than other convenience stores.
. Technology and Store Automation. These systems can improve an
operator's ability to optimize merchandise category margin and
mix, monitor inventory levels, implement zone pricing, improve
receiving and pricing accuracy, increase expense control and
management reporting and improve communication between individual
stores, field personnel and headquarters.
The current industry environment has created growth opportunities for a
large industry player with an experienced management team, strong merchandise
focus and access to capital. Since the arrival of the current management team
in 1996, we have capitalized on these opportunities and have grown from 379
stores in fiscal 1996 to 1,151 stores as of February 28, 1999 and from $384.8
million in total revenue in fiscal 1996 to $1.7 billion in total pro forma
revenue for fiscal 1998.
55
<PAGE>
BUSINESS
The Pantry is a leading convenience store operator in the southeastern
United States and the third largest independently operated convenience store
chain in the country. Our stores offer a broad selection of merchandise and
gasoline as well as ancillary services designed to appeal to the convenience
needs of our customers. Since the arrival of our current management team in
1996, we have experienced significant growth through a combination of
management initiatives and strategic acquisitions. As of February 28, 1999, we
operated 1,151 stores located in Florida, North Carolina, South Carolina,
Kentucky, Indiana, Tennessee and Virginia.
Our stores are generally situated in suburban areas of rapidly growing
markets, coastal/resort areas and smaller towns. Over 90% of our stores are
located in northern and central Florida, North Carolina and South Carolina,
which are among the fastest growing states in terms of population, employment
and gross state product. We believe that we have the number one market share in
each of our principal regions based on number of stores. On a pro forma basis
for fiscal 1998 we generated total revenue of $1.7 billion and EBITDA of $93.2
million.
Approximately 34% of our stores are located in Raleigh, Charlotte,
Jacksonville and Orlando, which are four of the ten fastest growing major
Standard Metropolitan Statistical Areas in the United States, as determined by
1997 Census Bureau estimates. Approximately 42% of our stores are strategically
located in coastal/resort areas such as Jacksonville, Orlando/Disney World,
Myrtle Beach, Charleston, St. Augustine, Hilton Head and the North Carolina
Outer Banks. These locations attract a large number of tourists who are prone
to exhibit liberal spending habits, tend to be less price sensitive than the
local populations and value convenience shopping. Furthermore, our locations
generally benefit from limited competition from large convenience store chains
and oil company owned and operated stores.
Operating Strategy
In February 1996, Freeman Spogli recruited our current management team
headed by Peter Sodini, an experienced food retailing executive. Mr. Sodini and
his team, with an average of 32 years of food retailing experience, implemented
a five-pronged operating strategy. This strategy included:
. enhancing our merchandising to increase same store merchandise sales
growth and margins
. improving our gasoline offering in order to increase customer traffic
and same store gasoline volume growth
. reducing expenses through strengthened vendor relationships and
tightened expense controls
. increasing expenditures for facilities improvement and store
automation
. growing through acquisitions and new store development
56
<PAGE>
These initiatives contributed to the following financial results:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------
Sept. 26, Sept. 25, Sept. 24,
1996 1997 1998 CAGR
--------- --------- --------- -----
<S> <C> <C> <C> <C>
Total revenue (in millions)............. $384.8 $427.4 $984.9 60.0%
EBITDA (in millions).................... $ 16.3 $ 20.3 $ 60.5 93.0%
Income from operations (in millions).... $ 1.9 $ 10.8 $ 31.8 312.2%
EBITDA margin........................... 4.2% 4.7% 6.1% --
Operating margin........................ 0.5% 2.5% 3.2% --
Average merchandise sales per store (in
thousands)............................. $479.8 $525.8 $532.1 5.3%
Average gallons sold per store (in
thousands)............................. 448.8 501.2 582.8 14.0%
Same store merchandise sales growth..... 2.8% 8.5% 5.3% --
Same store gasoline gallon growth....... (4.3)% 7.2% 4.8% --
Number of stores (end of period)........ 379 390 953 --
</TABLE>
We have achieved these results through implementation of the following
operating strategies:
Focus on Merchandise. Since 1996, we have increased same store
merchandise sales growth and gross profit dollars by focusing on four key
areas:
. increasing the merchandise SKU count in stores from 3,900 to 4,750
currently
. keeping fully stocked positions of and prominently displaying brand
name, high volume destination items
. adding impulse items that carry higher than average margins
. improving promotional displays, signage and overall store
presentation
We seek to increase customer traffic by providing a greater product
selection than our competitors. Our stores now offer a broader, more locally
defined variety of nationally branded and regionally branded products than is
typically provided by other convenience stores. Our broad product selection is
complemented by a breadth of ancillary products and services such as ATMs,
lottery tickets, video games, public telephones and money orders, which serve
to attract incremental customers into our stores and increase gross profit
dollars.
We also seek to attract customers by consistently stocking brand name,
high volume, destination items such as cigarettes, beer, soft drinks and coffee
at competitive prices. Another important component of our merchandising
strategy is to attract the customer to the store with these destination items,
and then, by offering a broad assortment of high margin, impulse items, to
capture the incremental purchase of these impulse items and increase gross
profit dollars. Finally, we are able to improve customer traffic through
promotional displays and improved signage that enhance the presentation of our
product offerings. Since the implementation of our merchandising strategy, same
store merchandise sales have improved from 2.8% in fiscal 1996 to 8.5% in
fiscal 1997, 5.3% in fiscal 1998 and 10.5% for the first fiscal quarter of
1999. Average gross profit dollars per store have improved from $158,400 in
fiscal 1996 to $181,200 in fiscal 1998.
Improve Gasoline Offering. We believe that gasoline is an essential
product offering and have implemented a number of initiatives that have
increased gasoline volume and gasoline gross profit dollars. These initiatives
involve increasing the competitiveness of our gasoline pricing while
57
<PAGE>
maintaining acceptable profit margins and upgrading gasoline facilities and
equipment. We believe that an attractive gasoline offering increases customer
traffic which positively impacts both gasoline volume and merchandise sales.
We have increased the competitiveness of our gasoline pricing by closely
monitoring gasoline prices across markets and competitors in each market and
giving pricing authority to our regional managers. This permits regional
managers to react more quickly to any changes in their respective markets. We
monitor the gasoline pricing of each of our competitors on a daily basis and
are able to reprice any market or location almost immediately.
We also improve sales and customer traffic by upgrading gasoline
facilities and equipment. Our upgrading program typically includes improving
exterior signage, canopies and lighting, and installing multi-purpose
dispensers and pay-at-the-pump credit card readers. We have funded these
improvements in part by concentrating our gasoline purchases with a more narrow
group of suppliers, including BP-Amoco, Chevron, CITGO and Shell. We have also
entered into strategic branding agreements that provide volume rebates and
vendor allowances for advertising, remodeling and gasoline facility and
equipment upgrades. We also seek to improve our gasoline offering by optimizing
our mix of locations selling branded and unbranded gasoline. These initiatives
have contributed to increases in same store gallon growth from -4.3% in fiscal
1996 to 7.2% in fiscal 1997, 4.8% in fiscal 1998 and 5.1% for the first fiscal
quarter of 1999.
Reduce Expenses Through Strengthened Vendor Relationships and Tightened
Expense Controls. We have developed strong relationships with our merchandise
and gasoline suppliers. We represent an attractive distribution channel to
suppliers because of our geographically concentrated store base and our
demonstrated ability to increase merchandise sales and gasoline volumes. Since
the arrival of our current management team, we have renegotiated purchasing
terms with each of our major vendors to obtain greater allowances for retail
displays, targeted marketing and other promotional rebates. The Pantry selected
McLane as its primary wholesale supplier in 1996 and through ongoing
negotiations has continued to benefit from improved terms and service as its
volume of purchases has increased. We have also reduced gasoline purchasing
costs and received allowances for facility and gasoline equipment upgrades by
concentrating gasoline purchases among a select group of suppliers. As we
continue to grow and expand our store base, we should enhance our ability to
obtain increasingly favorable terms from our key suppliers. Average gross
profit per store has increased 15.8% from $232,700 in fiscal 1996 to $269,500
in fiscal 1998.
Since 1996, we have also adhered to a disciplined cost-savings program
that has allowed us to reduce operating expenses without sacrificing customer
service. We have eliminated redundant overhead expenses, renegotiated supply
and service agreements, improved employee retention, implemented inventory
shrink reduction procedures, reduced insurance and workers compensation costs
and outsourced certain non-core functions to third parties. As a result of
these initiatives, total operating expenses as a percentage of total revenue
have declined from 23.2% in fiscal 1996 to 20.5% in fiscal 1998.
Increase Capital Expenditures. Since fiscal 1996, we have implemented a
capital expenditure program focused on (1) store facility and gasoline
equipment upgrades, (2) technology and store automation improvements and
(3) environmental regulatory compliance.
Our store remodel program, which includes both major and minor projects,
focuses on improvements to interior fixtures and equipment for self-service
food and beverages, interior lighting,
58
<PAGE>
in-store restrooms for customers, exterior lighting and signage, canopies,
pavement and landscape and gasoline equipment upgrades, including the
installation of pay-at-the-pump credit card readers and multi-product
dispensers. Based on data from more than 100 of our stores that have been
remodeled, average merchandise sales increased 10.3%, gasoline gallons
increased 17.8% and EBITDA increased 35.3% during the twelve months following
remodeling. We have remodeled more than 200 stores since fiscal 1996, and
currently approximately 49% of our stores that sell gasoline have pay-at-the-
pump credit card readers and approximately 77% have multi-product dispensers.
The total cost of these remodels and upgrades was $40.1 million, a significant
portion of which was reimbursed by our gasoline suppliers.
We are currently upgrading our management information systems, including
store, corporate accounting and management reporting systems. We have recently
begun implementation of a leading convenience store systems package that has
been used successfully in our Handy Way stores. Implementation of this system
into all of our individual stores will take place in phases through fiscal
2000. We spent $1.8 million on management information system upgrades in fiscal
1998.
The gasoline dispensing business is subject to strict environmental
regulations. We must adhere to various federal, state and local environmental
laws and regulations governing underground petroleum storage tanks. We have
invested approximately $12.8 million since fiscal 1995 to comply with
environmental requirements and do not expect any further significant
unreimbursable environmental expenditures relating to existing locations.
Currently, all our locations that sell gasoline are in substantial compliance
with EPA requirements and regulations.
Grow Through Acquisitions and New Store Development. Beginning in fiscal
1997, the new management team implemented a disciplined and ongoing acquisition
program. From April 1997 through February 1999, we acquired 892 convenience
stores in 11 major and numerous smaller transactions. Acquired stores are
rapidly integrated into our operations with minimal disruption. We have
materially improved the results of operations in our acquired stores and
believe there are opportunities to continue to improve results at these
locations. Our acquisition strategy is complemented by a new store development
program in select markets. In addition, we continuously evaluate store
performance trends to determine whether any particular store should be closed
or sold.
Growth Strategy
We believe that there is significant opportunity to continue to increase
sales, productivity and profitability through both the continued implementation
of our operating strategy at existing and newly acquired stores and our
strategy to double our store base in existing markets and expand into
contiguous markets. Specific elements of our growth strategy include the
following:
Improve Same Store Merchandise Sales and Gasoline Volume Growth. We focus
on continuous improvement of same store sales and profit growth at existing and
newly acquired stores through (1) key merchandising initiatives, (2)
competitive gasoline prices, (3) upgraded facilities, (4) new service
offerings, (5) improved technology, (6) improved customer service and (7)
targeted cost savings initiatives. Our merchandise and gasoline gallon sales
also benefit from the location of our operations, which are largely in some of
the fastest growing demographic markets in the United States. We continue to
add new services to our stores to increase traffic and margins, including ATMs,
lottery tickets, video games, public telephones and money orders. We also plan
to remodel approximately 100 additional stores annually and to continue to
refine our balance of branded and unbranded gasoline sales to increase our
market share in areas where we operate. In addition, since
59
<PAGE>
April 1997 we have acquired a total of 892 stores. We have implemented our
operating strategy in these stores and expect continued improvement in
merchandise sales and gasoline gallon sales.
Invest in Technology and Store Automation. Over the next two years, we
will invest over $15 million on new technology in three areas: (1) at the
gasoline pump, (2) in the store and (3) in our corporate offices. Our
investments in gasoline dispensing technology are targeted at making fueling
faster and increasing overall customer traffic at our stores. Our store and
corporate technology investments include point of sale systems, computer
hardware and computer software programs that provide us with better management
information and the ability to communicate on-line with our individual stores
and field personnel. We expect this technology to be fully implemented by the
end of fiscal 2000. This information will allow us to track product movement
data by location and better control inventory and expenses at the store level.
We believe these investments will increase transaction speed at the pump and in
the store and improve customer transaction information, which will allow us to
continuously optimize merchandise mix, gross margin and inventory at each of
our stores.
Pursue Acquisitions and New Store Growth. We believe that growth through
acquisition is currently more economically attractive than growth through new
store development because: (1) acquired stores provide an instant installed
base of revenue and cash flow, (2) we are able to grow more rapidly, thus
providing increased benefits of economies of scale, (3) we are able to enter
new markets without adding merchandise square footage or additional gasoline
outlets to these markets, (4) acquisitions provide access to established high
quality locations and to markets that restrict new store development through
stringent environmental and zoning regulations and (5) acquiring stores is a
lower cost alternative to developing new stores.
We believe there are enough attractive acquisition opportunities in the
convenience store industry to double our store base in existing markets and
expand into contiguous markets. There are approximately 25,000 convenience
stores operating in our existing and contiguous markets. We also believe that
the creation of a public market for our common stock through this offering will
enable us to offer our common stock as consideration for acquisitions and will
further enhance our ability to make acquisitions on favorable terms. In
addition, the consolidation trend among oil companies continues to result in
divestitures of additional oil company owned and operated convenience stores.
In evaluating potential acquisition candidates, we consider a number of
factors, including (1) strategic fit and desirability of location, (2) price,
(3) ability to improve productivity and profitability of a location through the
implementation of our operating strategy and (4) financial impact.
Our strategy is to continue to realize significant growth and cost
savings from acquisitions through (1) remerchandising acquired stores with more
SKUs and branded merchandise, (2) upgrading store facilities and gasoline
equipment, (3) selectively rebranding sites, (4) negotiating better terms with
our suppliers and (5) leveraging our existing infrastructure to realize
economies of scale and eliminate duplicative overhead and centralize functions
such as purchasing, accounting, payroll and other administrative functions.
These initiatives provide for significant improvement in the performance of
newly acquired stores and typically yield results within the first six to
twelve months following the acquisition. For example, in the twelve month
period following the acquisition of Lil' Champ, we were able to increase same
store gross profit by 3.4%, decrease same store operating expenses as a
percentage of total revenue by 6.3% and increase EBITDA by 44.1%. Since the
beginning of fiscal 1999, we have acquired 214 stores, which are at various
stages of integration and implementation of the key initiatives of our
operating strategy. We believe that our strategy should result in significant
improvements in the performance of these stores.
60
<PAGE>
Our acquisition strategy is complemented by a new store development
program in existing and contiguous markets. In opening new stores, we have
focused on selecting store sites on highly traveled roads in coastal/resort and
suburban markets or near highway exit and entrance ramps that provide
convenient access to store locations. We opened seven new stores in fiscal 1998
and expect to open eight to ten new stores annually.
We are not currently party to any definitive agreements relating to
future acquisitions. However, we are continually investigating and evaluating
acquisition candidates. Some of these candidates may be material.
Our Operations
We operate our stores under a variety of names, including The Pantry in
North Carolina, South Carolina, Virginia, Indiana, Tennessee and Kentucky, and
Lil' Champ and Handy Way in Florida. We also operate in certain markets under
the names Kwik Mart, Sprint, Quick Stop, Zip Mart, Dash-N, Express Stop and
ETNA.
Merchandise Sales
For the year ended September 24, 1998, our merchandise sales, including
commissions from services, were 48.2% of total revenue. The following table
highlights certain information with respect to our merchandise sales for the
last two fiscal years and for the first quarters of fiscal 1998 and 1999:
<TABLE>
<CAPTION>
Fiscal Year Ended Quarter Ended
------------------- ---------------
Dec.
Sept. 25, Sept. 24, Dec. 25, 24,
1997 1998 1997 1998
--------- --------- -------- ------
<S> <C> <C> <C> <C>
Merchandise sales (in millions)........ $202.4 $460.8 $ 89.4 $139.4
Average merchandise sales per store (in
thousands)............................ $525.8 $532.1 $123.1 $144.7
Comparable store merchandise sales..... 8.5% 5.3% 3.6% 10.5%
Merchandise gross margins (after
purchase rebates, mark-downs,
inventory spoilage and inventory
shrinkage)............................ 34.4% 34.0% 34.1% 32.2%
</TABLE>
Our stores generally carry approximately 4,750 SKUs and offer a full line
of convenience products. These products include:
<TABLE>
<S> <C>
. tobacco products . snack foods
. beer . dairy products
. soft drinks . canned goods and groceries
. newspapers and magazines . health and beauty aids
. self-service fast foods, including fountain . other immediate consumables
beverages and coffee
</TABLE>
We have developed an in-house food service program featuring breakfast
biscuits, fried chicken, deli and other hot food offerings. We also operate
approximately 104 quick service restaurants inside our stores with nationally
branded food franchises such as Subway, Church's, Taco Bell and Hardee's. Our
merchandise mix is influenced by the mix of the stores we acquire. The
following table describes our merchandise sales mix for the last two fiscal
years:
61
<PAGE>
Percentage of Merchandise Sales
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------
Sept. 25, 1997 Sept. 24, 1998
-------------- --------------
<S> <C> <C>
Tobacco products.............................. 27.8% 28.1%
Beer.......................................... 15.1 15.9
Soft drinks................................... 13.7 14.6
Self-service fast foods and beverages......... 6.9 6.5
General merchandise........................... 6.4 6.0
Candy......................................... 4.8 4.7
Newspapers and magazines...................... 5.0 4.7
Snack foods................................... 4.6 4.9
Dairy products................................ 2.8 2.4
Bread/cake.................................... 2.1 2.0
Grocery and other............................. 10.8 10.2
----- -----
Total....................................... 100.0% 100.0%
===== =====
</TABLE>
We purchase over 50% of our general merchandise, including most tobacco
products and grocery items, from a single wholesale grocer, McLane. In
addition, McLane supplies health and beauty aids, toys, and seasonal items to
all our stores. However, adequate alternative sources are available to purchase
this merchandise should a change from the current wholesaler become necessary
or desirable. We purchase the balance of our merchandise from a variety of
other distributors.
Since 1997, tobacco prices have increased significantly. The most recent
increase occurred on November 23, 1998, when major cigarette manufacturers
increased prices by $0.45 per pack. However, during December 1998, major
cigarette manufacturers offered a rebate to retailers of $0.45 per pack to
offset the November 1998 price increase. We passed along this rebate to our
customers. Major cigarette manufacturers offered no rebate in January 1999 and
a $0.30 per pack rebate in February 1999. In addition, these manufacturers
announced a $0.55 per pack rebate for March 1999. We cannot assure you that
major cigarette manufacturers will continue to offer these rebates or that any
resulting increase in prices to our customers will not have a material adverse
effect on our cigarette sales and gross profit dollars. Despite increases in
price, which have been passed on for the most part to our customers, we have
increased cigarette unit sales and gross profit dollars. We believe that
convenience stores in general, and The Pantry in particular, will benefit as
customers shift their cigarette buying patterns from less frequent carton
purchases to more frequent pack purchases and as certain competitors exit the
category. We expect that cigarette cost increases will reduce our gross margin
percentage for the cigarette category, but will not have a material impact on
the cigarette category gross profit dollars. Although it is too early to
determine the potential impact on cigarette unit volume, we believe we can
continue to pass along cost increases to our customers over the long term and,
therefore, we do not expect cigarette inflation to have a significant impact on
our results of operations or financial condition in the foreseeable future.
Our commission revenue is derived from ATMs, lottery ticket sales, video
gaming, money orders, public telephones and other ancillary product and service
offerings. This category is an important aspect of our merchandise operations
because it attracts incremental customers and provides additional services for
destination customers.
62
<PAGE>
Gasoline Operations
For the year ended September 24, 1998, our revenue from sales of gasoline
were 51.8% of total revenue. The following table highlights certain information
regarding our gasoline operations for the last two fiscal years and the first
quarters of fiscal 1998 and 1999:
<TABLE>
<CAPTION>
Fiscal Year Ended Quarter Ended
------------------- -------------
Dec. Dec.
Sept. 25, Sept. 24, 25, 24,
1997 1998 1997 1998
--------- --------- ------ ------
<S> <C> <C> <C> <C>
Gasoline sales (in millions)................ $220.2 $510.0 $103.0 $171.8
Gasoline gallons sold (in millions)......... 179.4 466.8 87.5 169.0
Average gallons sold per store (in
thousands)................................. 501.2 582.8 132.2 184.5
Average retail price per gallon............. $ 1.23 $ 1.09 $ 1.18 $ 1.02
Average gross profit per gallon............. $0.128 $0.134 $0.138 $0.136
Locations selling gasoline.................. 364 884 792 890
Number of company-owned branded locations... 300 667 499 636
Number of company-owned unbranded
locations.................................. 35 192 263 233
Number of third-party locations (branded and
unbranded)................................. 29 25 30 21
Number of locations with pay-at-the-pump
credit card readers........................ 125 379 188 439
Number of locations with multi-product
dispensers................................. 142 697 412 816
</TABLE>
The increase in gross profit per gallon in fiscal 1998 was primarily due
to the addition of Lil' Champ and the relatively higher gasoline margins in
Florida. Although gasoline gross margins in any particular location or market
may vary from time to time, since fiscal 1997 our gross margins on a
consolidated basis have been relatively stable due to our size and geographic
diversity. Historically, we have not entered into gasoline futures contracts
which may lock in gasoline prices for a period of time or reduce the volatility
in our gasoline costs.
Of the 1,065 stores that sold gasoline as of February 28, 1999, 768 or
72.1% (including third-party locations selling under these brands) were branded
under the Ashland, BP-Amoco, Chevron, Citgo, Exxon, Mobil, Shell or Texaco
brand names. We operate a mix of branded and unbranded locations and evaluate
our gasoline offerings on a local market level.
As of February 28, 1999, we owned the gasoline operations at 1,044
locations and at 21 locations had gasoline operations that were operated under
third-party arrangements. At company-operated locations, we own the gasoline
storage tanks, pumping equipment and canopies and retain 100% of the gross
profit received from gasoline sales. In fiscal 1998, these locations accounted
for approximately 98% of total gallons sold by us. Under third-party
arrangements, an independent gasoline distributor owns and maintains the
gasoline storage tanks and pumping equipment at the site, prices the gasoline
and pays us approximately 50% of the gross profit. In fiscal 1998, third-party
locations accounted for approximately 2% of the total gallons sold by us. We
have been phasing out third-party arrangements because our company owned
operations are more profitable.
We purchase our gasoline from major oil companies and independent
refiners. There are 20 gasoline terminals in our operating areas, enabling us
to choose from more than one distribution point for most of our stores. Our
inventories of both branded and unbranded gasoline turn approximately every
seven days.
63
<PAGE>
Store Locations
As of February 28, 1999, we operated 1,151 convenience stores located
primarily in suburban areas of rapidly growing markets, coastal/resort areas
and smaller towns. Approximately 34% of our stores are located in Raleigh,
Charlotte, Jacksonville and Orlando, which are four of the ten fastest growing
SMSAs in the United States. Approximately 42% of our stores are strategically
located in coastal/resort areas such as Jacksonville, Orlando/Disney World,
Myrtle Beach, Charleston, St. Augustine, Hilton Head and the North Carolina
Outer Banks. Substantially all of our stores are free standing structures
averaging approximately 2,400 square feet and provide ample customer parking.
The following table shows the geographic distribution by state of our stores as
of February 28, 1999:
<TABLE>
<CAPTION>
Number of Percent of
Stores Total Stores
--------- ------------
<S> <C> <C>
Florida............................................ 550 47.8%
North Carolina..................................... 338 29.4
South Carolina..................................... 160 13.9
Kentucky........................................... 46 4.0
Indiana............................................ 20 1.7
Tennessee.......................................... 19 1.7
Virginia........................................... 18 1.5
----- -----
Total.............................................. 1,151 100.0%
===== =====
</TABLE>
Since fiscal 1996, we have developed a limited number of new stores and
closed or sold a substantial number of underperforming stores. Beginning in
1997, we turned our attention from developing new stores to commencing our
acquisition program. The following table summarizes these activities:
<TABLE>
<CAPTION>
Fiscal Year Ended Five Months
--------------------------------------- Ended
Sept. 28, Sept. 24, Sept. 25, Sept. 26, February
1995 1996 1997 1998 28, 1999
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Number of stores at
beginning of period.... 406 403 379 390 953
Acquired or opened...... 10 4 36 650 214
Closed or sold.......... (13) (28) (25) (87) (16)
--- --- --- --- -----
Number of stores at end
of period.............. 403 379 390 953 1,151
=== === === === =====
</TABLE>
We continually evaluate the performance of each of our stores to
determine whether any particular store should be closed or sold based on its
sales trends and profitability. In deciding to close or sell an underperforming
store, we consider such factors as store location, gasoline volumes and
margins, merchandise sales and gross profits, lease term, rental rate and other
obligations and the store's contribution to corporate overhead. Although
closing or selling underperforming stores reduces revenue, our operating
results typically improve since these stores were generally unprofitable.
Acquisition Activity and Selection
Since April 1997, we have acquired 892 convenience stores in 11 major and
numerous smaller transactions located in Florida, North Carolina, South
Carolina and Virginia. See "--Store Locations" above. With these acquisitions,
we expanded our geographic reach within the southeast to Florida and Virginia
and enhanced our market position in North Carolina and South Carolina.
64
<PAGE>
We focus on acquiring chains within our existing and contiguous marketing
areas. In evaluating potential acquisition candidates, we consider a number of
factors including: (1) strategic fit and desirability of location, (2) price,
(3) ability to improve productivity and profitability of a location through the
implementation of our operating strategy and (4) financial impact. We believe
the advantages of these acquired locations include demonstrated revenue, growth
and market characteristics. We also believe the acquired stores have a lower
risk profile and higher average return on investment than traditional new store
development programs.
Site Selection
In opening new stores in recent years, we have focused on selecting store
sites on highly traveled roads in coastal/resort and suburban markets or near
highway exit and entrance ramps that provide convenient access to store
locations. In selecting sites for new stores, we use an evaluation process
designed to enhance our return on investment by focusing on market area
demographics, population density, traffic volume, visibility, ease of access
and economic development in the market area. We also review the location of
competitive stores and customer activity at those stores.
Upgrading Store Facilities and Equipment
We have upgraded the facilities and equipment at many of our existing and
acquired store locations, including gasoline equipment upgrades, at a cost of
approximately $9.2 million in fiscal 1997 and $30.9 million in fiscal 1998. A
portion of these upgrade costs have been reimbursed through long-term contracts
with our gasoline suppliers. Our store renovation program is an integral part
of our operating strategy. We continually evaluate the performance of
individual stores and periodically upgrade store facilities and equipment based
on sales volumes, the lease term for leased locations and management's
assessment of the potential return on investment.
Typical upgrades for many stores include improvements to interior
fixtures and equipment for self-service food and beverages, interior lighting,
in-store restrooms for customers and exterior lighting and signage. The
upgrading program for our gasoline operations includes multi-product dispensers
and pay-at-the-pump credit card readers to enhance customer convenience and
service and the installation of underground storage tank, leak detection and
other equipment in accordance with applicable EPA regulations. For further
discussion of EPA and other environmental regulations see "--Government
Regulation and Environmental Matters" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Store Operations
Each convenience store is staffed with a manager, an assistant manager
and sales associates who work various shifts to enable most stores to remain
open 24 hours a day, seven days a week. Our field operations organization is
comprised of a network of regional, divisional and district managers who, with
our corporate management, evaluate store operations. District managers
typically oversee from eight to ten stores. We also monitor store conditions,
maintenance and customer service through a regular store visitation program by
district and regional management.
Technology and Store Automation
We utilize information systems and application programs for our core
business systems, such as accounting, financial reporting and payroll. Within
the past two years, we installed newer and more reliable mid-range system
hardware to support these applications and our continued growth.
65
<PAGE>
These systems continue to be enhanced through modification and redesign in
order to meet management reporting requirements and operational needs.
Over the last year, we have expanded our computer system infrastructure
with the addition of new local area network systems, improved end user computer
hardware and software and replacement of older point of sale systems. This has
helped to streamline operations and improve productivity at our corporate
office, among our field management staff and at our stores.
In addition, these new and expanding systems have laid the foundation for
a strategic information systems initiative that will bring a new store and
corporate accounting and management reporting system. We selected and began
implementation of a leading convenience store systems package, Resource
Management Series ("RMS") from Professional Datasolutions, Inc. ("PDI"), a
wholly-owned subsidiary of McLane. Handy Way has the RMS system in place and
has kept pace with PDI upgrades. Handy Way also has a well-developed system in
place that provides centralized management reporting for their food service
operations. We expect to benefit from Handy Way's experience and knowledge as
we implement this technology at The Pantry.
During fiscal 1999, RMS will be implemented in phases. We will continue
to accelerate the store level implementation that began with all of the stores
we acquired in 1998. We expect to have the entire store base fully integrated
by the end of fiscal 2000. To complete this program, we plan to spend $5.8
million in fiscal 1999 and $3.0 million in fiscal 2000. In addition to
facilitating integration of future acquisitions, these upgrades will enable us
to optimize merchandise category margin and mix, monitor inventory levels,
implement zone pricing, improve receiving and pricing accuracy, increase
expense control and management reporting and improve communication between
individual stores and headquarters.
Competition
The convenience store and retail gasoline industries are highly
competitive. Changes in traffic patterns and the type, number and location of
competing stores can affect the performance of individual stores. Major
competitive factors include, among others, location, ease of access, gasoline
brands, pricing, product and service selections, customer service, store
appearance, cleanliness and safety. In addition, factors such as inflation,
increased labor and benefit costs and the lack of availability of experienced
management and hourly employees may adversely affect the convenience store
industry.
We compete with numerous other convenience stores and supermarkets. In
addition, our stores offering self-service gasoline compete with gasoline
service stations, including service stations operated by major oil companies
and, more recently, supermarkets. Our stores also compete to some extent with
supermarket chains, drug stores, fast food operations and other similar retail
outlets. In some of our markets, certain competitors, particularly major oil
companies, have been in existence longer and have substantially greater
financial, marketing and other resources than us.
Trade Names, Service Marks and Trademarks
We have registered or applied for registration of a variety of trade
names, service marks and trademarks for use in our business, including The
Pantry(R), Worth(R), Bean Street Coffee Company(TM), Bean Street Market(TM),
Big Chill(R), ETNA, Handy Way, Lil' Champ(R), Quick Stop, Zip Mart(TM), Express
Stop, Sprint(TM), and Smokers Express(TM). We regard our intellectual property
as having significant value and as being an important factor in the marketing
of the company and our
66
<PAGE>
convenience stores. We are not aware of any facts which would negatively impact
our continuing use of any of our trade names, service marks or trademarks.
Government Regulation and Environmental Matters
Many aspects of our operations are subject to regulation under federal,
state and local laws. We are currently in substantial compliance with all EPA
regulations and requirements that affect our locations that sell gasoline. The
most significant of the regulations that impact all aspects of our operations
are described below.
Storage and Sale of Gasoline
We are subject to various federal, state and local environmental laws.
Federal, state, and local regulatory agencies have adopted regulations
governing underground storage tanks, or USTs, that require us to make certain
expenditures for compliance. In particular, at the federal level, the Resource
Conservation and Recovery Act of 1976 requires the EPA to establish a
comprehensive regulatory program for the detection, prevention and cleanup of
leaking USTs.
Federal and state regulations require us to maintain evidence of the
financial responsibility necessary to take corrective action and compensate
third parties in the event of a release from our UST systems. In order to
comply with the applicable requirements, we maintain letters of credit in the
aggregate amount of $2.3 million issued by a commercial bank in favor of state
environmental agencies in the states of North Carolina, South Carolina,
Virginia, Tennessee, Kentucky and Indiana. We also rely upon the reimbursement
provisions of applicable state trust funds. In Florida, we meet such financial
responsibility requirements through private commercial liability insurance and
by qualified self-insurance. We have sold all of our Georgia stores but have
retained responsibility for pre-closing environmental remediation at certain
locations. The cost of such remediation and third party claims should be
covered by the state trust fund, subject to applicable deductibles and caps on
reimbursement.
Regulations enacted by the EPA in 1988 established requirements for (1)
installing UST systems; (2) upgrading UST systems; (3) taking corrective action
in response to releases; (4) closing UST systems; (5) keeping appropriate
records; and (6) maintaining evidence of financial responsibility for taking
corrective action and compensating third parties for bodily injury and property
damage resulting from releases. These regulations permit states to develop,
administer and enforce their own regulatory programs, incorporating
requirements which are at least as stringent as the federal standards. The
Florida rules for 1998 upgrades are more stringent than the 1988 EPA
regulations. Our facilities in Florida all meet or exceed such rules. The
following is an overview of the requirements imposed by these regulations:
. Leak Detection. We utilize several approved leak detection methods
for all company-owned UST systems. Daily and monthly inventory
reconciliations are completed at the store level and at the corporate
support center. The daily and monthly reconciliation data is also
analyzed using statistical inventory reconciliation which compares
the reported volume of gasoline purchased and sold with the capacity
of each UST system and highlights discrepancies. We believe we are in
substantial compliance with the leak detection requirements
applicable to our USTs.
. Corrosion Protection. The 1988 EPA regulations require that all UST
systems have corrosion protection by December 22, 1998. We began
installing non-corrosive fiberglass tanks and piping in 1982. All of
the UST systems at our stores are in substantial compliance with
these 1988 EPA regulations.
67
<PAGE>
. Overfill/Spill Prevention. The 1988 EPA regulations require that all
sites have overfill/spill prevention devices by December 22, 1998.
All of the company-owned UST systems are in substantial compliance
with these EPA regulations.
State Trust Funds
All states in which we operate UST systems have established trust funds
for the sharing, recovering and reimbursing of certain cleanup costs and
liabilities incurred as a result of releases from UST systems. These trust
funds, which essentially provide insurance coverage for the cleanup of
environmental damages caused by the operation of UST systems, are funded by a
UST registration fee and a tax on the wholesale purchase of motor fuels within
each state. We have paid UST registration fees and gasoline taxes to each state
where we operate to participate in these trust programs and we have filed
claims and received reimbursement in North Carolina, South Carolina, Kentucky,
Indiana, Georgia, Florida and Tennessee. The coverage afforded by each state
fund varies but generally provides from $150,000 to $1.0 million per site for
the cleanup of environmental contamination, and most provide coverage for
third-party liabilities.
Costs for which we do not receive reimbursement include but are not
limited to: (1) the per-site deductible; (2) costs incurred in connection with
releases occurring or reported to trust funds prior to their inception; (3)
removal and disposal of UST systems; and (4) costs incurred in connection with
sites otherwise ineligible for reimbursement from the trust funds. The trust
funds require that we pay deductibles ranging from $10,000 to $100,000 per
occurrence depending on the upgrade status of our UST system, the date the
release is discovered/reported and the type of cost for which reimbursement is
sought. The Florida trust fund will not cover releases first reported after
December 31, 1998. We have obtained private coverage for remediation and third
party claims arising out of releases reported after December 31, 1998.
In addition to immaterial amounts to be spent by us, a substantial amount
will be expended for remediation on our behalf by state trust funds established
in our operating areas or other responsible third parties (including insurers).
To the extent such third parties do not pay for remediation as we anticipated,
we will be obligated to make such payments, which could materially adversely
affect our financial condition and results of operations. Reimbursements from
state trust funds will be dependent upon the continued maintenance and
viability of the various funds.
Sale of Alcoholic Beverages
In areas where our stores are located, state or local laws limit the
hours of operation for the sale of certain products, the most significant of
which limit or govern the sale of alcoholic beverages. State and local
regulatory agencies have the authority to approve, revoke, suspend or deny
applications for and renewals of permits and licenses relating to the sale of
alcoholic beverages and to impose various restrictions and sanctions. In many
states, retailers of alcoholic beverages have been held responsible for damages
caused by intoxicated individuals who purchased alcoholic beverages from them.
While the potential exposure to us for damage claims as a seller of alcoholic
beverages is substantial, we have adopted employee training procedures intended
to minimize such exposure. In addition, we maintain general liability insurance
which may mitigate the cost of any liability.
68
<PAGE>
Video Poker Licenses
Stores in South Carolina operating video poker machines are subject to
local and state regulations regarding the operation and ownership of video
poker machines. Furthermore, state and local laws limit the manner in which
video poker machines may be operated. In addition, state and local regulatory
agencies have the authority to approve, revoke, suspend or deny applications
for, and renewal of, the applicable licenses for video poker machines.
Store Operations
Our stores are subject to regulation by federal agencies and to licensing
and regulations by state and local health, sanitation, safety, fire and other
departments relating to the development and operation of convenience stores,
including regulations relating to zoning and building requirements and the
preparation and sale of food. Difficulties in obtaining or failures to obtain
the required licenses or approvals could delay or prevent the development of a
new store in a particular area.
Our operations are also subject to federal and state laws governing such
matters as wage rates, overtime, working conditions and citizenship
requirements. At the federal level, there are proposals under consideration
from time to time to increase minimum wage rates and to introduce a system of
mandated health insurance which could affect our results of operations.
Employees
As of February 28, 1999, we employed 6,526 full-time and 1,624 part-time
employees. We employ fewer part-time employees during the winter months than
during the peak spring and summer seasons. Of our employees, approximately
7,610 are employed in our stores and 540 are corporate and field management
personnel. We have not been adversely impacted by recent increases in the
minimum wage because the majority of our employees are paid more than the
minimum wage. None of our employees are represented by unions. We consider our
employee relations to be good.
Properties
As of February 28, 1999 we owned 394 of our stores and leased the real
property at 757 of our stores. Management believes that none of these leases is
individually material to us. Most of our leases are net leases requiring us to
pay taxes, insurance and maintenance costs. Although our leases expire at
various times, approximately 90% of the leases have terms, including renewal
options, extending beyond the end of fiscal 2003. Of our leases that expire
prior to the end of 2003, management anticipates that we will be able to
negotiate acceptable extensions of the leases for those locations that it
intends to continue operating. When appropriate, we have chosen to sell and
then lease-back properties. Factors leading to this decision include
alternative desires for use of cash, beneficial taxation, and minimization of
the risks associated with owning the property (especially changes in valuation
due to population shifts, urbanization, and/or proximity to high volume
streets) and the economic terms of such sale-leaseback transactions.
We own our corporate headquarters, a three-story, 51,000 square foot
office building in Sanford, North Carolina, and a regional operations center in
central Florida. We lease our Lil' Champ corporate headquarters in
Jacksonville, Florida. Management believes that our headquarters facilities are
adequate for our present and foreseeable needs.
69
<PAGE>
Legal Proceedings
We are party to various legal actions which we believe are routine in
nature and incidental to the operation of our business. While the outcome of
such actions cannot be predicted with certainty, we believe that the resolution
of these matters, individually or in the aggregate, will not have a material
adverse impact on our business, financial condition or prospects. We make
routine applications to state trust funds for the sharing, recovering and
reimbursement of certain cleanup costs and liabilities incurred as a result of
releases from UST systems. See "--Government Regulation and Environmental
Matters."
70
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following is a list of our directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position with The Pantry
- ---- --- ------------------------
<S> <C> <C>
Peter J. Sodini......... 58 President, Chief Executive Officer and Director
Dennis R. Crook......... 56 Senior Vice President, Administration and Gasoline Marketing
William T. Flyg......... 56 Senior Vice President and Chief Financial Officer
Douglas M. Sweeney...... 60 Senior Vice President, Operations
Daniel J. McCormack..... 56 Vice President, Marketing
William M. Wardlaw...... 52 Director
Charles P. Rullman...... 50 Director
Todd W. Halloran........ 36 Director
Jon D. Ralph............ 34 Director
Christopher C. Behrens.. 38 Director
Peter M. Starrett....... 51 Director
</TABLE>
Peter J. Sodini has served as our President and Chief Executive Officer
since June 1996 and served as our Chief Operating Officer from February 1996
until June 1996. Mr. Sodini has served as a director since November 1995. Mr.
Sodini is a director of Transamerica Income Shares Inc. and Pamida Holding
Corporation. From December 1991 to November 1995, Mr. Sodini was Chief
Executive Officer and a director of Purity Supreme, Inc. ("Purity"), a chain of
grocery stores located in New England. Prior to 1991, Mr. Sodini held executive
positions at several supermarket chains including Boys Markets, Inc. and Piggly
Wiggly Southern, Inc.
Dennis R. Crook has served as our Senior Vice President, Administration
and Gasoline Marketing since March 1996. From December 1987 to November 1995,
Mr. Crook was Senior Vice President, Human Resources and Labor Relations of
Purity.
William T. Flyg has served as our Senior Vice President, Finance and
Chief Financial Officer since January 1997. He was employed by Purity as Chief
Financial Officer from January 1992 until Purity was sold in November 1995, at
which time he continued as an employee of Purity until December 1996.
Douglas M. Sweeney has served as our Senior Vice President, Operations
since March 1996. From December 1991 to December 1995, Mr. Sweeney was Senior
Vice President, Operations of Purity.
Daniel J. McCormack has served as our Vice President, Marketing since
March 1996. From 1989 to February 1996, Mr. McCormack was Director of
Purchasing of Purity.
William M. Wardlaw has served as a director since August 1998. Mr.
Wardlaw joined Freeman Spogli in 1988 and became a Principal in 1991. From 1984
to 1988, Mr. Wardlaw was Managing Partner in the Los Angeles law firm of
Riordan & McKinzie. Prior to 1984, he served as a partner in the law firm of
O'Melveny & Myers. Mr. Wardlaw is also a director of AFC Enterprises, Inc.
71
<PAGE>
Charles P. Rullman has served as a director since November 1995. Mr.
Rullman joined Freeman Spogli as a Principal in 1995. From 1992 to 1995, Mr.
Rullman was a General Partner of Westar Capital, a private equity investment
firm specializing in middle market transactions. Prior to joining Westar, Mr.
Rullman spent twenty years at Bankers Trust Company and its affiliate BT
Securities Corporation where he was a Managing Director and Partner. Mr.
Rullman is also a director of Hudson Respiratory Care Inc.
Todd W. Halloran has served as a director since November 1995. Mr.
Halloran joined Freeman Spogli in 1995 and became a Principal in 1998. From
1990 to 1995, Mr. Halloran was a Vice President and Associate at Goldman, Sachs
& Co., where he worked in the Principal Investment Area and the Mergers and
Acquisition Department.
Jon D. Ralph has served as a director since November 1995. Mr. Ralph
joined Freeman Spogli in 1989 and became a Principal in 1998. Prior to joining
Freeman Spogli, Mr. Ralph spent three years at Morgan Stanley & Co. where he
served as an analyst in the Investment Banking Division. Mr. Ralph is also a
director of Envirosource, Inc., Hudson Respiratory Care Inc., River Holding
Corp. and Century Maintenance Supply, Inc.
Christopher C. Behrens has served as a director since February 1996.
Since 1994, he has been a principal of Chase Capital Partners, the private
equity investment affiliate of Chase Manhattan Capital Corporation. From 1990
to 1994, Mr. Behrens was a Vice President in The Chase Manhattan Corporation's
Merchant Banking Group. Mr. Behrens is a director of Portola Packaging and
Patina Oil & Gas, as well as other private companies.
Peter M. Starrett has served as a director since January 1999. Since
August 1998, Mr. Starrett has served as a consultant to Freeman Spogli. Prior
to August 1998, Mr. Starrett was President of Warner Bros. Studio Stores
Worldwide and had been employed by Warner Bros. since May 1990. Mr. Starrett is
also a director of Petco Animal Supplies, Inc., Brylane, Inc., AFC Enterprises,
Inc., Advance Auto, Inc. and Guitar Center, Inc.
Our directors are elected annually and hold office until the next annual
meeting of stockholders and until their successors are duly elected and
qualified. Pursuant to the stockholder's agreement, Chase Capital is entitled
to nominate one director as long as it owns at least 10% of the common stock.
Upon consummation of the offering or soon thereafter, we expect that two
additional directors who are not our affiliates will be appointed to the board
of directors.
Board Committees
The board of directors has authorized the creation of an audit committee
to review the results and scope of the annual audit and the services provided
by our independent accountants. We anticipate that independent directors will
be appointed to the audit committee following consummation of the offering.
We historically have not used a compensation committee. We anticipate
that the board of directors will create a compensation committee in connection
with the offering.
Compensation Committee Interlocks and Insider Participation
Our board of directors determines the compensation of executive officers.
During fiscal 1997, Mr. Sodini participated in board of director deliberations
regarding the compensation of our executive officers.
72
<PAGE>
Compensation of Directors
Our directors receive no compensation as directors. Directors are
reimbursed for their reasonable out-of-pocket expenses in attending meetings.
Executive Compensation
The following table summarizes fiscal 1996, 1997 and 1998 compensation
for services in all capacities of our Chief Executive Officer and the four
other most highly compensated executive officers who were serving as executive
officers at the end of the last completed fiscal year (collectively, the
"Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
--------------------------------- ------------
Other Securities
Name and Principal Fiscal Annual Underlying All Other
Position Year Salary Bonus Compensation(a) Options/SARs Compensation(b)
------------------ ------ -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sodini ........ 1998 $475,000 $250,000 $42,337 $2,500
President and Chief 1997 305,218 150,000 98,892 -- 2,500
Executive Officer(c) 1996 124,086 50,000 3,392 -- --
Dennis R. Crook......... 1998 175,000 87,000 7,471 4,253
Senior Vice President, 1997 151,832 70,000 1,025 -- 2,019
Administration and 1996 82,933 20,000 41,250 -- --
Gasoline Marketing (d)
William T. Flyg......... 1998 175,000 75,000 6,041 --
Senior Vice President, 1997 109,615 54,000 3,076 -- --
Finance and Chief
Financial Officer(e)
Douglas Sweeney......... 1998 180,000 90,000 10,174 4,651
Senior Vice President, 1997 149,983 72,000 2,593 -- 2,014
Operations(f) 1996 91,334 20,000 1,352 --
Daniel J. McCormack..... 1998 110,000 60,000 10,412 2,645
Vice President,
Marketing(g) 1997 95,488 45,000 4,269 -- 1,279
1996 45,334 15,000 5,934 -- --
</TABLE>
- --------
(a) Consists primarily of executive medical, moving and relocation
reimbursements.
(b) Consists of matching contributions to our 401(k) Savings Plan. See
"Benefit Plan" below.
(c) Mr. Sodini was appointed Chief Operating Officer in February 1996 and
appointed President and Chief Executive Officer in June 1996.
(d) Dennis R. Crook was appointed Senior Vice President, Administration and
Gasoline Marketing in March 1996.
(e) William T. Flyg was appointed our Senior Vice President, Finance and Chief
Financial Officer in January 1997 and, accordingly, only fiscal 1997 and
fiscal 1998 information is provided.
(f) Douglas M. Sweeney was appointed Senior Vice President, Operations in
March 1996.
(g) Daniel J. McCormack was appointed Vice President, Marketing in September
1996.
73
<PAGE>
Option Grants
The following table sets forth information with respect to stock options
granted to our Chief Executive Officer and Executive Officers during the year
ended September 24, 1998:
Options/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed
Annual Rates
Individual Grants of Stock
---------------------------------------------- Price
Number of % of Total Exercise Appreciation
Securities Options/SARs Price or for Option
Underlying Granted to Base Term
Options/SARs Employees in Price Expiration -------------
Name Granted(#) Fiscal Year ($/Share) Date 5%($) 10%($)
---- ------------ ------------ --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sodini......... (a) $ 01/01/08 $ $
(b) 08/25/08
Dennis R. Crook......... (a) 01/01/08
(b) 08/25/08
William T. Flyg......... (a) 01/08/08
(b) 08/25/08
Douglas Sweeney......... (a) 01/01/08
(b) 08/25/08
Daniel J. McCormack..... (a) 01/01/08
(b) 08/25/08
</TABLE>
(Individual Grants)
- --------
(a) This option vests and becomes exercisable in three equal, annual
installments beginning on the first anniversary of the vesting commencement
date and expires to the extent not exercised by January 1, 2008.
(b) This option vests and becomes exercisable in three equal, annual
installments beginning on the first anniversary of the vesting commencement
date and expires to the extent not exercised by August 25, 2008.
Aggregate Option Exercises and Option Values
The following table sets forth information with respect to our Chief
Executive Officer and Executive Officers concerning option exercises for the
fiscal year ended September 24, 1998 and exercisable and unexercisable options
held as of September 24, 1998:
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
September 24, 1998(#) September 24, 1998($)(a)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sodini......... -- -- $ $
Dennis R. Crook......... -- --
William T. Flyg......... -- --
Douglas Sweeney......... -- --
Daniel J. McCormack..... -- --
</TABLE>
- --------
(a) These values are calculated using the assumed initial public offering price
of $ per share, less the exercise price of the options.
74
<PAGE>
Executive Employment Contracts
On October 1, 1997, we entered into an employment agreement with Mr.
Sodini. This agreement contains customary employment terms and provides for an
annual base salary of $475,000, subject to annual adjustment by the board of
directors, participation in any of our benefit or bonus programs, participation
in an incentive bonus program which provides for a payout of a minimum of 25%
upon the achievement of goals determined by the board of directors, and other
perquisites. This agreement terminates on September 30, 2000. Pursuant to the
terms of the agreement, if Mr. Sodini is terminated by us prior to a "change in
control" with "just cause" or upon death or disability, Mr. Sodini shall be
entitled to his then effective compensation and benefits through the last day
of his actual employment by us (for termination for just cause or upon death)
or his effective date of termination, as determined by the board of directors
(for termination upon disability). In addition, if Mr. Sodini is terminated
because of death or disability, we will pay to the estate of Mr. Sodini or to
Mr. Sodini, as the case may be, one year's pay less amounts paid under any
disability plan.
If Mr. Sodini is terminated by us prior to a change in control without
cause, Mr. Sodini shall be entitled to severance pay (including regular
benefits) through the term of the agreement until such time as he engages in
other employment. If Mr. Sodini is terminated by us following a change in
control without cause or Mr. Sodini terminates his employment for "good
reason," Mr. Sodini shall be entitled to severance pay (including regular
benefits) for a period of 18 months from the termination date, subject to
certain limitations. This agreement contains covenants prohibiting Mr. Sodini,
through the period ending on the latter of (1) 18 months after termination or
(2) such time at which he no longer received severance benefits from us, from
competing with us or soliciting employment from our employees.
We have severance arrangements with each of Mr. Crook, Mr. Sweeney and
Mr. McCormack that remain in effect so long as each continues to be employed by
us. Pursuant to these arrangements, if the employee is terminated by us prior
to a "change of control" (as defined) without cause, he shall be entitled to
severance pay for one year from the termination date, subject to certain
limitations. If the employee is terminated by us following a change of control
without cause or if the employee terminates his employment for "good reason"
(as defined), he shall be entitled to severance pay (including regular
benefits) for a period of two years from the termination date, subject to
certain limitations.
Benefit Plan
We sponsor a 401(k) employee retirement savings plan with Fidelity
Investments for eligible employees. Employees must be at least nineteen years
of age and have one year of service working at least 1,000 hours to be eligible
to participate in the 401(k) plan. Employees may contribute up to 15% of their
annual compensation and contributions are matched by us on the basis of 50% of
the first 5% contributed. Matching contribution expense was $330,000 in fiscal
1996, $305,000 in fiscal 1997 and $396,000 in fiscal 1998.
Stock Option Plan
We adopted a stock option plan in January 1998. The stock option plan
provides for the grant of incentive stock options and nonqualified stock
options, as appropriate, to certain of our officers, key employees and
consultants and certain members of our board of directors. An aggregate of
75
<PAGE>
shares of common stock has been reserved for issuance under the stock option
plan. As of December 24, 1998, options to purchase shares of common stock
were outstanding, and shares were available for future grant.
The stock option plan is currently administered by the board of
directors, although the board of directors may designate a committee to
undertake the administration. The stock option plan provides that the
administrator may, among other things, select the participants in the stock
option plan, determine the number of options which may be granted to such
participants, and determine the vesting schedule of the options granted. The
exercise price of options granted under the stock option plan will be
determined by the administrator, although the exercise price of incentive stock
options must be at least equal to the fair market value of our common stock on
the date of grant. The stock option plan will terminate in the event of certain
acquisitions of The Pantry as set forth in the stock option plan, and in such
event, the administrator may determine whether unvested options will
accelerate. The stock option plan will terminate when all shares authorized
thereunder have been issued, unless terminated earlier pursuant to the terms of
the stock option plan or by the board of directors.
Stock Subscription Plan
We adopted a stock subscription plan in August 1998. This plan permits
certain of our employees, including directors and executive officers, to
purchase up to an aggregate of shares of common stock at fair market value.
The purchase price for common stock purchased under our stock subscription plan
is payable in cash and/or the delivery to us of a secured promissory note
payable to us or one of our subsidiaries. As of December 24, 1998, we have
issued shares of common stock to employees under our stock subscription
plan.
The following table sets forth for our Chief Executive Officer and our
Executive Officers the number of shares purchased pursuant to the stock
subscription plan and the amount borrowed, if any, to finance the purchase of
such shares:
<TABLE>
<CAPTION>
Number of Amount of
Shares of Purchase Price Interest Rate
Common Stock Subject to Due Date of of
Name Purchased Promissory Note Promissory Note Promissory Note
- ---- ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Peter J. Sodini......... $100,100 8/31/2003 8.5%
Dennis R. Crook......... 50,025 8/31/2003 8.5%
William T. Flyg......... -- -- -- --
Douglas Sweeney......... -- -- --
Daniel J. McCormack..... 50,025 8/31/2003 8.5%
</TABLE>
Key Personnel Life Insurance
We are not the beneficiary of any key personnel life insurance policy on
any of our key management personnel.
Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law, we can
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act. We intend to enter
into agreements to indemnify our directors to the fullest extent
76
<PAGE>
permitted by law. These agreements, among other things, will indemnify our
directors for certain expenses (including attorneys' fees), judgments, fines
and settlement amounts incurred by such person in any action or proceeding,
including but not limited to any action by or in the right of The Pantry, on
account of services as a director of The Pantry, or as a director or officer of
any other company or enterprise to which the person provides services at our
request. We have also purchased liability insurance covering our director and
officers. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In addition, our certificate of incorporation provides that our directors
shall not be liable for monetary damages for breach of such director's
fiduciary duty of care to us and our stockholders except for liability for
breach of the director's duty of loyalty to us or our stockholders, for acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. This provision does not
eliminate the duty of care and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal or state securities
or environmental laws.
There is no pending litigation or proceeding involving any of our
directors, officers, employees or other agents as to which indemnification is
being sought, nor are we aware of any pending or threatened litigation that may
result in claims for indemnification by any director, officer, employee or
other agent.
77
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1995, Freeman Spogli purchased 45,521 shares of our common
stock and 10,374 shares of our Series A Preferred Stock and Chase Capital
purchased 13,700 shares of our common stock and 3,123 shares of our Series A
Preferred Stock. A portion of these shares were purchased from us and the rest
from existing stockholders.
In August 1996, Freeman Spogli and Chase Capital purchased the
outstanding common stock and Series A Preferred Stock held by other
stockholders.
In December 1996, Freeman Spogli purchased 17,500 shares of our series B
preferred stock and warrants to purchase 46,000 shares of common stock for
approximately $17.5 million. The warrants are exercisable at $380 per share
until December 30, 2006 and contain adjustment provisions in the event we
declare dividends or distributions, make stock splits or engage in mergers,
reorganizations or reclassifications. In connection with this offering, we will
repurchase the series B preferred stock from Freeman Spogli for $17.5 million,
plus approximately $6.0 million in accrued dividends.
In October 1997, Freeman Spogli, Chase Capital and Peter J. Sodini
purchased an aggregate of $32.4 million of common stock in connection with the
Lil' Champ acquisition. Mr. Sodini purchased 889 shares of common stock for an
aggregate purchase price of $400,500, payable $185,500 in cash and $215,000 in
the form of a secured promissory note in our favor. All of our Series A
Preferred Stock was contributed back to The Pantry and cancelled at this time.
In July 1998, in connection with the acquisition of certain of the assets
of Quick Stop and the acquisition of certain of the assets of Stallings Oil
Company, Freeman Spogli and Chase Capital purchased an aggregate of 43,478
shares of common stock for an aggregate purchase price of $25.0 million. As of
September 24, 1998, Freeman Spogli owned 78.8% of our outstanding common stock
and Chase Capital and its affiliates owned 19.5% of our outstanding common
stock. Certain of our directors and executive management owned the remaining
common stock in The Pantry. See "Management--Stock Subscription Plan" for a
description of loans made to our Chief Executive Officer and Executive Officers
for purchases of common stock under our stock subscription plan.
Since November 1995, we have paid transaction fees in the amount of $5.5
million to Freeman Spogli in connection with previous investments and
assistance with analyzing acquisition candidates and obtaining financing.
We have entered into a stockholders' agreement with Freeman Spogli, Chase
Capital and Peter J. Sodini whereby (1) Freeman Spogli has certain rights of
first offer prior to transfers of securities to non-affiliates (other than
transfers pursuant to a registration statement or under Rule 144), (2) Freeman
Spogli has certain rights to require Chase Capital and Sodini to sell their
shares of common stock to a third party buyer on the same terms as Freeman
Spogli with respect to the sale of securities, and (3) Freeman Spogli, Chase
Capital and Sodini have rights to be included in certain sales of common stock
by the other stockholders. In addition, Freeman Spogli has agreed, as long as
Chase Capital holds 10% of our common stock, to vote for a director nominated
by Chase Capital.
We have entered into a registration rights agreement with Freeman Spogli,
Chase Capital and Mr. Sodini obligating us to (1) make three registrations of
common stock upon the request of these stockholders, (2) put in place a
registration statement covering the resale of common stock by these
stockholders, and (3) allow these stockholders to participate in other
registrations made by us. The registration rights agreement also grants Freeman
Spogli, Chase Capital and Mr. Sodini the right to purchase their pro rata
portion of additional shares issued by us. This right will terminate upon
consummation of this offering.
78
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information, as of December 24,
1998, with respect to the beneficial ownership of capital stock by (1) each
person who beneficially owns more than 5% of such shares, (2) each of the
Executive Officers, (3) each of our directors and (4) all of our executive
officers and directors as a group.
<TABLE>
<CAPTION>
Shares of Shares of
Common Stock Preferred Stock
Name and Address of Beneficially Percentage Beneficially Percentage
Beneficial Owner(1) Owned of Class Owned of Class
------------------- ------------ ---------- --------------- ----------
<S> <C> <C> <C> <C>
Freeman Spogli & Co.
Incorporated(2).......... 82.3%(2) 17,500(3) 100%
William M. Wardlaw(2)... -- -- -- --
Charles P. Rullman(2)... -- -- -- --
Jon D. Ralph(2)......... -- -- -- --
Todd W. Halloran(2)..... -- -- -- --
Chase Manhattan Capital,
L.P.(4).................. 11.6% -- --
Christopher C.
Behrens(4)(5).......... * -- --
Peter J. Sodini(6)........ * -- --
Dennis R. Crook(7)........ * -- --
William T. Flyg(8)........ * -- --
Douglas Sweeney(9)........ * -- --
Daniel J. McCormack(10)... * -- --
Peter M. Starrett(11)..... * -- --
All directors and
executive officers as a
group (11 individuals)... * -- --
</TABLE>
- --------
* Less than 1.0%.
(1) Unless indicated otherwise, the address of the shareholder is c/o The
Pantry, P.O. Box 1410, 1801 Douglas Drive, Sanford, North Carolina 27331.
Unless indicated otherwise, each shareholder has sole voting and
investment power with respect to the shares of common stock beneficially
owned by such shareholder.
(2) Includes shares issuable on the exercise of currently exercisable
warrants. shares, shares and shares of common stock are held of
record by FS Equity Partners III, L.P. ("FSEP III"), FS Equity Partners
IV, L.P. ("FSEP IV") and FS Equity Partners International, L.P. ("FSEP
International"), respectively. As general partner of FS Capital Partners,
L.P. ("FS Capital"), which is general partner of FSEP III, FS Holdings,
Inc. ("FSHI") has the sole power to vote and dispose of the shares owned
by FSEP III. As general partner of FS&Co. International, L.P. ("FS&Co.
International"), which is the general partner of FSEP International, FS
International Holdings Limited ("FS International Holdings") has the sole
power to vote and dispose of the shares owned by FSEP International.
Bradford M. Freeman, Ronald M. Spogli, J. Frederick Simmons, William M.
Wardlaw, John M. Roth and Mr. Rullman are the sole directors, officers and
shareholders of FSHI, FS International Holdings and Freeman Spogli, and as
such may be deemed to be the beneficial owners of the shares of the common
stock and rights to acquire the common stock owned by FSEP III and FSEP
International. As general partner of FSEP IV, FS Capital Partners LLC
("FSCP") has the sole power to vote and dispose of the shares owned by
FSEP IV. Messrs. Freeman, Spogli, Wardlaw, Rullman, Ralph, Halloran, Roth
and Mark J. Doran are the sole directors, officers and beneficial owners
of FSCP, and as such may be deemed to be the beneficial owners of the
shares of the common stock and rights to acquire the common stock owned by
FSEP IV. The business address of Freeman Spogli, FSEP III, FSEP IV, FS
Capital, FSHI and FSCP and their directors, officers and beneficial owners
is 11100 Santa Monica Boulevard, Suite 1900, Los Angeles, California
90025. The business address of FSEP International, FS&Co. International
and FS International Holdings is c/o Padget-Brown & Company, Ltd., West
Winds Building, Third Floor, Grand Cayman, Cayman Islands, British West
Indies.
79
<PAGE>
(3) Includes and shares of preferred stock are held of record by FSEP III
and FSEP International, respectively. Each share of preferred stock is
entitled to ten votes on all matters on which holders of the common stock
vote. All of the preferred stock will be redeemed with the proceeds of the
offering.
(4) Includes shares held of record by Chase Manhattan Capital, L.P. and
shares held by CB Capital Investors, L.P. ("CBCLP"). The business address
of Chase Capital and CBCLP is c/o Chase Capital Partners, 380 Madison
Avenue, 12th Floor, New York, New York, 10017. Beneficial ownership of a
portion of such shares may be deemed to be attributable to Mr. Behrens as
a general partner of Chase Capital Partners ("CCP"), which is the limited
partner of, and which acts as the investment manager for, each of Chase
Capital and CBCLP. The actual pro rata portion of such beneficial
ownership is subject to several variables, including rates of return, and
thus is not readily determinable. Mr. Behrens is also the managing general
partner of Baseball Partners, which may be deemed to be an affiliate of
CCP, Chase Capital and CBCLP. Each of CCP, Chase Capital and CBCLP
disclaims any beneficial ownership interest in the shares held by Baseball
Partners that may be attributable to it as a result of any such
affiliation.
(5) Includes shares held of record by Baseball Partners, a New York
general partnership of which Mr. Behrens is the managing general partner.
Mr. Behrens disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein. Baseball is party to a
Stockholders Agreement with Chase Capital that contains various provisions
pertaining to the voting, acquisition and disposition of such shares,
including Baseball's grant to Chase Capital of a proxy to vote such shares
and restrictions on Baseball's ability to transfer such shares. Chase
Capital disclaims any beneficial ownership interest in such shares that
may be attributable to it as a result of such provisions.
(6) Includes shares of common stock issuable upon the exercise of options
exercisable within 60 days after February 28, 1999.
(7) Includes shares of common stock issuable upon the exercise of options
exercisable within 60 days after February 28, 1999.
(8) Includes shares of common stock issuable upon the exercise of options
exercisable within 60 days after February 28, 1999.
(9) Includes shares of common stock issuable upon the exercise of options
exercisable within 60 days after February 28, 1999.
(10) Includes shares of common stock issuable upon the exercise of options
exercisable within 60 days after February 28, 1999.
(11) Includes shares of common stock issuable upon the exercise of options
exercisable within 60 days after February 28, 1999.
80
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized Capital Stock
Upon consummation of the offering, our authorized capital stock will
consist of shares of common stock and shares of preferred stock. Of the
shares of common stock authorized, shares have been reserved for
issuance pursuant to our stock option plan and have been reserved for
issuance pursuant to warrants held by Freeman Spogli.
The following summary description of our capital stock does not purport
to be complete and is qualified in its entirety by reference to Delaware law
and to our certificate of incorporation, a copy of which is filed as an exhibit
to the registration statement of which this prospectus is a part.
Common Stock
Each share of common stock is entitled to one vote on all matters
submitted to a vote of our stockholders. Generally, all matters to be voted
upon by stockholders must be approved by a majority of the votes cast or
entitled to be cast by all shares of common stock. Subject to preferences that
may be applicable to any then outstanding preferred stock, holders of common
stock are entitled to receive ratably such dividends, if any, as may be
declared by the board of directors out of funds legally available therefor. See
"Dividend Policy."
In the event of a liquidation, dissolution or winding up of The Pantry,
holders of the common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding preferred stock or any class or series of stock ranking prior
to the common stock. There are no redemption or sinking fund provisions
applicable to the shares of common stock. All outstanding shares of common
stock are, and the common stock to be outstanding upon completion of this
offering will be, fully paid and nonassessable.
Preferred Stock
We intend to use a portion of the proceeds of the offering to redeem all
shares of preferred stock currently outstanding. However, the board of
directors will have the authority, without further action by the stockholders,
to issue from time to time preferred stock in one or more series and to fix the
number of shares, designations, preferences, powers and relative participating,
optional or other special rights and the qualifications or restrictions
thereof. The issuance of preferred stock could decrease the amount of earnings
and assets available for distribution to holders of common stock or affect
adversely the rights and powers, including voting rights, of the holders of
common stock, and may have the effect of delaying, deferring or preventing a
change in control of The Pantry. We have no present plan to issue any shares of
preferred stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is First Union
National Bank.
Listing
Application will be made for the quotation of the common stock on the
Nasdaq National Market under the symbol "PTRY."
81
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have outstanding shares of
common stock, assuming no exercise of outstanding warrants of options under our
stock option plan. An aggregate of shares of common stock have been
reserved for issuance pursuant to our stock option plan, of which options to
purchase shares are outstanding, and shares of common stock have been
reserved for issuance pursuant to warrants held by Freeman Spogli.
The shares of common stock sold in the offering will be freely tradable
without restriction or limitation under the Securities Act, except for any such
shares held by our "affiliates", as such term is defined under Rule 144 of the
Securities Act, which shares will be subject to the resale limitations under
Rule 144. Of our remaining shares (1) shares are "restricted securities"
within the meaning of Rule 144 and were issued and sold by us in private
transactions and may be publicly sold only if registered under the Securities
Act or sold in accordance with an applicable exemption from registration, such
as Rule 144 and (2) shares were sold to our employees in transactions
registered under the Securities Act and are freely tradeable.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
for at least one year, including an affiliate of The Pantry, would be entitled
to sell, within any three-month period, that number of shares that does not
exceed the greater of one percent of the then outstanding shares of common
stock (approximately shares) and the average weekly trading volume in the
common stock during the four calendar weeks immediately preceding the date on
which the notice of sale is filed with the Securities and Exchange Commission,
provided certain manner of sale and notice requirements and requirements as to
the availability of current public information about us are satisfied. Under
Rule 144(k), a holder of "restricted securities" who is not deemed an affiliate
of the issuer and who has beneficially owned shares for at least two years
would be entitled to sell shares under Rule 144(k) without regard to the
limitations described above. As defined in Rule 144, an "affiliate" of an
issuer is a person who directly or indirectly through the use of one or more
intermediaries controls, or is controlled by, or is under common control with,
such issuer.
We and our executive officers and directors and all of our existing
shareholders have agreed, subject to certain exceptions, not to directly or
indirectly (1) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of or otherwise dispose of or transfer
any shares of common stock or securities convertible into or exchangeable or
exercisable for or repayable with common stock, whether now owned or thereafter
acquired by the person executing the agreement or with respect to which the
person executing the agreement thereafter acquires the power of disposition, or
file a registration statement under the Securities Act with respect to the
foregoing or (2) enter into any swap or other agreement that transfers, in
whole or in part, the economic consequence of ownership of the common stock
whether any such swap or transaction is to be settled by delivery of common
stock or other securities, in cash or otherwise, without the prior written
consent of Merrill Lynch on behalf of the underwriters for a period of 180 days
after the date of this prospectus.
We intend to file a registration statement under the Securities Act
following the date of this prospectus to register the future issuance of up to
shares of common stock under the stock option plan. Shares issued under the
stock option plan after the effective date of such registration statement will
be freely tradable in the open market, subject to the lock-up agreements with
the
82
<PAGE>
representatives of the underwriters described above and, in the case of sales
by affiliates, to certain requirements of Rule 144. As of February 28, 1999,
options to purchase approximately shares of common stock are vested, of
which approximately such shares will be subject to the 180-day lock-up
period described above. See "Management--Stock Option Plan."
We are unable to estimate the number of shares that may be sold in the
future by our existing stockholders or the effect, if any, that sales of shares
by such stockholders will have on the market price of the common stock
prevailing from time to time. Sales of substantial amounts of common stock, or
the prospect of such sales, could materially adversely affect the market price
of the common stock.
83
<PAGE>
MATERIAL U.S. TAX CONSIDERATIONS APPLICABLE TO
NON-U.S. HOLDERS OF THE COMMON STOCK
The following discussion summarizes the material U.S. federal income and
estate tax consequences of the acquisition, ownership and disposition of the
common stock held by non-U.S. holders. A "non-U.S. holder" means a holder of
common stock who is not a U.S. holder. A U.S. holder means a holder of common
stock who, for U.S. federal income tax purposes, is
. A citizen or resident of the United States;
. A corporation, partnership or other entity created or organized in
the United States or under the laws of the United States or of any
political subdivision thereof (other than a partnership treated as
foreign under U.S. Treasury regulations);
. An estate whose income is includable in gross income for United
States federal income tax purposes regardless of its source;
. A trust, if a United States court is able to exercise primary
supervision over the administration of the trust and one or more
United States persons have the authority to control all substantial
decisions of the trust; or
. A person whose worldwide income or gain is subject to U.S. federal
income tax on a net basis.
An individual may, among other ways, be deemed to be a resident of the
United States with respect to any calendar year by virtue of being present in
the United States on at least 31 days in such calendar year and for an
aggregate of at least 183 days during the current calendar year and the two
preceding calendar years (counting for such purposes all of the days present in
the current year, one-third of the days present in the immediately preceding
year and one-sixth of the days present in the second preceding year).
This discussion is included for general information and is based upon the
U.S. federal tax law now in effect, which is subject to change, possibly
retroactively, which could affect the continued validity of this discussion.
The tax treatment of the holders of common stock may vary depending on their
particular situation. U.S. holders acquiring common stock are subject to
different rules than those discussed below. In addition, certain other holders
(including insurance companies, tax-exempt organizations, financial
institutions, subsequent purchasers of common stock, U.S. expatriates and
broker-dealers) may be subject to special rules not discussed below. The
discussion also does not consider the tax consequences for any person who is a
shareholder, partner or beneficiary of a holder of the common stock. Moreover,
the effect of any applicable state, local or foreign taxing jurisdiction is not
discussed. In general, this discussion assumes that a non-U.S. holder holds
such common stock as a capital asset and not as part of a "hedge," "straddle,"
"conversion transaction," "synthetic security" or other integrated investment.
Prospective investors are urged to consult their tax advisors regarding the
U.S. federal tax consequences of acquiring, holding and disposing of common
stock, as well as any tax consequences that may arise under the laws of any
foreign, state, local or other taxing jurisdiction.
Dividends
As described above, we do not expect to pay dividends. In the event we
pay dividends, dividends paid to a non-U.S. holder will be subject to a U.S.
withholding tax at a rate of 30% (or a lower rate under a relevant treaty) of
the gross amount of the dividend, unless the dividends are effectively
connected with the conduct of a trade or business by the non-U.S. holder within
the United States. Non-U.S. holders should consult their tax advisors regarding
their entitlement to benefits under a relevant income tax treaty.
84
<PAGE>
Currently, for purposes of determining whether tax is to be withheld at
the 30% rate or at a reduced treaty rate, we will ordinarily presume that
dividends paid to an address in a foreign country are paid to a resident of
such country, absent knowledge to the contrary. Under U.S. Treasury regulations
effective for payments after December 31, 1999, holders will be required to
satisfy certain applicable certification requirements to claim treaty benefits.
These regulations also contain special rules regarding treaty benefits
available for payments made to certain intermediary or disregarded entities.
Except to the extent otherwise provided under an applicable treaty,
dividends that are effectively connected with such holder's conduct of a trade
or business in the United States are subject to U.S. federal income tax on a
net income basis at applicable graduated individual or corporate rates, and are
not generally subject to withholding, if the holder complies with certain
certification and disclosure requirements. Any such effectively connected
dividends received by a foreign corporation may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or such lower rate as may be specified by an applicable income tax treaty.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income
tax in respect of gain recognized on a disposition of common stock unless:
. The gain is effectively connected with a trade or business of the
non-U.S. holder in the United States, or, alternatively, if a tax
treaty applies, is attributable to a permanent establishment
maintained by the non-U.S. holder in the United States (in which
cases such gain will be subject to tax at the rates and in the manner
applicable to United States persons and, if the holder is a foreign
corporation, the branch profits tax described above may also apply);
. In the case of a non-U.S. holder who is an individual and holds the
common stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of the sale and
either the income from the disposition is attributable to an office
or other fixed place of business maintained by the holder in the
United States or where the holder has a "tax home" in the United
States and certain other requirements are met; or
. We are or have been a "United States real property holding
corporation" for U.S. federal income tax purposes at any time during
the shorter of the five-year period ending on the date of the
disposition and the period that the common stock was held by the non-
U.S. holder.
In general, we will be treated as a U.S. real property holding
corporation if the fair market value of our U.S. real property interests equals
or exceeds 50% of the total fair market value of our U.S. and non-U.S. real
property interests and our other assets used or held for use in a trade or
business. The determination of the fair market value of our assets and,
therefore, whether we are a U.S. real property holding corporation at any given
time will depend on the particular facts and circumstances applicable at the
time. Currently, it is our best estimate that the fair market value of our U.S.
real property interests is approximately 50% of the fair market value of our
U.S. and non-U.S. real property interests and our other assets used or held for
use in our trade or business. Therefore, we believe that it is likely that we
currently are a U.S. real property holding corporation. Because the
determination of whether we are a U.S. real property holding corporation is
based on the fair market value of our U.S. real property interests and our
other assets, it is difficult to predict whether we will be a U.S. real
property holding corporation in the future.
85
<PAGE>
However, even if we are or have been a U.S. real property holding
corporation, a non-U.S. holder which did not beneficially own, directly or
indirectly, more than 5% of the total fair market value of our common stock at
any time during the shorter of the five-year period ending on the date of
disposition and the period that the common stock was held by the non-U.S.
holder, a "non-5% holder," and which is not otherwise subject to tax under any
other circumstance above will not be subject to U.S. federal income tax on any
gain realized on the disposition of the common stock if, at any time during the
calendar year of the disposition, the common stock was regularly traded on an
established securities market.
We have applied to have the common stock quoted on the Nasdaq National
Market. Although not free from doubt, our common stock should be considered to
be regularly traded on an established securities market for any calendar
quarter during which it is regularly quoted on Nasdaq by brokers or dealers
which hold themselves out to buy or sell the common stock at the quoted price.
If the common stock were not considered to be regularly quoted on Nasdaq at any
time during the applicable calendar year and we are treated as a U.S. real
property holding corporation, then a non-5% holder would be subject to U.S.
federal income tax on any gain realized on the disposition of its common stock
on a net income basis as if the gain were effectively connected with the
conduct of a United States trade or business by the non-5% holder during the
taxable year and, in such case, the person acquiring the common stock from a
non-5% holder generally would be required to withhold 10% of the amount of the
proceeds of the disposition. Such withholding may be reduced or eliminated
pursuant to a withholding certificate issued by the Internal Revenue Service in
accordance with applicable U.S. Treasury regulations. All non-U.S. holders
should consult their own tax advisors regarding application of the foregoing
rules to them.
Federal Estate Taxes
Common stock owned or treated as owned by a non-U.S. holder at the time
of death, or common stock of which the non-U.S. holder made certain lifetime
transfers, will be included in such holder's gross estate for U.S. federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
United States Information Reporting Requirements and Backup Withholding Tax
We must report annually to the Internal Revenue Service and to each non-
U.S. holder the amount of dividends paid to such holder and the tax withheld
with respect to such dividends, regardless of whether any tax was actually
withheld. Copies of the information returns reporting such dividends and
withholding may also be made available to the tax authorities in the country in
which the non-U.S. holder resides under the provisions of an applicable income
tax treaty.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
and additional information reporting generally will not apply to dividends paid
on common stock before January 1, 2000, that are either
. Subject to withholding at the 30% rate (or at a reduced rate under an
applicable treaty); or
. Paid to an address outside the United States.
Dividends paid after December 31, 1999, generally will be subject to
backup withholding at a 31% rate unless the non-U.S. holder provides a valid
Form W-8 (or substitute form) or is a corporation or other exempt recipient
that meets certain requirements.
86
<PAGE>
In general, payment to or through a United States office of a broker of
the proceeds of a sale of common stock is generally subject to both backup
withholding and information reporting unless either:
. The non-U.S. holder is a corporation or other exempt recipient that
meets certain requirements; or
. The non-U.S. holder provides a valid Form W-8 (or substitute form);
provided, however, the broker does not have actual knowledge that the holder is
a U.S. holder or that the conditions of any other exemption are not, in fact,
satisfied. Before January 1, 2000, payment of the proceeds of a sale of common
stock to or through a foreign office of a foreign broker generally will not be
subject to backup withholding and information reporting. After December 31,
1999, backup withholding will apply if information reporting is required.
However, payments of proceeds from the disposition of common stock to or
through a foreign office of a broker that is:
. A United States person;
. A controlled foreign corporation for U.S. federal income tax
purposes; or
. A foreign person 50% or more of whose gross income from certain
periods is effectively connected with a United States trade or
business,
will be subject to information reporting unless the broker has documentary
evidence in its files that the owner is a non-U.S. holder and the broker has no
actual knowledge to the contrary. After December 31, 1999, payments made to or
through a foreign intermediary satisfying certain requirements will not be
subject to either backup withholding or information reporting. Prospective
investors should consult with their own tax advisors regarding these rules, and
in particular with respect to whether the use of a particular broker would
subject the investor to potential information reporting and backup withholding.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules may be allowed as a refund or a credit against
such holder's U.S. federal income tax liability, provided the required
information is furnished to the Internal Revenue Service.
87
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated and NationsBanc
Montgomery Securities LLC are acting as representatives of each of the
underwriters named below. Subject to the terms and conditions set forth in a
purchase agreement among The Pantry and the underwriters, The Pantry has agreed
to sell to the underwriters, and each of the underwriters severally and not
jointly has agreed to purchase from The Pantry, the number of shares of common
stock listed opposite its name below.
<TABLE>
<CAPTION>
Number
of
Underwriter Shares
----------- ------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................
NationsBanc Montgomery Securities LLC.............................
Total........................................................
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the shares of
common stock being sold pursuant to each such agreement if any of the shares of
common stock being sold pursuant to such agreement are purchased. In the event
of a default by an underwriter, the purchase agreement provides that, in
certain circumstances, the purchase commitments of the nondefaulting
underwriters may be increased or the purchase agreement may be terminated.
The Pantry has agreed to indemnify the underwriters against certain
liabilities, including certain liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make in respect
thereof.
Commissions and Discounts
The representatives have advised The Pantry that the underwriters propose
initially to offer the shares of common stock to the public at the initial
public offering price set forth on the cover page of this prospectus, and to
certain dealers at such price less a concession not in excess of $ per share
of common stock. The underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share of common stock to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the per share and total public offering price,
underwriting discount to be paid by The Pantry to the underwriters and the
proceeds before expenses to The Pantry. This
88
<PAGE>
information is presented assuming either no exercise or full exercise by the
underwriters of their over-allotment options.
<TABLE>
<CAPTION>
Per Without With
Share Option Option
----- ------- ------
<S> <C> <C> <C>
Public offering price.................................. $ $ $
Underwriting discount.................................. $ $ $
Proceeds, before expenses, to The Pantry............... $ $ $
</TABLE>
The expenses of the offering (exclusive of the underwriting discount) are
estimated at $ and are payable by The Pantry.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and
certain other conditions. The underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part.
Over-allotment Options
The Pantry has granted options to the underwriters, exercisable for 30
days after the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price set forth on the
cover page of this prospectus, less the underwriting discount. The underwriters
may exercise these options solely to cover over-allotments, if any, made on the
sale of the common stock offered hereby. To the extent that the underwriters
exercise these options, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares of common stock
proportionate to such underwriter's initial amount reflected in the foregoing
table.
Reserved Shares
At the request of The Pantry, the underwriters have reserved for sale, at
the initial public offering price, up to % of the shares offered hereby to be
sold to certain directors, officers, employees, business associates and related
persons of The Pantry. The number of shares of common stock available for sale
to the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not orally confirmed for
purchase within one day of the pricing of the offering will be offered by the
underwriters to the general public on the same terms as the other shares
offered hereby.
No Sales of Similar Securities
The Pantry and its executive officers and directors and all existing
stockholders have agreed, subject to certain exceptions, not to directly or
indirectly offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right
or warrant for the sale of or otherwise dispose of or transfer any shares of
common stock or securities convertible into or exchangeable or exercisable for
or repayable with common stock, whether now owned or thereafter acquired by the
person executing the agreement or with respect to which the person executing
the agreement thereafter acquires the power of disposition, or file a
registration statement under the Securities Act with respect to the foregoing
or enter into any swap or other agreement that transfers, in whole or in part,
the economic consequence of ownership of the common stock whether any such swap
or transaction is to be settled by delivery of common stock or other
89
<PAGE>
securities, in cash or otherwise, without the prior written consent of Merrill
Lynch on behalf of the underwriters for a period of 180 days after the date of
this prospectus. See "Shares Eligible for Future Sale."
Nasdaq National Market Listing
We will apply to the Nasdaq National Market for the quotation of the
common stock under the symbol "PTRY." Prior to the offering, there has been no
public market for the common stock of The Pantry. The initial public offering
price will be determined through negotiations between The Pantry and the
representatives. The factors considered in determining the initial public
offering price, in addition to prevailing market conditions, are price-earnings
ratios of publicly traded companies that the representatives believe to be
comparable to The Pantry, certain financial information of The Pantry, the
history of, and the prospects for, The Pantry and the industry in which it
competes, and an assessment of its management, its past and present operations,
the prospects for, and timing of, future revenue of The Pantry, and the present
state of its development. There can be no assurance that an active trading
market will develop for the common stock or that the common stock will trade in
the public market subsequent to the offering at or above the initial public
offering price.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and certain selling group members to bid for and purchase the common stock. As
an exception to these rules, the representatives are permitted to engage in
certain transactions that stabilize the price of the common stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares of common stock
than are set forth on the cover page of this prospectus, the representatives
may reduce that short position by purchasing common stock in the open market.
The representatives may also elect to reduce any short position by exercising
all or part of the over-allotment options described above.
The representatives may also impose a penalty bid on certain underwriters
and selling group members. This means that if the representatives purchase
shares of common stock in the open market to reduce the underwriters' short
position or to stabilize the price of the common stock, they may reclaim the
amount of the selling concession from the underwriters and selling group
members who sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of the common stock to the extent
that it discourages resales of the common stock.
Neither The Pantry nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the common stock. In
addition, neither The Pantry nor any of the underwriters makes any
representation that the representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
90
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the common stock will be passed
upon for us by Riordan & McKinzie, a Professional Corporation, Los Angeles,
California. Certain legal matters will be passed upon for the Underwriters by
Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), New York, New York. Certain principals and employees of Riordan
& McKinzie are limited partners in a partnership which is a limited partner of
a Freeman Spogli investment fund that owns a majority of The Pantry's equity
interests. See "Security Ownership of Certain Beneficial Owners and
Management."
EXPERTS
The consolidated financial statements of The Pantry, Inc. as of September
25, 1997 and September 24, 1998 and for each of the three years in the period
ended September 24, 1998, included in the prospectus, and the related financial
statement schedule included elsewhere in the registration statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the registration statement, and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of Lil' Champ Food Stores, Inc. (a wholly-owned
subsidiary of Docks, U.S.A., Inc.) as of December 30, 1995 and December 28,
1996 and for the years then ended, included in the prospectus, have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The financial statements of Quick Stop Food Mart, Inc. as of December 31,
1996 and 1997 and for each of the three years in the period ended December 31,
1997 included in this prospectus have been audited by Cherry, Bekaert &
Holland, L.L.P., independent auditors, as stated in their report appearing
herein, and have been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of Express Stop, Inc. as of December 31, 1997
and the year then ended included in this prospectus have been audited by
Griffin, Maxwell & Frazelle, P.A., independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The financial statements of Taylor Oil Company as of December 31, 1997
and 1998 and for each of the three years in the period ended December 31, 1998
included in this prospectus have been audited by Edwards, Falls & Renegar,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
91
<PAGE>
ADDITIONAL INFORMATION
The Pantry has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the common stock. This prospectus
does not contain all of the information set forth in the Registration
Statement, certain portions of which are omitted as permitted by the rules and
regulations of the Commission. For further information pertaining to The Pantry
and the common stock, reference is made to the Registration Statement,
including the exhibits thereto and the financial statements, notes and
schedules filed as a part thereof. Statements contained in this prospectus
regarding the contents of any contract or other document referred to herein or
therein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
The Pantry is subject to the informational requirements of the Securities
Exchange Act of 1934, and files reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information, as
well as the Registration Statement and its exhibits and schedules, may be
inspected, without charge, or copied, at prescribed rates, at the public
reference facility maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. In addition, the Commission maintains an Internet
site that contains reports, proxy and information statements, and other
information, regarding issuers that file electronically with the Commission.
The address of the Commission's site is http://www.sec.gov.
92
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
THE PANTRY, INC.:
Independent Auditors' Report............................................ F-3
Consolidated Balance Sheets as of September 25, 1997 and September 24,
1998, and December 24, 1998 (unaudited)................................ F-4
Consolidated Statements of Operations for the years ended September 26,
1996, September 25, 1997 and September 24, 1998, and the three months
ended December 25, 1997 and December 24, 1998 (unaudited).............. F-6
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the years ended September 26, 1996, September 25, 1997 and September
24, 1998, and the three months ended December 24, 1998 (unaudited)..... F-7
Consolidated Statements of Cash Flows for the years ended September 26,
1996, September 25, 1997 and September 24, 1998, and the three months
ended December 25, 1997 and December 24, 1998 (unaudited).............. F-8
Notes to Consolidated Financial Statements.............................. F-10
LIL' CHAMP FOOD STORES, INC.:
Independent Auditors' Report............................................ F-46
Balance Sheets as of December 30, 1995 and December 28, 1996, and
September 27, 1997 (unaudited)......................................... F-47
Statements of Operations for the years ended December 30, 1995 and
December 28, 1996, and the nine months ended September 28, 1996 and
September 27, 1997 (unaudited)......................................... F-48
Statements of Shareholder's Equity for the years ended December 30, 1995
and December 28, 1996, and the nine months ended September 28, 1996 and
September 27, 1997 (unaudited)......................................... F-49
Statements of Cash Flows for the years ended December 30, 1995 and
December 28, 1996, and the nine months ended September 28, 1996 and
September 27, 1997 (unaudited)......................................... F-50
Notes to Financial Statements........................................... F-51
QUICK STOP FOOD MART, INC.:
Report of Independent Certified Public Accountants...................... F-60
Balance Sheets as of December 31, 1996 and 1997, and June 30, 1998
(unaudited)............................................................ F-61
Statements of Income for the years ended December 31, 1995, 1996 and
1997, and the six months ended June 30, 1997 and 1998 (unaudited)...... F-62
Statements of Stockholders' Equity for the years ended December 31,
1995, 1996 and 1997, and the six months ended June 30, 1998
(unaudited)............................................................ F-63
Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997, and the six months ended June 30, 1997 and 1998 (unaudited)...... F-64
Notes to Financial Statements........................................... F-65
EXPRESS STOP, INC.:
Report of Independent Auditors.......................................... F-71
Balance Sheets as of December 31, 1997 and September 30, 1998
(unaudited)............................................................ F-72
Statements of Income for the year ended December 31, 1997, and the nine
months ended September 30, 1997 and 1998 (unaudited)................... F-73
Statements of Retained Earnings for the year ended December 31, 1997,
and the nine months ended September 30, 1997 and 1998 (unaudited)...... F-74
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C>
Statements of Cash Flows for the year ended December 31, 1997, and the
nine months ended September 30, 1997 and 1998 (unaudited).............. F-75
Notes to Financial Statements........................................... F-76
TAYLOR OIL COMPANY:
Independent Auditors' Report............................................ F-82
Balance Sheets as of December 31, 1997 and 1998......................... F-83
Statements of Income for the years ended December 31, 1996, 1997 and
1998................................................................... F-85
Statement of Changes in Shareholders Equity for the years ended December
31, 1996, 1997 and 1998................................................ F-86
Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998................................................................... F-87
Notes to Financial Statements........................................... F-88
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders of
The Pantry, Inc.
Sanford, North Carolina
We have audited the accompanying consolidated balance sheets of The
Pantry, Inc. and subsidiaries as of September 25, 1997 and September 24, 1998,
and the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the three years in the period ended
September 24, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Pantry, Inc. and
subsidiaries as of September 25, 1997 and September 24, 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended September 24, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, in
fiscal 1996 the Company adopted Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
December 18, 1998
F-3
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited as to December 24, 1998 information)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 25, September 24, December 24,
1997 1998 1998
------------- ------------- ------------
(Unaudited)
ASSETS
-------------------------------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents............ $ 3,347 $ 34,404 $ 15,069
Receivables (net of allowance for
doubtful accounts of $150 at
September 25, 1997; $280 at
September 24, 1998 and $379 at
December 24, 1998).................. 2,101 9,907 13,393
Inventories (Note 3)................. 17,161 47,809 53,546
Income taxes receivable (Note 6)..... -- 488 --
Prepaid expenses..................... 1,204 2,216 1,338
Property held for sale............... 3,323 3,761 2,971
Deferred income taxes (Note 6)....... 1,142 3,988 3,521
-------- -------- --------
Total current assets.............. 28,278 102,573 89,838
-------- -------- --------
Property and equipment, Net (Notes 4,
5, 7 and 10)......................... 77,986 300,978 328,037
-------- -------- --------
Other assets:
Goodwill (net of accumulated
amortization of $9,705 at September
25, 1997, $11,940 at September 24,
1998 and $12,903 at December 24,
1998) (Notes 2 and 10).............. 20,318 120,025 119,534
Deferred lease costs (net of
accumulated amortization of $8,956
at September 25, 1997, 9,001 at
September 24, 1998 and $9,012 at
December 24, 1998) ................. 314 269 258
Deferred financing costs (net of
accumulated amortization of $4,345
at September 25, 1997, $4,871 at
September 24, 1998 and $5,468 at
December 24, 1998) (Note 5)......... 4,578 14,545 14,025
Environmental receivables (Note 8)... 6,511 13,187 12,783
Deferred income taxes (Note 6)....... 156 --
Escrow for Lil' Champ acquisition
(Note 2)............................ 4,049 --
Other................................ 609 3,243 4,085
-------- -------- --------
Total other assets................ 36,535 151,269 150,685
-------- -------- --------
Total assets.......................... $142,799 $554,820 $568,560
======== ======== ========
</TABLE>
F-4
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS--(Continued)
(Unaudited as to December 24, 1998 information)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 25, September 24, December 24,
1997 1998 1998
------------- ------------- ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
-----------------------------
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt
(Note 5)................................ $ 33 $ 45 $ 39
Current maturities of capital lease
obligations (Note 7).................... 285 1,240 1,240
Short-term debt.......................... -- -- 2,000
Accounts payable:
Trade.................................. 16,035 49,559 50,221
Money orders........................... 3,022 5,181 5,099
Accrued interest (Note 5)................ 4,592 11,712 5,529
Accrued compensation and related taxes... 3,323 6,719 6,031
Income taxes payable (Note 6)............ 296 -- 104
Other accrued taxes...................... 2,194 7,007 4,108
Accrued insurance........................ 3,887 5,745 6,097
Other accrued liabilities................ 2,856 24,348 27,490
-------- -------- --------
Total current liabilities............ 36,523 111,556 107,958
-------- -------- --------
Long-term debt (Note 5).................... 100,305 327,269 343,260
-------- -------- --------
Other noncurrent liabilities:
Environmental costs (Note 8)............. 7,806 17,137 17,291
Deferred income taxes (Note 6)........... -- 20,366 19,927
Capital lease obligations (Note 7)....... 679 12,129 11,806
Employment obligations................... 1,341 934 842
Accrued dividends on preferred stock
(Notes 2 and 13)........................ 7,958 4,391 5,103
Other.................................... 6,060 21,734 21,628
-------- -------- --------
Total other non-current liabilities.. 23,844 76,691 76,597
-------- -------- --------
Commitments and contingencies (Notes 5, 7,
8 and 15)................................. -- -- --
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
September 24, 1998 and December 24,
1998, liquidation preference $1,000 per
share (Notes 2 and 13).................. -- -- --
Common stock, $.01 par value, 300,000
shares authorized; 114,029 issued and
outstanding at September 25, 1997,
229,507 issued and outstanding at
September 24, 1998 and 232,701 issued
and outstanding at December 24, 1998
(Note 12)............................... 1 2 2
Additional paid-in capital............... 5,396 68,115 69,925
Shareholder loans........................ -- (215) (937)
Accumulated deficit...................... (23,270) (28,598) (28,245)
-------- -------- --------
Total shareholders' equity
(deficit)........................... (17,873) 39,304 40,745
-------- -------- --------
Total liabilities and shareholders' equity
(deficit)................................. $142,799 $554,820 $568,560
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
December 25, December 24,
September 26, September 25, September 24, 1997 1998
1996 1997 1998 (Unaudited) (Unaudited)
------------- ------------- ------------- ------------ ------------
(52 weeks) (52 weeks) (52 weeks) (13 weeks) (13 weeks)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $188,091 $202,440 $460,798 $ 89,360 $139,390
Gasoline sales........ 192,737 220,166 509,958 103,022 171,789
Commissions........... 3,979 4,787 14,128 2,789 4,428
-------- -------- -------- -------- --------
Total revenues...... 384,807 427,393 984,884 195,171 315,607
-------- -------- -------- -------- --------
Cost of sales:
Merchandise........... 125,979 132,846 303,968 58,897 94,453
Gasoline.............. 167,610 197,268 447,565 90,909 148,774
-------- -------- -------- -------- --------
Total cost of
sales.............. 293,589 330,114 751,533 149,806 243,227
-------- -------- -------- -------- --------
Gross Profit............ 91,218 97,279 233,351 45,365 72,380
-------- -------- -------- -------- --------
Operating Expenses:
Store expenses........ 57,841 60,208 140,089 28,165 43,729
General and
administrative
expenses............. 17,127 16,796 32,761 7,172 9,968
Merger integration
costs (Note 2)....... -- -- 1,016 -- --
Restructuring charges
(Note 11)............ 2,184 -- -- -- --
Impairment of long-
lived assets (Note
10).................. 3,034 -- -- -- --
Depreciation and
amortization......... 9,158 9,504 27,642 5,151 8,190
-------- -------- -------- -------- --------
Total operating
expenses........... 89,344 86,508 201,508 40,488 61,887
-------- -------- -------- -------- --------
Income from operations.. 1,874 10,771 31,843 4,877 10,493
-------- -------- -------- -------- --------
Other Income (Expense):
Interest expense...... (11,992) (13,039) (28,946) (5,817) (8,912)
Miscellaneous......... (660) 1,293 1,776 439 (184)
-------- -------- -------- -------- --------
Total other
expense............ (12,652) (11,746) (27,170) (5,378) (9,096)
-------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary loss..... (10,778) (975) 4,673 (501) 1,397
Income tax benefits
(Note 6)............... 2,664 -- -- 412 (332)
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item..... (8,114) (975) 4,673 (89) 1,065
Extraordinary loss (Note
5)..................... -- -- (7,998) (6,800) --
-------- -------- -------- -------- --------
Net loss................ $ (8,114) $ (975) $ (3,325) $ (6,889) $ 1,065
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT)
(Unaudited as to Three Months Ended December 24, 1998 information)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------- ----------------------- Paid in
Shares Par Value Shares Par Value Capital
-------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, September 28,
1995................... -- $ -- 100,000 $ 1 $ 6,999
Net loss................ -- -- -- -- --
Issuances of common and
preferred stock........ 25,999 -- 14,029 -- (447)
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ------- ------- --------
Balance, September 26,
1996................... 25,999 -- 114,029 1 6,552
Net loss................ -- -- -- -- --
Net proceeds from stock
issue.................. 17,500 -- -- -- 15,953
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ------- ------- --------
Balance, September 25,
1997................... 43,499 -- 114,029 1 22,505
-------- -------- ------- ------- --------
Net loss................ -- -- -- -- --
Issuances of common
stock.................. -- -- 115,478 1 57,150
Contribution of Series A
Preferred Stock and
related dividends to
Additional Paid in
Capital................ (25,999) -- -- -- 5,569
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ------- ------- --------
Balance, September 24,
1998................... 17,500 -- 229,507 2 $ 85,224
Net income.............. -- -- -- -- --
Issuances of common
stock.................. -- -- 3,194 -- 1,810
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ------- ------- --------
Balance, December 24,
1998................... 17,500 $ -- 232,701 $ 2 $ 87,034
======== ======== ======= ======= ========
<CAPTION>
Total
Additional
Paid in Shareholder Accumulated
Other(1) capital Loans Deficit Total
-------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, September 28,
1995................... $(17,109) $(10,110) $ -- $(6,223) $(16,332)
Net loss................ -- -- -- (8,114) (8,114)
Issuances of common and
preferred stock........ -- (447) -- -- (447)
Dividends on preferred
stock.................. -- -- -- (2,654) (2,654)
-------- -------- ------- ------- --------
Balance, September 26,
1996................... (17,109) (10,557) -- (16,991) (27,547)
Net loss................ -- -- -- (975) (975)
Net proceeds from stock
issue.................. -- 15,953 -- -- 15,953
Dividends on preferred
stock.................. -- -- -- (5,304) (5,304)
-------- -------- ------- ------- --------
Balance, September 25,
1997................... (17,109) 5,396 -- (23,270) (17,873)
-------- -------- ------- ------- --------
Net loss................ -- -- -- (3,325) (3,325)
Issuances of common
stock.................. -- 57,150 (215) -- 56,936
Contribution of Series A
Preferred Stock and
related dividends to
Additional Paid in
Capital................ -- 5,569 -- -- 5,569
Dividends on preferred
stock.................. -- -- -- (2,003) (2,003)
-------- -------- ------- ------- --------
Balance, September 24.
1998................... (17,109) 68,115 (215) (28,598) $ 39,304
-------- -------- ------- ------- --------
Net income.............. -- -- -- 1,065 1,065
Issuances of common
stock.................. -- 1,810 (722) -- 1,088
Dividends on preferred
stock.................. -- -- -- (712) (712)
-------- -------- ------- ------- --------
Balance, December 24,
1998................... $(17,109) $ 69,925 $ (937) (28,245) 40,745
======== ======== ======= ======= ========
</TABLE>
- --------
(1) Represents excess of amount paid in 1987 leveraged buy-out over net book
value for "carry over" shareholders (Note 1).
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended Three Months Ended
----------------------------------------- -------------------------
December 25, December 24,
September 26, September 25, September 24, 1997 1998
1996 1997 1998 (Unaudited) (Unaudited)
------------- ------------- ------------- ------------ ------------
(52 weeks) (52 weeks) (52 weeks) (13 weeks) (13 weeks)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss................ $(8,114) $ (975) $ (3,325) $ (6,889) $ 1,065
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Extraordinary loss..... -- -- 2,006 2,006 --
Impairment of long-
lived assets.......... 3,034 -- -- -- --
Depreciation and
amortization.......... 9,158 9,504 27,642 5,151 8,190
Provision for deferred
income taxes.......... (1,558) 371 138 (1,851) --
(Gain) loss on sale of
property and
equipment............. 470 (1,054) 531 (268) 260
Provision for
environmental
expenses.............. 512 1,574 6,181 27 154
Provision for closed
stores................ 673 (11) 50 -- --
Write-off of property
held for sale......... 168 -- -- -- --
Changes in operating
assets and liabilities,
net of effects of
acquisitions:
Receivables............ (539) (527) (8,512) (1,227) (2,566)
Inventories............ (937) (2,273) (4,518) (951) (4,677)
Prepaid expenses....... 20 (429) 390 614 878
Other non-current
assets................ 432 (4,295) 5,111 3,574 36
Accounts payable....... 2,104 603 13,896 (335) (480)
Other current
liabilities and
accrued expenses...... (639) 3,393 2,241 (2,614) (6,172)
Employment
obligations........... (255) (698) (407) (92) (92)
Other noncurrent
liabilities........... 886 2,155 6,608 1,927 (106)
------- -------- --------- --------- --------
Net cash provided by
(used in) operating
activities............. 5,415 7,338 48,032 (928) (3,510)
------- -------- --------- --------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale.......... (4,050) (1,828) (5,203) -- (42)
Additions to property
and equipment.......... (7,084) (14,749) (43,153) (5,932) (9,540)
Proceeds from sale of
property held for
sale................... 2,462 1,345 4,807 2,025 524
Proceeds from sale of
property and
equipment.............. 1,468 2,315 7,648 409 91
Acquisitions of related
businesses, net of cash
acquired............... -- (12,162) (250,592) (135,605) (25,541)
------- -------- --------- --------- --------
Net cash used in
investing activities... (7,204) (25,079) (286,493) (139,103) (34,508)
------- -------- --------- --------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases... (347) (303) (1,424) (246) (323)
Proceeds from issuance
of capital leases...... -- -- 1,086 -- --
Principal repayments of
long-term debt......... (20) (26) (51,543) (51,004) (15)
Net proceeds from
issuance of long-term
debt................... -- 200 278,508 200,023 16,000
Proceeds from issuance
of short-term debt..... -- -- -- -- 2,000
Net proceeds from equity
issues................. -- 15,953 56,935 32,151 1,088
Other financing costs... (3,505) (74) (14,044) (12,418) (67)
------- -------- --------- --------- --------
Net cash provided by
(used in) financing
activities............. (3,872) 15,750 269,518 168,506 18,683
------- -------- --------- --------- --------
Net increase (decrease)
in cash................ (5,661) (1,991) 31,057 28,475 (19,335)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD.... 10,999 5,338 3,347 3,347 34,404
------- -------- --------- --------- --------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD ................ $ 5,338 $ 3,347 $ 34,404 $ 31,822 $ 15,069
======= ======== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended Three Months Ended
----------------------------------------- -----------------------------
December 25, December 24,
September 26, September 25, September 24, 1997 1998
1996 1997 1998 (unaudited) (unaudited)
------------- ------------- ------------- ------------ ------------
(13 weeks) (13 weeks)
<S> <C> <C> <C> <C> <C> <C>
Cash paid (refunded)
during the year:
Interest.............. $12,719 $12,863 $21,826 $6,165 $15,095
======= ======= ======= ====== =======
Taxes................. $ (403) $ (917) $ 784 $ (116) $ 285
======= ======= ======= ====== =======
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1997 and 1998, the Company entered into several business
acquisitions and divestitures (see Note 2--Business Acquisitions and Note 12--
Common Stock). In connection with the acquisitions, the holders of the
Company's Series A Preferred Stock contributed all outstanding shares of Series
A Preferred Stock and related accrued and unpaid dividends to the capital of
the Company, resulting in an increase in paid in capital of $5,569.
F-9
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as to December 25, 1997 and December 24, 1998 information)
NOTE 1--HISTORY OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
The consolidated financial statements include the accounts of The Pantry,
Inc. ("The Pantry" or the "Company") and its wholly-owned subsidiaries,
Sandhills, Inc., Lil' Champ Food Stores, Inc. ("Lil' Champ"), PH Holding
Corporation ("PH") and PH's wholly-owned subsidiaries, TC Capital Management,
Inc. and Pantry Properties, Inc. All intercompany transactions and balances
have been eliminated in consolidation. The Pantry owns and operates
approximately 1,151 convenience stores in North Carolina, South Carolina,
Florida, Tennessee, Kentucky, Indiana and Virginia.
Prior to November 2, 1993, The Pantry was a wholly-owned subsidiary of
Montrose Pantry Acquisition Corporation ("MPAC"), an entity formed to affect
the 1987 leveraged buy-out of The Pantry. On November 2, 1993, The Pantry was
merged into MPAC and MPAC's name was changed to The Pantry. MPAC had no assets
or operations other than its investment in The Pantry.
On November 30, 1995, Freeman Spogli & Co. Incorporated, through its
affiliates, FS Equity Partners III, L.P., a Delaware limited partnership ("FSEP
III") and FS Equity Partners International, L.P., a Delaware limited
partnership ("FSEP International," collectively with FSEP III, "the FS Group"),
acquired a 39.9% interest in the Company and Chase Manhattan Capital
Corporation ("Chase") acquired a 12.0% interest in the Company through a series
of transactions which included the purchase of common stock from certain
shareholders and the purchase of newly issued common and preferred stock. The
FS Group and Chase subsequently acquired the remaining interests of
approximately 37.0% and 11.1%, respectively, on August 19, 1996 through the
purchase of common and preferred stock from certain shareholders. On December
30, 1996, the FS Group purchased additional preferred stock of the Company.
On October 23, 1997, The Pantry acquired 100% of the outstanding common
stock of Lil' Champ from Docks U.S.A., Inc. (the "Lil' Champ Acquisition"). The
acquisition was funded by a combination of Senior Subordinated Notes and an
additional equity investment by the FS Group, Chase and a member of management.
Also during fiscal 1998, the Company acquired several smaller convenience store
chains, financed primarily from an additional equity issuance (see discussion
of 1998 acquisitions at Note 2--Business Acquisitions). As of September 24,
1998, the Company was owned 76.4% and 17.0% by the FS Group and Chase,
respectively.
Unaudited Financial Statements--In the opinion of management, the
unaudited consolidated balance sheet at December 24, 1998, and the unaudited
consolidated statements of operations, shareholders' equity, and cash flows for
the three months ended December 25, 1997 and December 24, 1998 include all
adjustments (which include only normal recurring adjustments) necessary to
present the financial position and results of operations and cash flows for the
periods then ended in accordance with generally accepted accounting principles.
Acquisition Accounting
MPAC acquired all of The Pantry's common stock in a leveraged buy-out as
of August 13, 1987. Certain individuals and entities which held an ownership
interest in The Pantry retained approximately 45% of ownership interest after
the August 13, 1987 transaction. A new basis of
F-10
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
accounting was established as a result of the acquisition to the extent of the
"new" equity interests (partial step-up). The original basis of accounting was
retained for those shareholders that retained an equity interest in MPAC after
the acquisition. To the extent of ownership change, the excess amount paid over
The Pantry's net book value was allocated to property and equipment,
inventories, deferred lease cost and goodwill based on relative fair market
values. To the extent that certain individuals and entities maintained their
equity interests, the excess amount paid over net book value was recorded as a
debit in shareholders' deficit ($17,109,000). Had there not been a partial
step-up, this amount would have been allocated to property and equipment,
inventories, deferred lease cost and goodwill based on relative fair market
values.
Long-Lived Assets
In 1996, the Company early-adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed of. Accordingly, long-lived assets are
reviewed for impairment on a store-by-store basis whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When an evaluation is required, the projected future undiscounted
cash flows attributable to each store are compared to the carrying value of the
long-lived assets (including an allocation of goodwill, if appropriate) of that
store to determine if a write-down to fair value is required (see Note 10--
Impairment of Long-Lived Assets).
Goodwill
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over periods of
20 to 40 years. The Company assesses the recoverability of this intangible
asset by determining whether amortization of the goodwill balance over its
remaining life can be recovered through estimated undiscounted future operating
results. Estimated future results are based on a trend of historical results
for the trailing three fiscal years and management's estimate of future results
which indicate that the goodwill balances will be recovered over the various
periods remaining to be benefited.
Deferred Lease Cost
Deferred lease cost represents the value assigned to favorable leases
acquired. Such amounts are being amortized over the remaining term of the
respective leases.
Property Held for Sale
Certain property is classified as current assets when management's intent
is to sell these assets in the ensuing fiscal year, and is recorded at the
lower of cost or fair value less cost to sell.
Deferred Financing Cost
Deferred financing cost represents expenses related to issuing the
Company's long-term debt (see Note 5--Long-Term Debt), obtaining its lines of
credit (see Note 5--Long-Term Debt), and obtaining lease financing (see Note
7--Leases). Such amounts are being amortized over the remaining term of the
respective financing.
F-11
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization is provided primarily by the
straight-line method over the estimated useful lives of the assets for
financial statement purposes and by accelerated methods for income tax
purposes.
Upon sale or retirement of depreciable assets, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is
recognized. Leased buildings capitalized in accordance with SFAS No. 13 are
recorded at the lesser of fair value or the discounted present value of future
lease payments at the inception of the leases. Amounts capitalized are
amortized over the estimated useful lives of the assets or terms of the leases
(generally 5 to 20 years) using the straight-line method.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out ("LIFO") method, except for gasoline inventories
maintained by Lil' Champ, for which cost is determined using the first-in,
first-out ("FIFO") method.
Income Taxes
All operations of The Pantry and its subsidiaries are included in a
consolidated Federal income tax return. Pursuant to SFAS No. 109, Accounting
for Income Taxes, The Pantry recognizes deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between financial
statement carrying amounts and the related tax bases.
Stock Based Compensation
The Company's stock option plan is accounted for in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"). The Company follows the disclosure requirements of SFAS
No. 123, Accounting for Stock Based Compensation.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, cash and cash
equivalents include cash, deposits in interest bearing accounts, and other
financial instruments with original maturities of less than three months.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
F-12
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
Accounting Period
The Pantry operates on a 52 or 53 week fiscal year ending on the last
Thursday in September. For 1996, 1997 and 1998, each of the Company's fiscal
years contained 52 weeks.
Reclassifications
Certain amounts in the fiscal 1996 and 1997 consolidated financial
statements have been reclassified to conform to the current year presentation.
Newly Adopted Accounting Standards and Recently Issued Accounting Standards Not
Yet Adopted
In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 96-1, Environmental Remediation Liabilities. SOP 96-1 contains
authoritative guidance on specific accounting issues that are present in the
recognition, measurement, display and disclosure of environmental remediation
liabilities. The adoption of SOP 96-1 in fiscal 1998 did not have a material
effect on the Company's 1998 consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and loses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This Statement requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. This Statement is effective for
fiscal 1999. The adoption of SFAS No. 130 during the three months ended
December 24, 1998 did not have an impact on the Company's net income or
stockholder's equity as the Company had no differences between net loss and
comprehensive income.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(b) a hedge of the exposure to variable cash flows of a forecasted transaction,
or (c) a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. Under SFAS
No. 133, an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for
F-13
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk. SFAS No. 133 is
effective for the first quarter of fiscal 2000. Earlier application of all of
the provisions of SFAS No. 133 is encouraged. As of September 24, 1998, the
Company has not determined the effect of SFAS No. 133 on its consolidated
financial statements.
NOTE 2--BUSINESS ACQUISITIONS:
During fiscal 1998, the Company acquired the businesses described below,
which were accounted for by the purchase method of accounting:
. The October 23, 1997 acquisition of all of the common stock of Lil' Champ
Food Stores, Inc. ("Lil' Champ") for $136.4 million (net of cash
acquired), including 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 479 stores are located primarily in
northern Florida and Georgia. The purchase price, the refinancing of
existing Lil' Champ debt, and the fees and expense 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, cash on hand and the
purchase by existing stockholders and management of the Company of an
additional $32.4 million of the Company's capital stock.
. The March 19, 1998 acquisition of the operating assets of 23 convenience
stores in eastern North Carolina which was financed primarily from the
Acquisition Facility and cash on hand.
. The May 1998 acquisitions, in three separate transactions, of 12
convenience stores in the Gainesville, Florida area which were financed
primarily from the Acquisition Facility and cash on hand.
. The July 2, 1998 acquisition of certain assets of Quick Stop Food Mart,
Inc. ("Quick Stop") including, but not limited to, seventy-five (75)
convenience stores located throughout North Carolina and South Carolina
(the "Quick Stop Acquisition"). Total consideration paid was
approximately $56.0 million.
. The July 16, 1998 acquisition of certain assets of Stallings Oil Company,
Inc. ("Stallings") including, but not limited to, forty-one (41)
convenience stores located throughout North Carolina and Virginia (the
"Stallings Acquisition"). Total consideration paid was approximately
$29.3 million. The Stallings and Quick Stop acquisitions were financed by
proceeds of $50.0 million from the Acquisition Facility, cash on hand,
and an equity investment of $25.0 million in the aggregate by existing
shareholders of the Company.
Subsequent to September 24, 1998 in two separate transactions, the
Company acquired certain operating assets including 32 convenience stores
located in North Carolina and South Carolina. These transactions were funded
from borrowings under the Company's Credit Facility and cash on hand.
(unaudited)
F-14
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The purchase prices have been allocated to the assets purchased and the
liabilities assumed based upon the fair values on the dates of the
acquisitions, as follows (amounts in thousands):
<TABLE>
<CAPTION>
Stallings,
Quick Stop
Lil' Champ and Others Total
---------- ---------- --------
<S> <C> <C> <C>
ASSETS ACQUIRED:
Receivables, net............................... $ 1,617 $ 2,100 $ 3,717
Inventories.................................... 20,113 8,758 28,871
Deferred income taxes.......................... 2,992 -- 2,992
Prepaid expenses and other current assets...... 1,402 -- 1,402
Property and equipment......................... 155,382 48,682 204,064
Other noncurrent assets........................ 3,696 -- 3,696
-------- -------- --------
Total assets acquired.......................... 185,202 59,540 244,742
-------- -------- --------
LIABILITIES ASSUMED:
Short-term capital lease obligations........... 1,027 -- 1,027
Accounts payable--trade........................ 10,870 228 11,098
Other liabilities and accrued expenses......... 36,093 -- 36,093
Long-term capital lease obligations............ 11,716 -- 11,716
Environmental remediation liabilities.......... 3,150 -- 3,150
Noncurrent deferred income taxes............... 20,530 -- 20,530
Other noncurrent liabilities................... 8,070 996 9,066
Total liabilities assumed...................... 91,456 1,224 92,680
-------- -------- --------
Net tangible assets acquired................... 93,746 58,316 152,062
Goodwill....................................... 42,622 55,908 98,530
-------- -------- --------
Total consideration paid, including direct
costs, net of cash acquired................... $136,368 $114,224 $250,592
======== ======== ========
</TABLE>
The Stallings and Quick Stop purchase price allocations are preliminary
estimates, based on available information and certain assumptions management
believes are reasonable. Accordingly, the purchase price allocations are
subject to finalization. The purchase price allocations for other 1998
acquisitions have been finalized. The excess of the purchase prices over fair
values of the net assets acquired for all 1998 acquisitions, $98,530,000 has
been recorded as goodwill, which is being amortized on a straight-line basis
over 30 years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and acquired businesses as if
the transactions occurred at the beginning of the fiscal year for each of the
periods presented (amounts in thousands):
<TABLE>
<CAPTION>
Quarter Ended
-------------------------
December 25, December 24,
1997 1998 1997 1998
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenues................ 1,246,596 1,235,520 325,093 319,885
Income (loss) before
extraordinary loss........... (9,684) 4,278 1,390 1,132
Net loss...................... (9,684) (3,720) (5,410) 1,132
</TABLE>
In management's opinion, the unaudited pro forma information is not
necessarily indicative of actual results that would have occurred had the
acquisitions been consummated at the beginning of fiscal 1997 or fiscal 1998,
or of future operations of the combined companies.
F-15
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
In connection with the Lil' Champ acquisition, the Company recorded an
integration charge of approximately $1.0 million for costs of combining its
existing business with the acquired business of Lil' Champ. The charge includes
$0.3 million for relocation costs and $0.7 million for consolidation and
related expenses. All amounts had been expended as of September 24, 1998.
During fiscal 1997, the Company acquired 35 stores, acquired the gasoline
operations at 23 third-party locations and disposed of 21 stores. The net
assets acquired and liabilities assumed are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
September 25,
1997
-------------
<S> <C>
Inventories................................................ $ 1,665
Property and equipment..................................... 6,374
Other noncurrent assets.................................... 9
Accrued expenses........................................... (43)
-------
8,005
Goodwill................................................... 4,157
-------
Total consideration, including direct costs................ $12,162
=======
</TABLE>
NOTE 3--INVENTORIES:
At September 25, 1997 and September 24, 1998, inventories consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Inventories at FIFO cost:
Merchandise.......................................... $16,877 41,967
Gasoline............................................. 4,969 11,510
------- -------
21,846 53,477
Less adjustment to LIFO cost:
Merchandise.......................................... (4,203) (5,668)
Gasoline............................................. (482) --
------- -------
Inventories at LIFO cost............................... $17,161 $47,809
======= =======
</TABLE>
Total inventories at September 24, 1998 include $5,213,000 of gasoline
inventories held by Lil' Champ that are recorded under the FIFO method.
The positive effect on cost of sales of LIFO inventory liquidations was
$68,000, $4,141 and $482,000 for fiscal years 1996, 1997 and 1998,
respectively.
F-16
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
NOTE 4--PROPERTY AND EQUIPMENT:
At September 25, 1997 and September 24, 1998, property and equipment
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Land..................................................... $ 16,109 62,183
Buildings................................................ 29,928 85,278
Gasoline equipment....................................... 50,362 95,729
Other equipment, furniture and fixtures.................. 26,657 96,874
Leasehold improvements................................... 10,743 28,286
Automobiles.............................................. 134 516
Construction in progress................................. 1,471 9,443
-------- --------
135,404 378,309
Less--accumulated depreciation and amortization.......... (57,418) (77,331)
-------- --------
$ 77,986 $300,978
======== ========
</TABLE>
NOTE 5--LONG-TERM DEBT:
At September 25, 1997 and September 24, 1998, long-term debt consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Notes payable ("Senior Notes"); due November 15, 2000;
interest payable semi-annually at 12%.................. $ 99,995 $ 48,995
Notes payable ("Senior Subordinated Notes"); due October
15, 2007; interest payable semi-annually at 10.25%..... -- 200,000
Note payable; secured by certain property; due monthly
through 2004; interest at 10%.......................... 153 136
Notes payable ("Acquisition Facility"); interest payable
monthly at LIBOR (5.85% at September 24, 1998) plus
2.5%; principal due in quarterly installments through
October 31, 2002....................................... -- 78,000
Note payable; secured by certain property; due monthly
through 2005; interest at 8%........................... 190 173
-------- --------
Other notes payable; due monthly through 1999; interest
at 9%.................................................. -- 10
100,338 327,314
Less--current maturities................................ (33) (45)
-------- --------
$100,305 $327,269
======== ========
</TABLE>
While the Senior Notes are unsecured, the terms of the Senior Notes
contain certain covenants restricting (i) the use of proceeds from the
offering; (ii) the placing of 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, consolidation or change in control;
(vii) lines of business and (viii) transactions with affiliates. In addition,
the Indenture requires certain positive covenants including the maintenance of
a "Consolidated Fixed Charge Ratio" (the "Coverage Ratio") of greater than 1.69
to 1.0.
F-17
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
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. The Tender Offer resulted in the Company's
purchase of $51 million in principal amount of the Senior Notes at a purchase
price of 110% of the aggregate principal amount plus accrued and unpaid
interest and other related fees. In connection with this repurchase, the
Company incurred an extraordinary loss of approximately $8.0 million related to
costs of the Tender Offer and Consent Solicitation and write-off of deferred
financing costs.
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 (see Note 15--
Supplemental Guarantors Information). 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.
Historically, The Pantry had two bank lines of credit with borrowing
capacity limits of $10.0 million and $15.0 million, respectively. The $10.0
million line of credit bore interest at prime (8.50% at September 25, 1997)
plus 0.5%.
On October 23, 1997 in connection with the Lil' Champ Acquisition, the
Company entered into the New Credit Facility replacing the $10.0 million and
$15.0 million bank lines discussed above. Originally, the New Credit Facility
consisted of a $45.0 million Revolving Credit Facility and a $30 million
Acquisition Facility.
Under the terms of the New Credit Facility, the Acquisition Facility is
available to finance acquisition of related businesses with certain
restrictions (see Note 2--Business Acquisitions). The New Credit Facility
contains covenants restricting the ability of the Company and any of its
subsidiaries to among other things: (i) incur additional indebtedness; (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 or 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.
During the year, the New Credit Facility was amended to increase the
amount available to the Company for acquisitions from $30.0 million to $85.0
million. In addition, amendments were made to certain of the Company's
financial covenants under the New Credit Facility, including (a) the minimum
coverage ratio, (b) the minimum pro forma EBITDA, (c) the maximum pro forma
leverage ratio, and (d) the maximum capital expenditure allowance. As of
September 24, 1998, there was $78,000,000 outstanding under the acquisition
line. The Company had outstanding letters of credit of $13,545,000 at September
24, 1998, issued under the Revolving Credit Facility.
F-18
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
As of September 24, 1998, the Company was in compliance with all
covenants and restrictions relating to all its outstanding borrowings.
As of September 24, 1998, substantially all of the Company's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
See Unaudited Note 16--Subsequent Events.
NOTE 6--INCOME TAXES:
The components of income tax expense (benefit) are summarized below (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ----- -----
<S> <C> <C> <C>
Current:
Federal............................................. $(1,111) $ 163 $ --
State............................................... 5 (534) 138
------- ----- -----
(1,106) (371) 138
------- ----- -----
Deferred:
Federal............................................. (1,074) 371 --
State............................................... (484) -- (138)
------- ----- -----
(1,558) 371 (138)
------- ----- -----
$(2,664) $ -- $ --
======= ===== =====
</TABLE>
As of September 25, 1997 and September 24, 1998, deferred tax
liabilities (assets) are comprised of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Depreciation.............................................. $ 6,513 $ 32,921
Deferred lease cost....................................... 27 17
Inventory................................................. 940 3,417
Other..................................................... 469 1,672
------- --------
Gross deferred tax liabilities............................ 7,949 38,027
------- --------
Capital lease obligations................................. (321) (1,207)
Allowance for doubtful accounts........................... (58) (108)
Environmental expenses.................................... (500) (2,114)
Accrued insurance reserves................................ (1,607) (4,482)
Exit and employee termination costs....................... -- (1,860)
Accrued compensation...................................... (667) --
Other..................................................... (616) (3,154)
------- --------
Gross deferred tax assets................................. (3,769) (12,925)
Net operating loss carryforwards.......................... (2,622) (6,836)
General business credits.................................. (1,846) (1,832)
AMT Credits............................................... (2,696) (2,492)
Deferred tax assets valuation allowance................... 1,686 2,436
------- --------
$(1,298) $ 16,378
======= ========
</TABLE>
F-19
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
As of September 25, 1997 and September 24, 1998, net current deferred
income tax assets totaled $1,142,000 and $3,988,000, respectively, and net
noncurrent deferred income tax assets (liabilities) totaled $156,000 and
$(20,366,000), respectively.
Reconciliations of income taxes at the Federal statutory rate (34%) to
actual taxes provided are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ----- -------
<S> <C> <C> <C>
Tax benefit at Federal statutory rate............. $(3,665) $(332) $(1,131)
Tax benefit at state rate, net of Federal income
tax benefit...................................... (316) (325) (153)
Permanent differences:
Amortization of goodwill........................ 1,127 235 474
Other........................................... 14 248 190
Tax benefit from creation of general business
credits.......................................... -- (151) --
Valuation allowance............................... 176 325 620
------- ----- -------
Net income tax benefit............................ $(2,664) $ -- $ --
======= ===== =======
</TABLE>
As of September 24, 1998 The Pantry had net operating loss carryforwards,
general business credits and AMT credits which can be used to offset future
Federal income taxes. The benefit of these carryforwards is recognized, net of
a valuation allowance, as a reduction in the Company's net deferred tax asset.
Loss carryforwards as of September 24, 1998 have the following expiration dates
(in thousands):
<TABLE>
<CAPTION>
Federal State
------- -------
<S> <C> <C>
2009........................................................ $ -- $ 3,158
2010........................................................ -- 2,974
2011........................................................ -- 10,919
2012........................................................ 2,332 5,101
2013........................................................ -- 12,820
2018........................................................ 12,022 --
------- -------
Total loss carryforwards.................................... $14,354 $34,972
======= =======
</TABLE>
The valuation allowance increased $176,000 and $325,000 in 1996 and 1997,
respectively, to provide for state net economic loss carryforwards. The
valuation allowance increased $620,000 in 1998, which was primarily
attributable to federal net operating losses, net of a decrease for state tax
net economic loss carryovers (as discussed below).
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 million, for the
periods February 1, 1992 to September 26, 1996. The Company reached a
settlement with the State of North Carolina, which is pending final approval by
the State. Under the settlement, the Company will reduce State net economic
loss carryforwards and pay a de minimis amount of additional tax. The expected
settlement is reflected in the financial statements as a reduction to State net
economic losses and a reduction of deferred tax assets which is fully offset by
a corresponding reduction to the valuation allowance. The Company is contesting
the Tennessee
F-20
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
assessment and 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 financial
statements.
NOTE 7--LEASES:
The Pantry leases store buildings, office facilities and store equipment
under both capital and operating leases. The asset balances related to capital
leases at September 25, 1997, and September 24, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Buildings................................................ $ 2,196 $12,344
Less--accumulated amortization........................... (1,649) (2,142)
------- -------
$ 547 $10,202
======= =======
</TABLE>
Amortization expense related to capitalized leased assets was $261,000,
$185,000, and $1,249,000 for fiscal 1996, 1997, and 1998 respectively.
Future minimum lease payments as of September 24, 1998, for capital
leases and operating leases that have initial or remaining terms in excess of
one year are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Fiscal Year Leases Leases
----------- ------- ---------
<S> <C> <C>
1999..................................................... $ 2,507 $ 21,462
2000..................................................... 2,396 20,179
2001..................................................... 2,309 18,203
2002..................................................... 2,307 16,954
2003..................................................... 2,307 15,817
Thereafter............................................... 5,022 38,083
------- --------
Net minimum lease payments............................... 16,848 $130,698
========
Amount representing interest (8% to 20%)................. 3,479
-------
Present value of net minimum lease payments.............. 13,369
Less--current maturities................................. 1,240
-------
$12,129
=======
</TABLE>
Rental expense for operating leases was approximately $8,126,000,
$9,618,000 and $23,758,000 for fiscal years 1996, 1997 and 1998, respectively.
NOTE 8--COMMITMENTS AND CONTINGENCIES:
As of September 24, 1998, the Company was contingently liable for
outstanding letters of credit in the amount of $13,545,000 related primarily to
several areas in which the Company is self-insured. The letters of credit are
not to be drawn against unless the Company defaults on the timely payment of
related liabilities.
F-21
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry is involved in certain legal actions arising in the normal
course of business. In the opinion of management, based on a review of such
legal proceedings, the ultimate outcome of these actions will not have a
material effect on the consolidated financial statements.
Environmental Liabilities and Contingencies
The Company is subject to various federal, state and local environmental
laws and regulations governing underground petroleum storage tanks ("USTs")
that require the Company to make certain expenditures for compliance. In
particular, at the federal level, the Resource Conservation and Recovery Act,
as amended, requires the EPA to establish a comprehensive regulatory program
for the detection, prevention, and cleanup of leaking USTs. Regulations enacted
by the EPA in 1988 established requirements for (i) installing UST systems;
(ii) upgrading UST systems; (iii) taking corrective action in response to
releases; (iv) closing UST systems; (v) keeping appropriate records; and (vi)
maintaining evidence of financial responsibility for taking corrective action
and compensating third parties for bodily injury and property damage resulting
from releases. These regulations permit states to develop, administer and
enforce their own regulatory programs, incorporating requirements which are at
least as stringent as the federal standards. The Florida rules for 1998
upgrades are more stringent than the 1998 EPA regulations. The Pantry
facilities in Florida all meet or exceed such rules. The following is an
overview of the requirements imposed by these regulations:
. Leak Detection: The EPA and states' release detection regulations were
phased in based on the age of the USTs. All USTs were required to comply
with leak detection requirements by December 22, 1993. The Company
utilizes several approved leak detection methods for all Company-owned
UST systems. Daily and monthly inventory reconciliations are completed at
the store level and at the corporate support center. The daily and
monthly reconciliation data is also analyzed using statistical inventory
reconciliation which compares the reported volume of gasoline purchased
and sold with the capacity of each UST system and highlights
discrepancies. The Company believes it is in full or substantial
compliance with the leak detection requirements applicable to USTs.
. Corrosion Protection: The 1988 EPA regulations require that all UST
systems have corrosion protection by December 22, 1998. All of the
Company's USTs have been protected from corrosion either through the
installation of fiberglass tanks or upgrading steel USTs with interior
fiberglass lining and the installation of cathodic protection.
. Overfill/Spill Prevention: The 1988 EPA regulations require that all
sites have overfill/spill prevention devices by December 22, 1998. The
Company has installed spill/overfill equipment on all Company-owned UST
systems to meet these regulations.
In addition to the technical standards, The Pantry is required by federal
and state regulations to maintain evidence of financial responsibility for
taking corrective action and compensating third parties in the event of a
release from its UST systems. In order to comply with this requirement, The
Pantry maintains letters of credit in the aggregate amount of $2.3 million
issued by a commercial bank in favor of state environmental enforcement
agencies in the states of North Carolina, Virginia, South Carolina, Tennessee,
Indiana and Kentucky and relies on reimbursements from applicable state trust
funds. In Florida, the Company meets such financial responsibility requirements
by state trust
F-22
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
fund coverage through December 31, 1998 and will meet such requirements
thereafter through private commercial liability insurance and by qualified self
insurance. The Company has sold all of its Georgia stores but has retained
responsibility for pre-closing environmental remediation at certain locations.
The costs of such remediation and third party claims should be covered by the
state trust fund, subject to applicable deductibles and caps on reimbursements.
All states in which The Pantry operates or has operated UST systems have
established trust funds for the sharing, recovering, and reimbursing of certain
cleanup costs and liabilities incurred as a result of releases from UST
systems. These trust funds, which essentially provide insurance coverage for
the cleanup of environmental damages caused by the operation of UST systems,
are funded by a UST registration fee and 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 programs
and has filed claims and received reimbursement in North Carolina, South
Carolina, Kentucky, Indiana, Florida, Georgia, and Tennessee. The coverage
afforded by each state fund varies but generally provides up to $1.0 million
per site for the cleanup of environmental contamination, and most provide
coverage for third party liabilities. Costs for which the Company does not
receive reimbursement include but are not limited to: (i) the per-site
deductible; (ii) costs incurred in connection with releases occurring or
reported to trust funds prior to their inception; (iii) removal and disposal of
UST systems; and (iv) costs incurred in connection with sites otherwise
ineligible for reimbursement from the trust funds. The trust funds require the
Company to pay deductibles ranging from $10,000 to $100,000 per occurrence
depending on the upgrade status of its UST system, the date the release is
discovered/reported and the type of cost for which reimbursement is sought. The
Florida trust fund will not cover releases first reported after December 31,
1998. The Company will obtain private coverage for remediation and third party
claims arising out of releases reported after December 31, 1998. In addition to
material amounts to be spent by the Company, a substantial amount will be
expended for remediation on behalf of the Company by state trust funds
established in the Company's operating areas or other responsible third parties
(including insurers). To the extent such third parties do not pay for
remediation as anticipated by the Company, the Company will be obligated to
make such payments, which could materially adversely affect the Company's
financial condition and results of operations. Reimbursement from state trust
funds will be dependent upon the maintenance and continued solvency of the
various funds.
Environmental reserves of $17.1 million and $17.3 million (unaudited) as
of September 24, 1998 and December 24, 1998, respectively, 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. As of September 24, 1998, and
December 24, 1998, these anticipated reimbursements of $13.2 million and $12.8
million (unaudited), respectively, are recorded as long-term environmental
receivables. In Florida, remediation of such contamination will be performed by
the state and substantially all of the costs will be paid by the state trust
fund. The Company will perform remediation in other states through independent
contractor firms engaged by the Company. For certain sites the trust fund does
not cover a deductible or has a copay which may be less than the cost of such
remediation.
F-23
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Company has reserved $500,000 to cover third party claims that are
not covered by state trust funds or by private insurance. This reserve is based
on management's best estimate of losses that may be incurred over the next
several years based on, among other things, the fact that remediation standards
and expectations are evolving, the legal principles regarding the right to and
proper measure of damages for diminution in value, lost profit, lost
opportunity and damage to soil and subsurface water that may be owned by the
state, the absence of controlling authority of the limitation period, if any,
that may be applicable and the possibility that remediation (which will be
funded by state trust funds, private insurance or is included within the
reserve described above for remediation) may be sufficient.
Several of the locations identified as contaminated are being cleaned up
by third parties who have indemnified The Pantry as to responsibility for clean
up matters. Additionally, The Pantry is awaiting closure notices on several
other locations which will release the Company from responsibility related to
known contamination at those sites.
NOTE 9--BENEFIT PLANS:
The Pantry sponsors a 401(k) Employee Retirement Savings Plan for
eligible employees. Employees must be at least nineteen years of age and have
one year of service with at least 1,000 hours worked to be eligible to
participate in the plan. Employees may contribute up to 15% of their annual
compensation, and contributions are matched by The Pantry on the basis of 50%
of the first 5% contributed. Matching contribution expense was $330,000,
$305,000 and $396,000 for fiscal years 1996, 1997 and 1998, respectively.
NOTE 10--IMPAIRMENT OF LONG-LIVED ASSETS:
In fiscal year 1996, the Company early-adopted SFAS No. 121, Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed of. SFAS No. 121 establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived and certain identifiable
intangible assets to be disposed of.
Pursuant to SFAS No. 121, the Company evaluated its long-lived assets for
impairment on a store-by-store basis by comparing the sum of the projected
future undiscounted cash flows attributable to each store to the carrying value
of the long-lived assets (including an allocation of goodwill, if appropriate)
of that store. Projected future cash flows for each store were estimated for a
period approximating the remaining lives of that store's long-lived assets,
based on earnings history, lease expiration dates and renewal periods, market
conditions and assumptions reflected in internal operating plans and
strategies. Based on this evaluation, the Company determined that certain long-
lived assets were impaired and recorded an impairment loss based on the
difference between the carrying value and the fair value of the assets. Fair
value was determined based on an evaluation of each property's value. The
impairment consists of the following assets (in thousands):
<TABLE>
<S> <C>
Property, plant and equipment.................................... $ 415
Goodwill......................................................... 2,619
------
Total............................................................ $3,034
======
</TABLE>
F-24
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
NOTE 11--RESTRUCTURING CHARGES:
In fiscal year 1996, the Company recorded restructuring charges of
$2,184,000 pursuant to a formal plan to restructure its corporate offices. The
costs include $1,484,000 for employee severance, $350,000 for employee moving
costs, and $350,000 for legal costs related to the ownership litigation.
Substantially all of these amounts were expended during fiscal 1996.
NOTE 12--COMMON STOCK
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 stockholders 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 (together with the issuance of Common Stock, "the Equity
Investment"). As a result, preferred stock and accrued dividends were reduced
by $260 and $5,569,000 respectively, and additional paid in capital was
increased by $5,569,260.
On July 2, 1998 and in connection with two acquisitions completed in July
1998, the Company issued 43,478 shares of Common Stock, par value $0.01 per
share, to certain existing stockholders for an aggregate purchase price of
$25.0 million.
NOTE 13--PREFERRED STOCK:
As of September 24, 1998, preferred stock consists of 150,000 authorized
shares. As discussed in Note 12--Common Stock, holders of the Company's 25,999
shares of Series A contributed all outstanding shares of Series A and related
accrued and unpaid dividends to the Capital of the Company in connection with
the Lil' Champ acquisition. Issued and outstanding shares at September 24, 1998
include 17,500 shares designated as Series B, all of which is held by FS Group.
The Company is limited from paying dividends under the terms and conditions of
the Senior Notes Indenture, Senior Subordinated Notes Indenture and the
Certificate of Designation of Preferences of the Series B Preferred Stock of
The Pantry, Inc. ("Series B Preferred Stock Certificate").
In addition, the Series B Preferred Stock Certificate, without consent of
the holders of a majority of the outstanding shares of Series B Preferred
Stock, voting separately as a single class, restricts the following: (i) the
issuance of any securities with equal or superior rights with respect to
dividends or liquidation preferences, (ii) the repurchase of any shares of,
making of any dividend or distribution to, or any reclassification with respect
to, any of the Company's outstanding shares of capital stock, (iii) amendment
or modification of the Company's Article of Incorporation or Bylaws so as to
adversely affect the relative rights, preferences, qualification, limitations
or restrictions or the Series B Preferred Stock and (iv) amendment of the
related paragraph regarding Restrictions and Limitations in the Series B
Preferred Stock Certificate.
At all meetings of the stockholders of the Company and in the case of any
actions of stockholders in lieu of a meeting date, the holders of the Series B
Preferred Stock shall be entitled to ten (10) votes per share and, except as
required by Delaware law, shall vote together with the holders
F-25
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
of Common Stock as a single class. The holders of Series B Preferred Stock are
entitled to cumulative dividends from the Company on each share of Series B
Preferred Stock at a quarterly rate equal to $32.5 per share plus an amount
determined by applying a thirteen percent (13%) annual rate compounded
quarterly to any accrued but unpaid dividend. Except as limited by both the
Senior Notes and Senior Subordinated Notes Indentures, such dividends on the
outstanding shares of Series B Preferred Stock shall be payable at such
intervals as the Board of Directors of the Company may from time to time
determine and may be paid in cash or by issuing additional shares, including
fractional shares of Series B Preferred Stock, at the rate of one share for
each $1,000 of dividends outstanding. As of September 24, 1998, substantially
all of the Company's and its subsidiaries' net assets are restricted as to
payment of dividends and other distributions.
Upon the dissolution, liquidation or winding up of the Company, whether
voluntary or involuntary, the holders of outstanding shares of Series B
Preferred Stock, shall be entitled to be paid out of the assets of the Company
available for distribution to its Stockholders, whether such assets are
capital, surplus or earnings, before any payment or declaration and setting
apart for payment of any amount shall be made in respect of the outstanding
shares of any other class or series of the Company's capital stock, including
without limitation, shares of Common Stock, an amount equal to $1,000 per share
of Series B Preferred Stock then outstanding, plus all accrued but unpaid
dividends thereon to the date fixed for liquidation (whether or not declared),
and no more. If upon the dissolution, liquidation or winding up of the Company,
whether voluntary or involuntary, the assets to be distributed among the
holders of outstanding shares of Series B Preferred Stock shall be insufficient
to permit the payment to such stockholders of the full preferential amounts
aforesaid, then the entire assets of the Company are to be distributed ratably
among the holders of outstanding shares of Series B Preferred Stock based on
the full preferential amounts for the number of outstanding shares of Series B
Preferred Stock held by each holder.
NOTE 14--STOCK OPTIONS AND OTHER EQUITY INSTRUMENTS:
On January 1, 1998, the Company adopted an incentive and non-qualified
1998 Stock Option Plan (the "1998 Plan"). Pursuant to the provisions of the
1998 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 up to 25,000 shares of the Company's Common
Stock. The 1998 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, the terms and conditions of awards
under the 1998 Plan may differ from one grant to another. Under the 1998 Plan,
incentive stock options may only be granted to employees with an exercise price
at least equal to the fair market value of the related common stock on the date
the option is granted. During 1998, options to acquire 11,311 shares of Common
Stock were granted under the Plan with exercise prices ranging from $450-$575
per share (weighted-average exercise price of $479 per share).
F-26
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The following table summarizes information about stock options
outstanding at September 24, 1998:
<TABLE>
<CAPTION>
Number
Outstanding at Weighted-Average
Range of September 24, Remaining Weighted-Average
Exercise Prices 1998 Contractual Life Exercise Price
--------------- -------------- ---------------- ----------------
<S> <C> <C> <C>
$450........................ 8,701 9 $450
$575........................ 2,610 9 $575
------
Total..................... 11,311
======
</TABLE>
All options granted in 1998 vest over a three-year period, with one-third
of each grant vesting on the anniversary of the initial grant. None of the
options outstanding at September 24, 1998 had vested as of that date. All stock
options are granted at estimated fair market value of the common stock at the
grant date. Had compensation cost for the 1998 Plan been determined consistent
with SFAS 123, the Company's pro-forma net loss for 1998 would have been
approximately $3,395,000. The fair value of each option grant is estimated on
the date of grant using the minimum value method with the following
assumptions:
<TABLE>
<CAPTION>
1998
-----
<S> <C>
Weighted-average grant date fair value................................ $ 479
Weighted-average expected lives (years)............................... 2.33
Risk-free interest rate............................................... 5.5%
Dividend yield........................................................ 0.00%
</TABLE>
On August 31, 1998, the Company adopted the 1998 Stock Subscription Plan
("1998 Subscription Plan"). The 1998 Subscription Plan allows the Company to
offer to certain employees the right to purchase shares of the Company's Common
Stock at a purchase price equal to the fair market value on the date of
purchase. A purchaser may not sell, transfer or pledge their shares (a) prior
to the first anniversary of the date on which the purchaser acquires the
shares, or (b) after the first anniversary, except in compliance with the
provisions of the subscription agreement (and a pledge agreement if part of the
consideration for such shares includes a secured promissory note). In the event
that the purchaser's employment with the Company and all of its subsidiaries
terminates for any reason, the Company shall have the option to repurchase from
the purchaser all or any portion of the shares acquired by the purchaser under
the subscription agreement for a period of six months after the effective date
of such termination (the "Repurchase Option"). The Repurchase Option shall
terminate upon the later to occur of (a) the first anniversary of the date the
shares were originally acquired, and (b), an initial public offering of common
stock by the Company registered under the Securities Act (other than an
offering registered on Form S-4 or Form S-8) resulting in gross proceeds to the
Company in excess of $25 million. After the first anniversary of the date the
shares were originally acquired by the purchaser, the purchaser may transfer
the shares for cash (only) to a third party, subject to the Company's right of
first refusal with respect to such sale. Finally, under certain circumstances,
a purchaser of shares under the 1998 Subscription Plan may be forced to sell
all or part of the shares purchased under such plan if any members of the FS
Group find a third-party buyer for all or part of the shares of Company Common
Stock held by the FS Group. No issuances of shares under the 1998 Subscription
Plan had been made at September 24, 1998. During the three months ended
December 24, 1998, 3,184 shares were issued under the 1998 Subscription Plan.
F-27
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
In December 1996, in connection with their purchase of $17,500 shares of
Series B Preferred Stock, the FS Group acquired warrants to purchase 46,000
shares of common stock. The warrants are exercisable at $380 per share until
December 30, 2006, and contain adjustment provisions in the event the Company
declares dividends or distributions, makes stock splits, or engages in mergers,
reorganizations or reclassifications. None of these warrants had been exercised
at December 24, 1998.
NOTE 15--SUPPLEMENTAL GUARANTORS INFORMATION:
As discussed in Note 2--Business Acquisitions, on October 23, 1997, the
Company purchased all of the capital stock of Lil' Champ, Sandhills, Inc., Lil'
Champ and all future direct and indirect restricted subsidiaries (together the
"Guarantors"), jointly and severally, unconditionally guaranteed, on an
unsecured senior subordinated basis, the full and prompt performance of The
Pantry's obligations under the Senior Subordinated Notes and the related
Indenture, the issuance of which occurred on October 23, 1997. The Senior
Subordinated Notes were exchanged for new notes in an exchange offer which was
registered under the Securities Act on a registration statement on Form S-4
which became effective on January 8, 1998. The form and terms of the exchange
notes are the same as the form and terms of the Senior Subordinated Notes
(which they replaced) except that (i) the exchange notes are registered under
the Securities Act and, therefore, do not bear legends restricting the transfer
thereof, and (ii) the holders of the exchange notes are not entitled to certain
rights under the Registration Rights Agreement by virtue of consummation of the
exchange offer.
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 (currently, Sandhills, Inc. and Lil Champ, wholly-owned
subsidiaries of The Pantry) and future direct and indirect restricted
subsidiaries (the "Guarantors"). The Senior Subordinated Notes contain
covenants that, among other things, restrict the ability of The Pantry 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 Pantry or any of its subsidiaries; and (x)
transfer and sell assets.
As of September 24, 1998, substantially all of the Company's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
Management has determined that separate, full financial statements of the
Guarantors (Sandhills, Inc. and Lil' Champ as of September 24, 1998) would not
be material to investors and therefore such financial statements are not
provided. The following supplemental combining financial statements present
information regarding the Guarantors and The Pantry.
Certain reclassifications have been made to conform all of the financial
information to the financial presentation on a consolidated basis. The
principal eliminating entries eliminate investments in subsidiaries and
intercompany balances.
F-28
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statements of Operations
Year Ended September 26, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Guarantor Non-Guarantor
Pantry Subsidiary Subsidiary Eliminations Total
-------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $188,091 $ -- $ -- $ -- $188,091
Gasoline sales........ 192,737 -- -- -- 192,737
Commissions........... 3,979 -- -- -- 3,979
-------- ------- ----- -------- --------
Total revenues...... 384,807 -- -- -- 384,807
-------- ------- ----- -------- --------
Cost of sales:
Merchandise........... 125,979 -- -- -- 125,979
Gasoline.............. 167,610 -- -- -- 167,610
-------- ------- ----- -------- --------
Total cost of
sales.............. 293,589 -- -- -- 293,589
-------- ------- ----- -------- --------
Gross profit............ 91,218 -- -- -- 91,218
-------- ------- ----- -------- --------
Operating expenses:
Store expenses........ 68,331 -- (293) (11,471) 56,567
Store expenses--
related parties...... 1,274 -- -- -- 1,274
General and
administrative
expenses............. 17,024 80 23 -- 17,127
Restructuring
charges.............. 2,184 -- -- -- 2,184
Impairment of long-
lived assets......... 3,034 -- -- -- 3,034
Depreciation and
amortization......... 9,138 14 6 -- 9,158
-------- ------- ----- -------- --------
Total operating
expenses........... 100,985 94 (264) (11,471) 89,344
-------- ------- ----- -------- --------
Income from operations.. (9,767) (94) 264 11,471 1,874
-------- ------- ----- -------- --------
Equity in earnings of
subsidiaries........... 14,597 -- -- (14,597) --
-------- ------- ----- -------- --------
Other income (expense):
Interest expense...... (14,540) -- (14) 2,562 (11,992)
Miscellaneous......... (1,068) 14,243 198 (14,033) (660)
-------- ------- ----- -------- --------
Total other
expense............ (15,608) 14,243 184 (11,471) (12,652)
-------- ------- ----- -------- --------
Income (loss) before
income taxes........... (10,778) 14,149 448 (14,597) (10,778)
Income tax benefit
(expense).............. 2,664 (4,811) (128) 4,939 2,664
-------- ------- ----- -------- --------
Net income (loss)....... $ (8,114) $ 9,338 $ 320 $ (9,658) $ (8,114)
======== ======= ===== ======== ========
</TABLE>
F-29
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Year Ended September 26, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
The Pantry Subsidiary Subsidiary Eliminations Total
---------- ---------- ------------- ------------ -------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)...... $(8,114) $ 9,339 $ 319 $(9,658) $(8,114)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Impairment of long-
lived assets........ 3,034 -- -- -- 3,034
Depreciation and
amortization........ 9,152 -- 6 -- 9,158
Provision for
deferred income
taxes............... (1,558) -- -- -- (1,558)
Loss on sale of
property and
equipment........... 470 -- -- -- 470
Provision for
environmental
expenses............ 512 -- -- -- 512
Provision for closed
stores.............. 673 -- -- -- 673
Write-off of property
held for sale....... 168 -- -- -- 168
Equity earnings of
affiliates.......... (9,658) -- -- 9,658 --
Changes in operating
assets and
liabilities, net:
Receivables.......... (627) (392) (8) 488 (539)
Inventories.......... (937) -- -- -- (937)
Prepaid expenses..... 19 (1) 2 -- 20
Other non-current
assets.............. 448 (17) 1 -- 432
Accounts payable..... 2,104 -- -- -- 2,104
Other current
liabilities and
accrued expenses.... (641) 125 (27) (96) (639)
Employment
obligations......... (255) -- -- -- (255)
Other noncurrent
liabilities......... 1,279 -- (1) (392) 886
------- ------- ------ ------- -------
Net cash provided by
(used in) operating
activities............. (3,931) 9,054 292 -- 5,415
------- ------- ------ ------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (3,301) -- (799) 50 (4,050)
Additions to property
and equipment......... (7,070) -- (14) -- (7,084)
Proceeds from sale of
property held for
sale.................. 2,462 -- 50 (50) 2,462
Proceeds from sale of
property and
equipment............. 1,458 -- 10 -- 1,468
Intercompany notes
receivable
(payable)............. 12,502 (12,502) -- --
Acquisition of related
businesses............ -- -- -- -- --
------- ------- ------ ------- -------
Net cash provided by
(used in) investing
activities............. 6,051 (12,502) (753) -- (7,204)
------- ------- ------ ------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital lease
obligations........... (347) -- -- -- (347)
Principal repayments
of long-term debt..... (5) -- (15) -- (20)
Net proceeds from
equity issue.......... -- -- -- -- --
Other financing
costs................. (3,505) -- -- -- (3,505)
------- ------- ------ ------- -------
Net cash provided by
(used in) financing
activities............. (3,857) -- (15) -- (3,872)
------- ------- ------ ------- -------
Net increase (decrease)
in cash................ (1,737) (3,448) (476) -- (5,661)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR...... 3,247 3,584 4,168 -- 10,999
------- ------- ------ ------- -------
CASH AND CASH
EQUIVALENTS AT END OF
YEAR................... $ 1,510 $ 136 $3,692 $ -- $ 5,338
======= ======= ====== ======= =======
</TABLE>
F-30
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Balance Sheets
September 25, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Guarantor Non-Guarantor
Pantry Subsidiary Subsidiary Eliminations Total
----------------------- -------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents........... $ 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 and 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>
F-31
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Balance Sheets
September 25, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Guarantor Non-Guarantor
Pantry 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>
F-32
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Year Ended September 25, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
The Pantry Subsidiary Subsidiary Eliminations Total
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $202,440 $ -- $ -- $ -- $202,440
Gasoline sales........ 220,166 -- -- -- 220,166
Commissions........... 4,787 -- -- -- 4,787
-------- ------- ----- -------- --------
Total revenues...... 427,393 -- -- -- 427,393
-------- ------- ----- -------- --------
Cost of sales:
Merchandise........... 132,846 -- -- -- 132,846
Gasoline.............. 197,268 -- -- -- 197,268
-------- ------- ----- -------- --------
Total cost of
sales.............. 330,114 -- -- -- 330,114
Gross profit............ 97,279 -- -- -- 97,279
-------- ------- ----- -------- --------
Operating expenses:
Store expenses........ 71,945 -- (291) (12,726) 58,928
Store expenses--
related parties...... 1,280 -- -- -- 1,280
General and
administrative
expenses............. 16,731 42 23 -- 16,796
Depreciation and
amortization......... 9,485 13 6 -- 9,504
-------- ------- ----- -------- --------
Total operating
expenses........... 99,441 55 (262) (12,726) 86,508
-------- ------- ----- -------- --------
Income from operations.. (2,162) (55) 262 12,726 10,771
-------- ------- ----- -------- --------
Equity in earnings of
subsidiaries........... 16,605 -- -- (16,605) --
Other income (expense):
Interest expense...... (16,095) -- (13) 3,069 (13,039)
Miscellaneous......... 677 16,207 204 (15,795) 1,293
-------- ------- ----- -------- --------
Total other
expense............ (15,418) 16,207 191 (12,726) (11,746)
-------- ------- ----- -------- --------
Income (loss) before
income taxes........... (975) 16,152 453 (16,605) (975)
Income tax benefit
(expense).............. -- (5,492) (155) 5,647 --
-------- ------- ----- -------- --------
Net income (loss)....... $ (975) $10,660 $ 298 $(10,958) $ (975)
======== ======= ===== ======== ========
</TABLE>
F-33
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Year Ended September 25, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
The Pantry Subsidiary Subsidiary Eliminations Total
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)....... $ (975) $10,660 $ 298 $(10,958) $ (975)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization......... 9,499 -- 5 -- 9,504
Provision for deferred
income taxes......... 371 -- -- -- 371
Gain on sale of
property and
equipment............ (1,054) -- -- -- (1,054)
Provision for
environmental
expenses............. 1,574 -- -- -- 1,574
Provision for closed
stores............... (11) -- -- -- (11)
Equity earnings of
affiliates........... (10,958) -- -- 10,958 --
Changes in operating
assets and
liabilities, net:
Receivables........... 129 (664) 8 -- (527)
Inventories........... (2,273) -- -- -- (2,273)
Prepaid expenses...... (426) (3) -- -- (429)
Other non-current
assets............... (5,378) 14 1 1,068 (4,295)
Accounts payable...... 600 3 -- -- 603
Other current
liabilities and
accrued expenses..... 3,396 246 135 (384) 3,393
Employment
obligations.......... (698) -- -- -- (698)
Other noncurrent
liabilities.......... 2,970 (131) -- (684) 2,155
-------- ------- ------ -------- --------
Net cash provided by
(used in) operating
activities............. (3,234) 10,125 447 -- 7,338
-------- ------- ------ -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (1,874) -- (4) 50 (1,828)
Additions to property
and equipment......... (14,749) -- -- -- (14,749)
Proceeds from sale of
property held for
sale.................. 642 -- 753 (50) 1,345
Proceeds from sale of
property and
equipment............. 2,315 -- -- -- 2,315
Intercompany notes
receivable (payable).. 9,982 (9,982) -- -- --
Acquisition of related
businesses............ (12,162) -- -- -- (12,162)
-------- ------- ------ -------- --------
Net cash provided by
(used in) investing
activities............. (15,846) (9,982) 749 -- (25,079)
-------- ------- ------ -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital lease
obligations........... (303) -- -- -- (303)
Principal repayments of
long-term debt........ (10) -- (16) -- (26)
Proceeds from issuance
of long-term debt..... 200 -- -- -- 200
Net proceeds from equity
issue.................. 15,953 -- -- -- 15,953
Other financing costs.. (74) -- -- -- (74)
-------- ------- ------ -------- --------
Net cash provided by
(used in) financing
activities............. 15,766 -- (16) -- 15,750
-------- ------- ------ -------- --------
Net increase (decrease)
in cash................ (3,314) 143 1,180 -- (1,991)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR...... 1,512 136 3,690 -- 5,338
-------- ------- ------ -------- --------
CASH AND CASH
EQUIVALENTS AT END OF
YEAR................... $ (1,802) $ 279 $4,870 $ -- $ 3,347
======== ======= ====== ======== ========
</TABLE>
F-34
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc. and Subsidiaries
Supplemental Combining Balance Sheets
Year Ended September 24, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Non-
Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
-------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents.......... $ 24,031 $ 6,300 $4,073 $ -- $ 34,404
Receivables, net...... 11,211 9,263 1,030 (11,597) 9,907
Inventories........... 24,933 22,876 -- -- 47,809
Income taxes
receivable........... 270 (2,098) (472) 2,788 488
Prepaid expenses...... 1,206 1,007 3 -- 2,216
Property held for
sale................. 3,761 -- -- -- 3,761
Deferred income
taxes................ 1,262 2,726 -- -- 3,988
-------- -------- ------ --------- --------
Total current
assets............. 66,674 40,074 4,634 (8,809) 102,573
-------- -------- ------ --------- --------
Investment in
subsidiaries........... 69,317 -- -- (69,317) --
-------- -------- ------ --------- --------
Property and equipment,
net.................... 125,340 175,298 340 -- 300,978
-------- -------- ------ --------- --------
Other assets:
Goodwill, net......... 72,375 47,650 -- -- 120,025
Deferred lease cost,
net.................. 269 -- -- -- 269
Deferred financing
cost, net............ 14,545 -- -- -- 14,545
Environmental
receivables, net..... 11,566 1,621 -- -- 13,187
Intercompany notes
receivable........... 19,803 49,705 -- (69,508) --
Other................. 155 3,088 -- -- 3,243
-------- -------- ------ --------- --------
Total other assets.. 118,713 102,064 -- (69,508) 151,269
-------- -------- ------ --------- --------
Total assets........ $380,044 $317,436 $4,974 $(147,634) $554,820
======== ======== ====== ========= ========
</TABLE>
F-35
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc. and Subsidiaries
Supplemental Combining Balance Sheets--(Continued)
Year Ended September 24, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Non-
Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
-------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS'
EQUITY (DEFICIT):
-----------------
Current liabilities:
Current maturities of
long-term debt....... $ 17 $ 10 $ 18 $ -- $ 45
Current maturities of
capital lease
obligations.......... 213 1,027 -- -- 1,240
Accounts payable:
Trade............... 28,563 20,996 -- -- 49,559
Money orders........ 4,112 1,069 -- -- 5,181
Accrued interest...... 11,564 1,283 1 (1,136) 11,712
Accrued compensation
and related taxes.... 4,366 2,352 1 -- 6,719
Other accrued taxes... 3,108 3,899 -- -- 7,007
Accrued insurance..... 3,188 2,557 -- -- 5,745
Other accrued
liabilities.......... 11,118 18,877 122 (5,769) 24,348
-------- -------- ------ --------- --------
Total current
liabilities...... 66,249 52,070 142 (6,905) 111,556
-------- -------- ------ --------- --------
Long-term debt.......... 188,151 139,000 118 -- 327,269
-------- -------- ------ --------- --------
Other non-current
liabilities:
Environmental
expenses............. 13,487 3,650 -- -- 17,137
Deferred income
taxes................ (36) 22,001 -- (1,599) 20,366
Capital lease
obligations.......... 1,534 10,595 -- -- 12,129
Employment
obligations.......... 934 -- -- -- 934
Accrued dividends on
preferred stock...... 4,391 -- -- -- 4,391
Intercompany note
payable.............. 50,705 20,822 -- (71,527)
Other................. 15,325 5,737 38 634 21,734
-------- -------- ------ --------- --------
Total other non-current
liabilities............ 86,340 62,805 38 (72,492) 76,691
-------- -------- ------ --------- --------
SHAREHOLDERS' EQUITY
(DEFICIT):
Preferred stock....... -- -- -- -- --
Common stock.......... 2 1 -- (1) 2
Additional paid-in
capital.............. 68,115 6,758 5,001 (11,759) 68,115
Shareholder loan...... (215) -- -- -- (215)
Accumulated earnings
(deficit)............ (28,598) 56,802 (325) (56,477) (28,598)
-------- -------- ------ --------- --------
Total
shareholders'
equity
(deficit)........ 39,304 63,561 4,676 (68,237) 39,304
-------- -------- ------ --------- --------
Total liabilities
and shareholders'
equity
(deficit)........ $380,044 $317,436 $4,974 $(147,634) $554,820
======== ======== ====== ========= ========
</TABLE>
F-36
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Year Ended September 24, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $245,402 $215,396 $ -- $ -- $460,798
Gasoline sales........ 269,865 240,093 -- -- 509,958
Commissions........... 6,838 7,290 -- -- 14,128
-------- -------- ----- -------- --------
Total revenues...... 522,105 462,779 -- -- 984,884
-------- -------- ----- -------- --------
Cost of sales:
Merchandise........... 162,027 141,941 -- -- 303,968
Gasoline.............. 238,381 209,184 -- -- 447,565
-------- -------- ----- -------- --------
Total cost of
sales.............. 400,408 351,125 -- -- 751,533
-------- -------- ----- -------- --------
Gross profit............ 121,697 111,654 -- -- 233,351
-------- -------- ----- -------- --------
Operating expenses:
Store expenses........ 89,774 66,046 (240) (15,491) 140,089
General and
administrative
expenses............. 18,398 14,341 22 -- 32,761
Merger integration
costs................ -- 1,016 -- -- 1,016
Depreciation and
amortization......... 14,003 13,633 6 -- 27,642
-------- -------- ----- -------- --------
Total operating
expenses........... 122,175 95,036 (212) (15,491) 201,508
-------- -------- ----- -------- --------
Income (loss) from
operations............. (478) 16,618 212 15,491 31,843
-------- -------- ----- -------- --------
Equity in earnings of
subsidiaries........... 22,864 -- -- (22,864) --
-------- -------- ----- -------- --------
Other income (expense):
Interest expense...... (18,241) (14,926) (12) 4,233 (28,946)
Miscellaneous......... 528 20,943 29 (19,724) 1,776
-------- -------- ----- -------- --------
Total other income
(expense).......... (17,713) 6,017 17 (15,491) (27,170)
-------- -------- ----- -------- --------
Income (loss) before
income taxes and
extraordinary loss..... 4,673 22,635 229 (22,864) 4,673
Income tax benefit
(expense).............. -- (8,337) (250) 8,587 --
-------- -------- ----- -------- --------
Net income (loss) before
extraordinary item..... 4,673 14,298 (21) (14,277) 4,673
Extraordinary loss...... (7,998) -- -- -- (7,998)
-------- -------- ----- -------- --------
Net income (loss)....... $ (3,325) $ 14,298 $ (21) $(14,277) $ (3,325)
======== ======== ===== ======== ========
</TABLE>
F-37
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Year Ended September 24, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
The Pantry Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)....... $ (3,325) $ 14,298 $ (21) $(14,277) $ (3,325)
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Extraordinary loss..... 2,006 -- -- -- 2,006
Depreciation and
amortization.......... 14,014 13,623 5 -- 27,642
Change in deferred
income taxes.......... -- 1,737 -- (1,599) 138
(Gain) loss on sale of
property and
equipment............. 88 443 -- -- 531
Provision for
environmental
expenses.............. 5,681 500 -- -- 6,181
Provision for closed
stores................ 50 -- -- -- 50
Equity earnings of
affiliates............ (15,359) -- -- 15,359 --
Changes in operating
assets and liabilities,
net:
Receivables............ (10,380) (2,165) (1,017) 5,050 (8,512)
Inventories............ 986 (5,504) -- -- (4,518)
Prepaid expenses....... (11) 401 -- -- 390
Other noncurrent
assets................ 379 681 4,050 1 5,111
Accounts payable....... 13,393 503 -- -- 13,896
Other current
liabilities and
accrued expenses...... 11,632 (6,497) 254 (3,148) 2,241
Employment
obligations........... (407) -- -- -- (407)
Other noncurrent
liabilities........... 8,459 (2,483) (2) 634 6,608
--------- --------- ------- -------- ---------
Net cash provided by
operating activities... 27,206 15,537 3,269 2,020 48,032
--------- --------- ------- -------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (5,203) -- -- -- (5,203)
Additions to property
and equipment......... (27,569) (15,584) -- -- (43,153)
Proceeds from sale of
property held for
sale.................. 4,807 -- -- -- 4,807
Proceeds from sale of
property and
equipment............. 2,102 5,546 -- -- 7,648
Intercompany notes
receivable (payable).. (8,532) 10,551 -- (2,019) --
Acquisition of related
businesses, net of
cash acquired......... (102,684) (147,908) -- -- (250,592)
--------- --------- ------- -------- ---------
Net cash used in
investing activities... (137,079) (147,395) -- (2,019) (286,493)
--------- --------- ------- -------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases.. (303) (1,121) -- -- (1,424)
Proceeds from issuance
of capital leases..... 1,086 -- -- -- 1,086
Principal repayments of
long-term debt........ (51,516) (10) (17) -- (51,543)
Proceeds from issuance
of long-term debt..... 139,499 139,010 -- (1) 278,508
Net proceeds from
equity issue.......... 56,935 -- -- -- 56,935
Other financing costs.. (14,044) -- -- -- (14,044)
--------- --------- ------- -------- ---------
Net cash provided by
(used in) financing
activities............. 131,657 137,879 (17) (1) 269,518
--------- --------- ------- -------- ---------
Net increase in cash.... 21,784 $ 6,021 3,252 -- 31,057
Cash and Cash
Equivalents at
Beginning of Year...... 2,247 279 821 -- 3,347
--------- --------- ------- -------- ---------
Cash and Cash
Equivalents at End of
Year................... $ 24,031 $ 6,300 $ 4,073 $ -- $ 34,404
========= ========= ======= ======== =========
</TABLE>
F-38
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Three Months Ended December 25, 1997
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in Thousands)
<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)
-------- ------- ---- ------- --------
Income (loss) before
income taxes and
extraordinary loss..... (501) 3,886 56 (3,942) (501)
Income tax benefit
(expense).............. 412 (1,387) (75) 1,462 412
-------- ------- ---- ------- --------
Income (loss) before
extraordinary loss..... (89) 2,499 (19) (2,480) (89)
Extraordinary loss, net
of taxes............... (6,800) -- -- -- (6,800)
-------- ------- ---- ------- --------
Net income (loss)....... $ (6,889) $ 2,499 $(19) $(2,480) $ (6,889)
======== ======= ==== ======= ========
</TABLE>
F-39
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Three Months Ended December 25, 1997
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ ---------
(Dollars in Thousands)
<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.... 2,006 -- -- -- 2,006
Depreciation and
amortization......... 2,870 2,280 1 -- 5,151
Provision for deferred
income taxes......... (1,834) -- (17) -- (1,851)
(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... (5,509) 4,536 45 -- (928)
-------- --------- ---- ------- ---------
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 provided by
(used in) 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......... (51,000) -- (4) -- (51,004)
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
(used in) financing
activities............. 22,924 145,586 (4) -- 168,506
-------- --------- ---- ------- ---------
NET INCREASE 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>
F-40
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Balance Sheets
December 24, 1998
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents........... $ 6,122 $ 4,799 $4,148 $ -- $ 15,069
Receivables, net....... 25,458 16,419 1,030 (29,514) 13,393
Inventories............ 28,444 25,102 -- -- 53,546
Income taxes
receivable
(payable)............. (47) (3,416) (517) 3,980 --
Prepaid expenses....... 946 392 -- -- 1,338
Property held for
sale.................. 2,971 -- -- -- 2,971
Deferred income
taxes................. 1,262 2,259 -- -- 3,521
-------- -------- ------ --------- --------
Total current
assets............ 65,156 45,555 4,661 (25,534) 89,838
-------- -------- ------ --------- --------
Investment in
subsidiaries........... 73,023 -- -- (73,023) --
-------- -------- ------ --------- --------
Property and equipment,
net.................... 151,710 175,989 338 -- 328,037
-------- -------- ------ --------- --------
Other assets:
Goodwill, net.......... 72,261 47,273 -- -- 119,534
Deferred lease cost,
net................... 258 -- -- -- 258
Deferred financing
cost, net............. 14,025 -- -- -- 14,025
Environmental
receivables, net...... 11,566 1,217 -- -- 12,783
Intercompany note
receivable............ 19,803 49,705 -- (69,508) --
Other.................. 1,037 3,048 -- -- 4,085
-------- -------- ------ --------- --------
Total other
assets............ 118,950 101,243 -- (69,508) 150,685
-------- -------- ------ --------- --------
Total assets....... $408,839 $322,787 $4,999 $(168,065) $568,560
======== ======== ====== ========= ========
</TABLE>
F-41
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Balance Sheets--(Continued)
December 24, 1998
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
- -----------------------------
Current liabilities:
Current maturities of long-
term debt.................. $ 17 $ 4 $ 18 $ -- $ 39
Current maturities of
capital lease
obligations................ 213 1,027 -- -- 1,240
Short-term debt............. 2,000 -- -- -- 2,000
Accounts payable:
Trade..................... 31,634 18,613 -- (26) 50,221
Money orders.............. 3,962 1,137 -- -- 5,099
Accrued interest............ 11,255 4,049 1 (9,776) 5,529
Accrued compensation and
related taxes.............. 3,430 2,600 1 -- 6,031
Income taxes payable........ -- -- -- 104 104
Other accrued taxes......... 2,194 1,914 -- -- 4,108
Accrued insurance........... 3,356 2,741 -- -- 6,097
Other accrued liabilities... 18,730 21,634 123 (12,997) 27,490
-------- -------- ------ --------- --------
Total current
liabilities............ 76,791 53,719 143 (22,695) 107,958
-------- -------- ------ --------- --------
Long-term debt............... 204,147 139,000 113 -- 343,260
-------- -------- ------ --------- --------
Other noncurrent liabilities:
Environmental reserves...... 13,641 3,650 -- -- 17,291
Deferred income taxes....... (1,550) 21,477 -- -- 19,927
Capital lease obligations... 1,466 10,340 -- -- 11,806
Employment obligations...... 842 -- -- -- 842
Accrued dividends on
preferred stock............ 5,103 -- -- -- 5,103
Intercompany note payable... 51,705 20,642 -- (72,347) --
Other....................... 15,949 5,642 37 -- 21,628
-------- -------- ------ --------- --------
Total other noncurrent
liabilities............ 87,156 61,751 37 (72,347) 76,597
-------- -------- ------ --------- --------
SHAREHOLDERS' EQUITY
(DEFICIT):
Preferred stock.............. -- -- -- -- --
Common stock................. 2 1 5,001 (5,002) 2
Additional paid-in capital... 69,925 6,758 -- (6,758) 69,925
Shareholder loans............ (937) -- -- -- (937)
Accumulated earnings
(deficit)................... (28,245) 61,558 (295) (61,263) (28,245)
-------- -------- ------ --------- --------
Total shareholders'
equity (deficit)....... 40,745 68,317 4,706 (73,023) 40,745
-------- -------- ------ --------- --------
Total liabilities and
shareholders' equity
(deficit).............. $408,839 $322,787 $4,999 $(168,065) $568,560
======== ======== ====== ========= ========
</TABLE>
F-42
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Three Months Ended December 24, 1998
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $ 83,377 $ 56,013 $-- $ -- $139,390
Gasoline sales........ 107,075 64,714 -- -- 171,789
Commissions........... 2,508 1,920 -- -- 4,428
-------- -------- ---- ------- --------
Total revenues...... 192,960 122,647 -- -- 315,607
-------- -------- ---- ------- --------
Cost of sales:
Merchandise........... 56,966 37,487 -- -- 94,453
Gasoline.............. 93,447 55,327 -- -- 148,774
-------- -------- ---- ------- --------
Total cost of
sales.............. 150,413 92,814 -- -- 243,227
-------- -------- ---- ------- --------
Gross profit............ 42,547 29,833 -- -- 72,380
-------- -------- ---- ------- --------
Operating expenses:
Store expenses........ 32,139 17,356 (61) (5,705) 43,729
General and
administrative
expenses............. 5,675 4,288 5 -- 9,968
Depreciation and
amortization......... 4,536 3,652 2 -- 8,190
-------- -------- ---- ------- --------
Total operating
expenses........... 42,350 25,296 (54) (5705) 61,887
-------- -------- ---- ------- --------
Income (loss) from
operations............. 197 4,537 54 5,705 10,493
-------- -------- ---- ------- --------
Equity in earnings of
subsidiaries........... 7,252 -- -- (7,252) --
-------- -------- ---- ------- --------
Other income (expense):
Interest expense...... (5,772) (4,372) (3) 1,235 (8,912)
Miscellaneous......... (280) 7,002 34 (6,940) (184)
-------- -------- ---- ------- --------
Total other
expense............ (6,052) 2,630 31 (5,705) (9,096)
-------- -------- ---- ------- --------
Income (loss) before
income taxes........... 1,397 7,167 85 (7,252) 1,397
Income tax benefit
(expense).............. (332) (2,411) (55) 2,466 (332)
-------- -------- ---- ------- --------
Net income (loss)....... $ 1,065 $ 4,756 $ 30 $(4,786) $ 1,065
======== ======== ==== ======= ========
</TABLE>
F-43
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Three Months Ended December 24, 1998
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)....... $ 1,065 $ 4,756 $ 30 $ (4,786) $ 1,065
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 4,536 3,650 4 -- 8,190
Change in deferred
income taxes.......... -- -- -- --
(Gain) loss on sale of
property and
equipment............. 176 86 (2) -- 260
Reserves for
environmental issues.. 154 -- -- -- 154
Equity earnings of
affiliates............ (4,786) -- -- 4,786 --
Changes in operating
assets and liabilities,
net:
Receivables............ (15,444) (6,857) 17 19,718 (2,566)
Inventories............ (2,451) (2,226) -- -- (4,677)
Prepaid expenses....... 260 615 3 -- 878
Other noncurrent
assets................ (4) 40 -- -- 36
Accounts payable....... 1,861 (2,315) -- (26) (480)
Other current
liabilities and
accrued expenses...... 5,621 5,336 29 (17,158) (6,172)
Employment
obligations........... (92) -- -- -- (92)
Other noncurrent
liabilities........... 624 (95) (1) (634) (106)
-------- ------- ------ -------- --------
Net cash provided by
(used in) operating
activities............. (8,480) 2,990 80 1,900 (3,510)
-------- ------- ------ -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (42) -- -- -- (42)
Additions to property
and equipment......... (5,474) (4,066) -- -- (9,540)
Proceeds from sale of
property held for
sale.................. 524 -- -- -- 524
Proceeds from sale of
property and
equipment............. 75 16 -- -- 91
Intercompany notes
receivable (payable).. 2,080 (180) -- (1,900) --
Acquisitions of related
businesses, net of
cash acquired of
$70................... (25,541) -- -- -- (25,541)
-------- ------- ------ -------- --------
Net cash used in
investing activities... (28,378) (4,230) -- (1,900) (34,508)
-------- ------- ------ -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases.. (68) (255) -- -- (323)
Principal repayments of
long-term debt........ (4) (6) (5) -- (15)
Proceeds from issuance
of short-term debt.... 2,000 -- -- -- 2,000
Proceeds from issuance
of long-term debt..... 16,000 -- -- -- 16,000
Net proceeds from
equity issue.......... 1,088 -- -- -- 1,088
Other financing costs.. (67) -- -- -- (67)
-------- ------- ------ -------- --------
Net cash provided by
(used in) financing
activities............. 18,949 (261) (5) -- 18,683
-------- ------- ------ -------- --------
NET INCREASE (DECREASE)
IN CASH................ (17,909) (1,501) 75 -- (19,335)
CASH & CASH EQUIVALENTS,
BEGINNING OF YEAR...... 24,031 6,300 4,073 -- 34,404
-------- ------- ------ -------- --------
CASH & CASH EQUIVALENTS,
END OF YEAR............ $ 6,122 $ 4,799 $4,148 $ -- $ 15,069
======== ======= ====== ======== ========
</TABLE>
F-44
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
NOTE 16--SUBSEQUENT EVENTS (Unaudited):
On January 28, 1999, the Company entered into an Amended and Restated
Credit Facility (the "Amended Credit Facility") consisting of (i) a $45.0
million revolving credit facility available for working capital financing,
general corporate purposes and issuing commercial and standby letters of credit
(the "'Revolving Credit Facility"); (ii) a $50.0 million acquisition facility
available to finance acquisition of related businesses (the "Acquisition
Facility") and (iii) term loan facilities with outstanding borrowings of $240.0
million (the "Term Loan Facilities").
The Amended Credit Facility contains covenants restricting the ability of
the Company and any of its subsidiaries to among other things: (i) incur
additional indebtedness; (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 or 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, as defined in the
Amended Credit Facility, (c) a maximum pro forma leverage ratio, and (d) a
maximum capital expenditure allowance.
The Company used the proceeds of the Term Loan Facilities and a $5.0
million initial draw under its Revolving Credit Facility, along with cash on
hand, to (i) finance the Miller Acquisition (as defined below), (ii) refinance
$94.0 million outstanding under the prior bank credit facility, and replace
outstanding letters of credit (iii) redeem the Company's outstanding Senior
Notes in the aggregate principal amount of $49.0 million and (iv) pay related
transaction costs.
On January 28, 1999, the Company acquired 100% of the outstanding capital
stock of Miller Enterprises and certain other real estate assets of certain
affiliates of Miller Enterprises (the "Miller Acquisition"). Miller Enterprises
is a leading operator of convenience stores, operating 121 stores located in
central Florida and operated under the name "Handy Way." The purchase price and
the fees and expenses of the Miller Acquisition were financed with proceeds
from the Company's Term Loan Facility and a draw under its Revolving Credit
Facility and cash on hand. On February 25, 1999, the Company acquired 60
convenience stores owned by Taylor Oil Company. The stores are located
throughout North Carolina and Virginia and are operated under the name "ETNA".
The acquisition and related fees were financed primarily with proceeds from the
Acquisition Facility.
On January 28, 1999, the Company redeemed $49.0 million in principal
amount of Senior Notes and paid (i) accrued and unpaid interest up to, but not
including, the date of purchase and (ii) a 4% call premium. The repurchase of
100% of the Senior Notes outstanding, the payment of accrued interest and the
call premium were financed with proceeds from the Company's Term Loan
Facilities, and a draw under its Revolving Credit Facility.
The Company recognized an extraordinary loss of approximately $5.5
million in connection with the repurchase of the Senior Notes including the
payment of the 4% call premium of $2.0 million, fees paid in connection with
the amendments and commitments under the Credit Facility, and the write-off of
related deferred financing costs.
F-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Lil' Champ Food Stores, Inc.
Jacksonville, Florida
We have audited the accompanying balance sheets of Lil' Champ Food
Stores, Inc. (a wholly-owned subsidiary of Docks U.S.A., Inc.) as of December
30, 1995 and December 28, 1996, and the related statements of operations,
shareholder's equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Lil' Champ Food Stores, Inc. as of December
30, 1995 and December 28, 1996 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Jacksonville, Florida
February 14, 1997
F-46
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
BALANCE SHEETS
(Unaudited as to September 27, 1997 information)
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
December 30, December 28, September 27,
1995 1996 1997
------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and equivalents.................. $ 13,553 $ 19,510 $ 9,506
Certificates of deposit............... 805 805 805
Receivables, net of allowance for
doubtful accounts (1995-$0; 1996-
$21; 1997-$21)....................... 1,518 1,820 1,824
Environmental receivables, current
portion, net of allowance for
uncollectible amounts (1995-$545;
1996-$710; 1997-$515)................ 1,798 2,066 1,330
Inventories........................... 17,072 17,938 18,017
Prepaid income taxes.................. 68 2,784 545
Current portion of deferred income
taxes................................ 313
Prepaid expenses and other assets..... 1,444 1,365 1,032
Due from affiliates................... 238 225 304
-------- -------- --------
Total current assets................ 36,809 46,513 33,363
-------- -------- --------
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, net of accumulated
depreciation and amortization (1995-
$56,543; 1996-$62,062; 1997-$61,848).. 110,083 117,354 119,158
BUILDINGS UNDER CAPITAL LEASES, net of
accumulated amortization (1995-$7,592;
1996-$7,895; 1997-$8,664)............. 8,210 11,264 10,396
OTHER ASSETS:
Investment in The Eli Witt Company.... 2,037
Goodwill, net of accumulated
amortization (1995-$4,391; 1996-
$5,166; 1997-$5,747)................. 14,981 14,206 13,625
Environmental receivables, net of
allowance for uncollectible amounts
(1995-$1,013; 1996-$429; 1997-
$734)................................ 3,341 1,249 1,521
Other................................. 1,076 921 1,042
-------- -------- --------
Total other assets.................. 21,435 16,376 16,188
-------- -------- --------
TOTAL ASSETS........................... $176,537 $191,507 $179,105
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable, trade............... $ 12,841 $ 18,287 $ 19,612
Current portion of obligations under
capital leases....................... 871 1,037 990
Current portion of long-term debt..... 4,353 4,355 10,700
Accrued compensation and employee
benefits............................. 1,867 2,146 2,182
Current portion of accrued workers'
compensation self insurance.......... 2,579 2,271 2,261
Accrued medical and health
insurance............................ 900 630 565
Accrued interest...................... 179 272 46
Lottery payable....................... 1,828 2,131 1,657
Other taxes payable................... 4,809 2,766 4,081
Deferred income taxes payable......... 90 159
Money orders trust fund payable....... 242 (309) 766
Other accrued liabilities............. 4,536 4,690 5,378
-------- -------- --------
Total current liabilities........... 35,005 38,366 48,397
-------- -------- --------
DEFERRED INCOME........................ 211 298 259
DEFERRED INCOME TAXES.................. 7,856 10,060 9,824
OBLIGATIONS UNDER CAPITAL LEASES, less
current portion....................... 9,604 12,547 11,837
ACCRUED WORKERS' COMPENSATION SELF-
INSURANCE less current portion........ 6,391 6,674 7,713
ENVIRONMENTAL RESERVE.................. 3,150
LONG-TERM DEBT, less current portion... 18,050 22,695
DUE TO DOCKS de FRANCE, S.A............ 12,000 6,000
-------- -------- --------
Total liabilities................... 89,117 96,640 81,180
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Notes 4,
6, 8 and 11)
SHAREHOLDER'S EQUITY:
Common stock; authorized issued and
outstanding 500 shares of $1 par
value................................ 1 1 1
Additional paid-in capital............ 67,966 67,966 67,966
Retained earnings..................... 19,453 26,900 29,958
-------- -------- --------
Total shareholder's equity.......... 87,420 94,867 97,925
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY................................ $176,537 $191,507 $179,105
======== ======== ========
</TABLE>
See notes to financial statements.
F-47
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
STATEMENTS OF OPERATIONS
(In Thousands Except Store Data)
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
------------------------- ---------------------------
December 30, December 28, September 28, September 27,
1995 1996 1996 1997
------------ ------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Number of stores in
operation at end of
period................. 501 495 499 488
======== ======== ======== ========
REVENUES:
Gasoline sales........ $257,056 $278,905 $207,208 $214,676
Merchandise sales..... 217,282 226,146 171,322 177,426
Commissions........... 7,978 8,164 5,979 5,971
-------- -------- -------- --------
Total revenues...... 482,316 513,215 384,509 398,073
-------- -------- -------- --------
COST OF SALES:
Gasoline.............. $227,592 251,614 186,110 193,499
Merchandise........... 143,598 148,877 112,909 116,879
-------- -------- -------- --------
Total cost of
sales.............. 371,190 400,491 299,019 310,378
-------- -------- -------- --------
GROSS PROFIT............ 111,126 112,724 85,490 87,695
-------- -------- -------- --------
Store operating
expense................ 70,289 73,721 55,486 56,339
General and
administrative
expenses............... 15,452 14,191 11,397 12,581
Environmental
contamination charge... 3,381
Depreciation and
amortization........... 11,568 11,361 8,439 8,989
-------- -------- -------- --------
Total operating
expenses........... 97,309 99,273 75,322 81,290
-------- -------- -------- --------
INCOME FROM OPERATIONS.. 13,817 13,451 10,168 6,405
OTHER INCOME (EXPENSE):
Interest expense...... (3,219) (2,670) (1,994) (1,712)
Miscellaneous......... 1,873 1,647 865 588
-------- -------- -------- --------
Total other
expense............ (1,346) (1,023) (1,129) (1,124)
-------- -------- -------- --------
INCOME BEFORE INCOME
TAXES.................. 12,471 12,428 9,039 5,281
INCOME TAX EXPENSE...... (4,985) (4,981) (3,622) (2,223)
-------- -------- -------- --------
NET INCOME.............. $ 7,486 $ 7,447 $ 5,417 $ 3,058
======== ======== ======== ========
</TABLE>
See notes to financial statements.
F-48
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
STATEMENTS OF SHAREHOLDER'S EQUITY
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to Nine Months Ended September 27, 1997 information)
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
Common Stock
------------ Additional
Par Paid-in Retained
Shares Value Capital Earnings Total
------ ----- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994............ 500 $ 1 $67,966 $11,967 $79,934
Net income.......................... 7,486 7,486
--- --- ------- ------- -------
BALANCE, DECEMBER 30, 1995............ 500 1 67,966 19,453 87,420
Net income.......................... 7,447 7,447
--- --- ------- ------- -------
BALANCE, DECEMBER 28, 1996............ 500 1 67,966 26,900 94,867
Net income.......................... 3,058 3,058
--- --- ------- ------- -------
BALANCE, SEPTEMBER 27, 1997........... 500 $ 1 $67,966 $29,958 $97,925
=== === ======= ======= =======
</TABLE>
See notes to financial statements.
F-49
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
------------------------- ---------------------------
December 30, December 28, September 28, September 27,
1995 1996 1996 1997
------------ ------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............ $ 7,486 $ 7,447 $ 5,417 $ 3,058
Adjustments to
reconcile net income
to cash provided by
operating activities:
Depreciation and
amortization....... 11,568 11,361 8,439 8,989
Loss on investment.. 37
(Gain) loss on sale
of assets.......... 225 (90) 193 132
Changes in assets and
liabilities
Deferred income
taxes.............. (744) 2,607 (167)
Receivables......... (10) (302) (300) (4)
Inventories......... (467) (866) (1,352) (79)
Prepaid taxes....... (68) (2,716) (507) 2,239
Prepaid expenses and
other assets....... 89 2,058 1,416 676
Due from
affiliates......... (43) 13 43 (79)
Accounts payable,
trade.............. 795 5,446 5,630 1,325
Enviromental
Reserve............ 3,150
Other liabilities... (345) (2,066) 2,148 3,565
Income taxes
payable............ (598)
Accrued interest.... (67) 93 92 (226)
-------- -------- -------- --------
Net cash provided
by operating
activities....... 17,821 23,022 21,219 22,579
-------- -------- -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property,
equipment and
leasehold
improvements......... (11,977) (21,353) (16,124) (10,153)
Proceeds from sale of
equipment and
leasehold
improvements......... 632 4,708 3,176 677
Proceeds related to
Eli Witt investment.. 2,000
-------- -------- -------- --------
Net cash used in
investing
activities....... (11,345) (14,645) (12,948) (9,476)
-------- -------- -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Additional borrowings
under long-term
debt................. 2,000 20,000 12,000
Payments to Docks de
France, S.A. ........ (6,000) (6,000) (6,000) (6,000)
Principal payments
under long-term
debt................. (4,862) (15,353) (7,348) (28,350)
Principal payments
under capital lease
obligations.......... (921) (1,067) (890) (757)
-------- -------- -------- --------
Net cash used in
financing
activities....... (9,783) (2,420) (14,238) (23,107)
-------- -------- -------- --------
NET INCREASE
(DECREASE)............. (3,307) 5,957 (5,967) (10,004)
CASH AND EQUIVALENTS,
BEGINNING OF YEAR...... 16,860 13,553 13,553 19,510
-------- -------- -------- --------
CASH AND EQUIVALENTS,
END OF YEAR............ $ 13,553 $ 19,510 $ 7,586 $ 9,506
======== ======== ======== ========
CASH PAID FOR:
Interest.............. $ 3,286 $ 2,577 $ 1,902 $ 1,937
======== ======== ======== ========
Income taxes.......... $ 6,438 $ 5,090 $ 4,130 $ 2,250
======== ======== ======== ========
</TABLE>
See notes to financial statements.
F-50
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
1--COMPANY'S BUSINESS
Lil' Champ Food Stores, Inc. ("LCFS"). LCFS is a convenience store chain
operating in central and northern Florida and southeastern Georgia.
2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year--The Company operates on the basis of a 52-53 week fiscal
year ending on the last Saturday in December. The years ended December 28, 1996
and December 30, 1995 consisted of 52 weeks.
Unaudited Financial Statements--In the opinion of management, the
Unaudited Balance Sheet as of December 24, 1998, and the unaudited statements
of Operations, Shareholder's Equity, and Cash Flows for the nine months ended
September 28, 1996 and September 27, 1997 include all adjustments (which
include only normal recurring adjustments) necessary to present the financial
position and results of operations and cash flows for the periods then ended in
accordance with generally accepted accounting principles.
Cash and Equivalents--LCFS considers all investments with an original
maturity of three months or less to be cash equivalents.
Certificates of Deposit--Certificates of deposit for $500,000 secure a
standby letter of credit and are pledged to the State of Georgia as security
for payment of workers' compensation claims.
Certificates of deposit for $305,000 are pledged to the State of Florida
as security for payment of workers' compensation claims.
Inventories--Merchandise inventories are valued at the lower of last-in,
first-out (LIFO) cost or market using the retail method. Information relating
to the first-in, first-out (FIFO) method may be useful in comparing operating
results to those companies not on LIFO. If the FIFO method had been used by the
Company, merchandise inventory would have been $3,112,000 and $3,086,000 higher
than as reported as of December 30, 1995 and December 28, 1996. Due to the LIFO
method of inventory valuation, income before income taxes was decreased by
$206,000 for the year ended December 30, 1995 and increased by $26,000 for the
year ended December 28, 1996.
Gasoline is valued at the lower of FIFO cost or market.
Property, Equipment and Leasehold Improvements--Property, equipment and
leasehold improvements are stated at cost, which includes cost of construction,
property taxes and interest incurred during development. Depreciation and
amortization for financial reporting purposes are computed using the straight-
line method based upon the following estimated useful lives in years:
<TABLE>
<S> <C>
Buildings.......................................... 18-30
Office and store equipment......................... 3-15
Automotive equipment............................... 3-4
Leasehold improvements, equipment and buildings Shorter of the initial
under lease....................................... lease term or estimated
useful under lease life
of asset.
</TABLE>
F-51
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
Repairs and maintenance are charged to income; major expenditures for
renewals and betterments are capitalized. When items of property are sold or
otherwise disposed of, the related costs and accumulated depreciation or
amortization are removed from the accounts, and any resulting gains or losses
are credited or charged to income.
Investment in The Eli Witt Company--The Company accounts for its
investment in The Eli Witt Company ("Eli Witt"), formerly known as Certified
Grocers of Florida, Inc., at lower of cost or estimated market. Writedowns of
this investment are considered to be permanent diminutions in value.
Goodwill--Goodwill is being amortized using the straight-line method over
twenty-five years.
Leasing Arrangements--A substantial portion of the Company's operations
are conducted in leased premises. Some leases on convenience store locations
provide for a base rental amount per month and contingent additional rentals if
an annual gross sales floor is exceeded. Renewal options generally provide for
multiple terms of five years each and in some instances are at increased
rentals. Some leases require the Company to pay real estate taxes and other
expenses.
Certain building and equipment leases have been capitalized and are being
amortized over the shorter of the lease term or the estimated useful life of
the asset. All other leases are accounted for as operating leases. In most
cases, management expects that leases will be renewed or replaced by other
leases in the normal course of business.
Workers' Compensation Self-Insurance--The Company self-insures its
exposure to workers' compensation claims up to certain limits. The Company
records estimated liabilities based on currently available information.
Ultimate claims and expenses may vary from the current estimates and as
adjustments become necessary, they are recorded in earnings in the periods in
which they become known.
Group Health Self Insurance--The Company self-insures its group health
insurance claims to certain limits per occurrence. Estimated liabilities are
based on prior years' experience on claims and on current year fixed
administrative costs.
Income Taxes--The Company's parent files consolidated Federal income tax
returns. For financial statement purposes, the Company determines its income
tax liability and provisions using the separate return method.
Deferred income taxes are provided on temporary differences between the
financial reporting and the tax basis of the Company's assets and liabilities.
Deferred Income--Gains resulting from sale/leaseback transactions
involving land and buildings have been deferred. Such gains are being amortized
in proportion to the amortization of the leased asset, if a capital lease, or
in proportion to the related gross rental charged to expense over the lease
term, if an operating lease.
F-52
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3--PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
A summary of property, equipment and leasehold improvements, net, follows
(in thousands):
<TABLE>
<CAPTION>
December 30, December 28,
1995 1996
------------ ------------
<S> <C> <C>
Land............................................... $ 44,581 $ 44,894
Buildings.......................................... 30,172 29,000
Store equipment.................................... 26,327 34,539
Leasehold improvements............................. 7,629 7,468
Automotive equipment............................... 547 581
Office equipment................................... 589 587
Construction in progress........................... 238 285
-------- --------
$110,083 $117,354
======== ========
</TABLE>
4--LEASES
Capital Leases--Minimum future lease payments under capital leases at
December 28, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year Ending:
1997............................................................ $ 2,274
1998............................................................ 2,170
1999............................................................ 2,083
2000............................................................ 2,039
2001............................................................ 1,973
Thereafter...................................................... 10,750
-------
Total minimum lease payments...................................... 21,289
Less interest portion............................................. (7,705)
-------
Present value of minimum lease payments (current portion of
$1,037).......................................................... $13,584
=======
</TABLE>
F-53
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
Operating Leases--Rent expense for the years December 30, 1995 and
December 28, 1996 was approximately $7,935,000 and $8,552,000. Minimum annual
rentals under noncancellable leases having an initial or remaining term of more
than one year at December 28, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year Ending:
1997.............................................................. $ 4,672
1998.............................................................. 4,342
1999.............................................................. 3,995
2000.............................................................. 3,465
2001.............................................................. 2,756
Thereafter........................................................ 9,865
-------
Total........................................................... $29,095
=======
</TABLE>
5--LONG-TERM DEBT
At December 30, 1995 and December 28, 1996 long-term debt comprised the
following (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Borrowings under revolving credit agreement with Credit
Lyonnais; interest is based on the New York interbank
eurodollar market rate ("Eurorate") plus .4% (6.30% and
6.08% at December 30, 1995 and December 28, 1996);
expiring January 31, 1997. Guaranteed by Docks de
France, S.A. .......................................... $ 6,000 $ 3,000
Note payable to bank under a commitment for total
borrowings up to $8,000 at a variable rate (6.684% and
6.50% at December 30, 1995 and December 28, 1996),
payable in annual installments of 16.67% of the loan
balance payable January 1996 and 1997 and the balance
due January 1998; guaranteed by Docks de France,
S.A. .................................................. 5,334 4,001
Borrowings under $20,000 revolving credit agreement with
Credit Lyonnais; interest is based on the Paris
Interbank Official Rate ("PIBOR") plus .25% (5.84% at
December 28, 1996), maturing on June 8, 1998.
Guaranteed by Docks de France, S.A. ................... 20,000
Borrowings under $15,000 revolving credit agreement with
Societe Generale; interest is based on the Eurorate
plus .35% (6.314% at December 30, 1995), guaranteed by
Docks de France, S.A. On December 30, 1996 the Company
secured a letter of intent to extend this credit
facility for one year.................................. 11,000
Other notes and mortgages payable, generally due in
monthly installments of principal plus interest at
various rates and terms................................ 69 49
-------- --------
22,403 27,050
Less current portion.................................... (4,353) (4,355)
-------- --------
$18,050 $22,695
======== ========
</TABLE>
The borrowings with Credit Lyonnais require the Company to obtain consent
from Credit Lyonnais before paying any dividends.
F-54
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
Because the Company has the ability and the intent to refinance
$6,000,000 of borrowings from Docks de France, S.A. otherwise coming due during
1997, this amount has been reclassified from current liabilities to long-term
as of December 28, 1996.
Aggregate principal payments required on long-term debt during each of
the fiscal years ending subsequent to December 28, 1996 are as follows (in
thousands):
<TABLE>
<S> <C>
Fiscal Year Ending In:
1997............................................................ $ 4,355
1998............................................................ 22,691
1999............................................................ 4
--------
$ 27,050
========
</TABLE>
6--RELATED PARTY TRANSACTIONS
Certain premises used by LCFS in its operations are leased under
arrangements with related parties. Rental payments under such leases for the
years ended December 30, 1995 and December 28, 1996 were approximately
$2,417,000 and $2,582,000. Required future rentals, which relate to both
capital and operating leases, at December 28, 1996 are as follows (in
thousands):
<TABLE>
<S> <C>
Fiscal Year Ending In:
1997............................................................. $ 2,825
1998............................................................. 2,813
1999............................................................. 2,749
2000............................................................. 2,672
2001............................................................. 2,600
Thereafter....................................................... 12,498
-------
$26,157
=======
</TABLE>
Sunbelt Wholesale, a company controlled by Robert Jackson, a brother of
an officer of the Company, furnishes certain supplies to the Company. Payments
to Sunbelt Wholesale were approximately $2,233,000 and $2,102,000 for the years
ended December 30, 1995 and December 28, 1996.
Allsafe Security Systems, Inc. and Allsafe Paging Systems, Inc.,
companies controlled by Lester Jackson, a brother of an officer of the Company,
supplies burglar alarms, security systems and an alerting system which allows
mobility to store personnel. This equipment is subject to a monthly rental fee
plus charges for initial installation and maintenance. Approximately $882,000
and $1,207,000 was expended for this service for the years ended December 30,
1995 and December 28, 1996.
F-55
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
The $6,000,000 due to Docks de France, S.A. is payable June 25, 1997.
Interest accrues at 6.6% per annum. Interest of $990,000 and $594,000 was paid
for the years ended December 30, 1995 and December 28, 1996. See note 5 related
to the classification of this amount.
LCFS paid Docks U.S.A., Inc. approximately $500,000 of service agreement
fees for the years ended December 30, 1995 and December 28, 1996.
During 1996, the company entered into sale-leaseback transactions with a
director whereby buildings were sold to the director for $4,176,000. This same
property was then leased back to the company. The leases were classified as
capital leases, therefore the underlying property was capitalized and the
obligation recognized.
7--INCOME TAXES
The provision for income taxes for the years ended December 30, 1995 and
December 28, 1996 is comprised of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Current:
Federal.................................................. $4,897 $2,028
State.................................................... 832 346
------ ------
5,729 2,374
------ ------
Deferred:
Federal.................................................. (634) 2,223
State.................................................... (110) 384
------ ------
(744) 2,607
------ ------
Provision for income taxes................................. $4,985 $4,981
====== ======
</TABLE>
Income taxes, for the years ended December 30, 1995 and December 28,
1996, differ from the amount computed by applying the federal statutory
corporate rate to earnings before income taxes. The amounts of such differences
(in thousands) and the reasons are set forth in the table below:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Provision based on federal income tax rate................. $4,240 $4,226
State income taxes--net of federal income tax benefit...... 580 481
Nondeductible amortization................................. 267 267
Other...................................................... (102) 7
------ ------
Actual provision for income taxes.......................... $4,985 $4,981
====== ======
</TABLE>
F-56
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
The types of temporary differences and their related tax effects which
create deferred tax liabilities at December 30, 1995 and December 28, 1996 are
summarized below (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Deferred tax liabilities:
Fixed asset basis differences............................ $7,960 $10,525
Reserve for LIFO......................................... 1,821 1,582
Deductible prepaids...................................... 3,066 1,762
Other.................................................... 609
------ -------
12,847 14,478
------ -------
Deferred tax assets:
Capital leases........................................... 853 874
Writedown of investment in Eli Witt...................... 516
Self-insured liabilities................................. 3,719 3,454
Other.................................................... 216
------ -------
5,304 4,328
------ -------
Net deferred tax liability................................. $7,543 $10,150
====== =======
</TABLE>
8--COMMITMENTS AND CONTINGENCIES
The Company is a party to various lawsuits, threatened suits and claims.
It is the opinion of management that the resolution of such matters will not
have a material adverse effect on the Company's financial position or results
of operations.
9--CASH FLOW
Supplemental disclosure of noncash investing and financing activities (in
thousands):
<TABLE>
<CAPTION>
1995 1996
---- ------
<S> <C> <C>
Additional capital lease obligations on buildings............. $-0- $4,176
==== ======
</TABLE>
10--RETIREMENT SAVINGS PLAN
LCFS has a 401(k) plan for all full-time employees who are 21 years of
age or older and who have been employed one year with at least 1,000 hours of
service. Participants can contribute 1% to 10% of their salary, not to exceed a
maximum allowable contribution amount. Participant contributions are 100%
vested. Distributions may be made at employment termination, retirement, or in
the event participants are disabled or can demonstrate financial hardship. The
Company matches an amount equal to 15% of the participants' contribution. The
total contribution for the years ended December 30, 1995 and December 28, 1996
was $83,000 and $98,000.
F-57
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
11--ENVIRONMENTAL MATTERS
The ownership and/or operation of underground storage tanks is subject to
federal, state and local laws and regulations.
Prior to 1996, LCFS was involved in evaluating and cleaning up
environmental contamination caused by releases of petroleum products at its
stores. The costs related to this process are reimbursable from state programs
in both Florida and Georgia, which are funded from taxes and fees paid based on
the purchase of petroleum products. The Company has not been able to reasonably
estimate that amount which will be reimbursed by the state of Georgia;
therefore, amounts expended for clean-up in Georgia have generally been
expensed and although some portion of this amount may be reimbursed in the
future the Company has not recorded a receivable for such amounts. LCFS has
recorded receivables for amounts recoverable from the state of Florida and
outside engineering firms and has provided an allowance on environmental
receivables of $1,558,000 and $1,139,000 as of December 30, 1995 and December
28, 1996 and $1,249,000 (unaudited) as of September 27, 1997. This allowance is
an estimate of amounts that LCFS has incurred that may not be reimbursed by the
state of Florida and outside engineering firms.
In prior years, LCFS entered into agreements with outside engineering
firms to assume the clean-up of contamination sites in Florida. Under these
arrangements LCFS was still responsible for the clean-up of the sites but LCFS
did not incur significant expenditures to complete the clean-up of existing
sites. LCFS had expended funds which were submitted to the State for
reimbursement by the outside engineering firms. These amounts, which represent
approximately 48% of the gross environmental receivable, will be reimbursed
directly to the engineering firms who will in-turn reimburse LCFS.
During 1996, new legislation was enacted by the State of Florida which
replaced the State's previous reimbursement program. All expenditures incurred
through March 29, 1995 and submitted for reimbursement by December 31, 1996
will be evaluated and reimbursed on the same basis as prior submissions. Under
the new legislation, the State has assumed the responsibility for clean-up of
registered sites assessed and reported to the State under the previous program,
but not yet remediated, exclusive of tank or other hardware replacement.
Georgia Underground Storage Tank Fund--Remediation of contaminated sites
in Georgia will be reimbursed under the state program for eligible costs to a
maximum of $1,000,000 per site. A $10,000 deductible applies to each site. All
LCFS sites in Georgia qualify for coverage from this fund. LCFS does not
currently expect remediation at any of its sites to exceed $1,000,000 of
coverage.
Florida Underground Storage Tank Fund--Remediation of contaminated sites
in Florida is eligible for reimbursement under the state's program. For
incidents discovered and reported to the state prior to July 1, 1992, the state
will reimburse for all eligible remediation costs to a maximum of $1,000,000
per incident with an annual aggregate of $2,000,000 per facility. For incidents
discovered
F-58
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
from July 1, 1992 to June 30, 1993, the state will reimburse for all eligible
reimbursement costs to a maximum of $1,000,000 subject to a $1,000 deductible.
For incidents discovered from July 1, 1993 to December 31, 1993, the state will
reimburse for all eligible reimbursement costs to a maximum of $1,000,000
subject to a $5,000 deductible. For incidents discovered from January 1, 1994
to December 31, 1996 the maximum reimbursement was reduced to $300,000 per site
with a $10,000 deductible. For incidents discovered subsequent to December 31,
1996, the maximum reimbursement was reduced to $150,000 per site with a $10,000
deductible. For incidents discovered subsequent to December 31, 1998 no costs
will be eligible for reimbursement under this program. LCFS is responsible for
all costs in excess of the state limits. Notwithstanding this schedule of
limits, certain of the LCFS sites are covered under the other Florida "trust
fund" programs pursuant to which the state will pay all required costs.
During 1997 management of the Company did a comprehensive review of the
status of its stores as it relates to environmental remediation and as a result
decided to record an environmental contamination charge as of September 27,
1997 of approximately $3,381,000 (Unaudited).
In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 96-1, Environmental Remediation Liabilities. SOP 96-1 provides
authoritative guidance on specific accounting issues that are present in the
recognition, measurement, display and disclosure of environmental remediation
liabilities. The provisions of this SOP are effective for fiscal years
beginning after December 15, 1996. The Company's management does not believe
the adoption of this statement will have a material impact on the Company's
financial statements.
12--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of all of the Company's financial instruments
approximates their fair value.
13--SUBSEQUENT EVENT (UNAUDITED)
On October 23, 1997, The Pantry, Inc. purchased all of the capital stock
of LCFS for $132.7 million in cash and repaid all outstanding indebtedness of
LCFS.
F-59
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Quick Stop Food Mart, Inc.
Fayetteville, North Carolina
We have audited the accompanying balance sheets of Quick Stop Food Mart,
Inc. as of December 31, 1996 and 1997, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Quick Stop Food
Mart, Inc. as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Cherry, Bekaert & Holland, L.L.P.
Fayetteville, North Carolina
March 6, 1998, except for Note 10,
as to which the date is February 24, 1999
F-60
<PAGE>
QUICK STOP FOOD MART, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
----------------------- -----------
1996 1997 1998
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents................ $ 1,489,685 $ 930,995 $ 2,209,473
Receivables (net of allowance for
doubtful accounts of $30,000 in 1996 and
$33,000 in 1997 and 1998)............... 971,690 1,241,442 965,351
Inventories.............................. 3,303,988 3,805,653 3,334,167
Other current assets..................... 147,765 140,265 292,520
----------- ----------- -----------
TOTAL CURRENT ASSETS................. 5,913,128 6,118,355 6,801,511
----------- ----------- -----------
PROPERTY AND EQUIPMENT
Land and buildings....................... 6,794,281 9,615,335 9,912,660
Store and office equipment............... 16,135,535 21,651,228 22,345,714
Transportation equipment................. 937,019 1,026,034 1,094,310
Leasehold improvements................... 2,575,573 3,117,212 3,277,948
Construction-in-progress................. 2,308,181 137,347 23,006
----------- ----------- -----------
28,750,589 35,547,156 36,653,638
Less accumulated depreciation.......... 12,826,346 14,609,791 16,071,013
----------- ----------- -----------
NET PROPERTY AND EQUIPMENT........... 15,924,243 20,937,365 20,582,625
----------- ----------- -----------
OTHER NONCURRENT ASSETS.................... 1,510,193 1,724,495 1,799,870
----------- ----------- -----------
$23,347,564 $28,780,215 $29,184,006
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt........ $ 1,121,949 $ 804,606 $ 5,941,863
Line of credit........................... -- 600,000 1,300,000
Bonds payable related party.............. 25,829 25,829 25,829
Accounts payable and accrued expenses.... 7,750,842 7,995,854 7,788,880
----------- ----------- -----------
TOTAL CURRENT LIABILITIES............ 8,898,620 9,426,289 15,056,572
----------- ----------- -----------
LONG-TERM DEBT............................. 2,002,604 5,529,179 --
----------- ----------- -----------
TOTAL LIABILITIES.................... 10,901,224 14,955,468 15,056,572
----------- ----------- -----------
STOCKHOLDERS' EQUITY
Common stock (par value $1). Authorized
100,000 shares; issued and outstanding
1,026 shares in 1996 and 1,078 shares in
1997 and 1998........................... 1,026 1,078 1,078
Additional paid-in capital............... 671,577 886,446 886,446
Retained earnings........................ 11,773,737 12,937,223 13,239,910
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY........... 12,446,340 13,824,747 14,127,434
----------- ----------- -----------
$23,347,564 $28,780,215 $29,184,006
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-61
<PAGE>
QUICK STOP FOOD MART, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended June
Years Ended December 31, 30,
-------------------------------------- -----------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net Sales............... $135,467,154 $143,568,524 $164,503,534 $78,222,131 $75,922,825
Cost of goods sold...... 111,059,632 119,888,214 137,102,870 65,945,552 63,290,730
------------ ------------ ------------ ----------- -----------
Gross Profit.......... 24,407,522 23,680,310 27,400,664 12,276,579 12,632,095
Operating and
administrative
expenses............... 21,639,341 21,812,494 24,569,641 11,878,685 11,278,924
------------ ------------ ------------ ----------- -----------
Income from
operations........... 2,768,181 1,867,816 2,831,023 397,894 1,353,171
Other income............ 407,372 466,743 254,463 184,370 149,516
------------ ------------ ------------ ----------- -----------
Net income............ $ 3,175,553 $ 2,334,559 $ 3,085,486 $ 582,264 $ 1,502,687
============ ============ ============ =========== ===========
</TABLE>
See Notes to Financial Statements
F-62
<PAGE>
QUICK STOP FOOD MART, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------- Six Months Ended
1995 1996 1997 June 30, 1998
----------- ----------- ----------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
COMMON STOCK
Beginning of year..... $ 1,023 $ 1,023 $ 1,026 $ 1,078
Additional shares
issued (3 shares in
1996 and 52 shares in
1997)................ -- 3 52 --
----------- ----------- ----------- -----------
End of year........... $ 1,023 $ 1,026 $ 1,078 $ 1,078
=========== =========== =========== ===========
ADDITIONAL PAID-IN
CAPITAL
Beginning of year..... $ 649,198 $ 649,198 $ 671,577 $ 886,446
Additions............. -- 22,379 214,869 --
----------- ----------- ----------- -----------
End of year........... $ 649,198 $ 671,577 $ 886,446 $ 886,446
=========== =========== =========== ===========
RETAINED EARNINGS
Beginning of year..... $ 9,236,916 $11,131,019 $11,773,737 $12,937,223
Net income............ 3,175,553 2,334,559 3,085,486 1,502,687
Stockholder
distributions........ (1,281,450) (1,691,841) (1,922,000) (1,200,000)
----------- ----------- ----------- -----------
End of year........... $11,131,019 $11,773,737 $12,937,223 $13,239,910
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-63
<PAGE>
QUICK STOP FOOD MART, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
-------------------------------------- ----------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income............. $ 3,175,553 $ 2,334,559 $ 3,085,486 $ 582,264 $1,502,687
Adjustments to
reconcile net income
to net cash provided
by operating
activities --
Depreciation and
amortization........ 1,778,181 1,880,460 2,514,142 1,084,392 1,465,309
(Gain) loss on
disposal of property
and equipment....... (68,573) 17,114 89,722 -- --
(Increase) decrease
in receivables...... 13,954 (53,488) (269,752) 20,381 276,091
(Increase) decrease
in inventories...... 119,566 (392,916) (501,665) (397,216) 471,486
(Increase) decrease
in other current
assets.............. (248,229) 91,243 7,500 (36,576) (152,255)
(Increase) decrease
in other noncurrent
assets.............. (237,213) (355,925) (223,322) 142,680 (79,463)
Increase (decrease)
in accounts payable
and accrued
expenses............ 436,565 1,253,749 245,012 355,484 (206,973)
----------- ----------- ------------ ----------- ----------
NET CASH PROVIDED
BY OPERATING
ACTIVITIES........ 4,969,804 4,774,796 4,947,123 1,751,409 3,276,882
----------- ----------- ------------ ----------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from sale of
property and
equipment............. 155,000 45,575 1,852,021 -- --
Additions to property
and equipment......... (1,248,986) (6,613,166) (9,459,986) (4,455,070) (1,106,482)
----------- ----------- ------------ ----------- ----------
NET CASH USED BY
INVESTING
ACTIVITIES........ (1,093,986) (6,567,591) (7,607,965) (4,455,070) (1,106,482)
----------- ----------- ------------ ----------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from issuance
of debt............... 1,285,000 -- 20,936,250 4,304,469 700,000
Principal payments on
debt.................. (2,202,716) (461,494) (17,127,019) (254,765) (391,922)
Proceeds from sale of
stock................. -- 22,382 214,921 214,921 --
Stockholder
distributions......... (1,281,450) (1,691,841) (1,922,000) (1,300,000) (1,200,000)
----------- ----------- ------------ ----------- ----------
NET CASH FLOWS
PROVIDED (USED) BY
FINANCING
ACTIVITIES........ (2,199,166) (2,130,953) 2,102,152 2,964,625 (891,922)
----------- ----------- ------------ ----------- ----------
NET INCREASE
(DECREASE) IN CASH
AND CASH
EQUIVALENTS....... 1,676,652 (3,923,748) (558,690) 260,964 1,278,478
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD.... 3,736,781 5,413,433 1,489,685 1,489,685 930,995
----------- ----------- ------------ ----------- ----------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD................. $ 5,413,433 $ 1,489,685 $ 930,995 $ 1,750,649 $2,209,473
=========== =========== ============ =========== ==========
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid.......... $ 356,158 $ 295,729 $ 537,603 $ 240,106 $ 310,571
=========== =========== ============ =========== ==========
</TABLE>
See Notes to Financial Statements.
F-64
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
The Corporation operates convenience stores under the name of "Quick
Stop" in North and South Carolina. Revenues are generated primarily by the sale
of various merchandise and petroleum products to the general public.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Statements of Cash Flows
For purposes of the statements of cash flows, the Corporation considers
all highly liquid debt instruments purchased with a maturity date of three
months or less to be cash equivalents.
Inventories
Substantially all merchandise inventories are stated at the lower of cost
or market using the retail last-in, first-out (LIFO) inventory method. Gasoline
inventories are stated at the lower of cost or market using the LIFO method.
The current cost of inventories valued under the first-in, first-out, (FIFO)
method exceeded their LIFO carrying values by approximately $1,738,000,
$1,717,000, and $1,717,000 at December 31, 1996 and 1997, and June 30, 1998
respectively.
Property and Equipment
Property and equipment is stated at cost. Maintenance and repairs are
charged to operations as incurred, and renewals and betterments are
capitalized. Gains or losses on disposals are credited or charged to
operations.
Depreciation
Depreciation and amortization is charged to income over the estimated
useful lives of assets using the straight-line method for financial statement
purposes.
Stockholders' Equity
All stockholders have equal voting rights according to the number of
shares held. Distributions are primarily made to compensate for the individual
tax impact of Subchapter "S" earnings passed through to each stockholder.
F-65
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Advertising
The Corporation expenses advertising costs as incurred. Advertising costs
for the years ended 1995, 1996 and 1997 were approximately $253,000, $299,000
and $207,000, respectively.
Income Taxes
The Corporation has elected by unanimous consent of its stockholders to
be taxed under the provisions of Subchapter "S" of the Internal Revenue code.
Under those provisions, the Corporation does not pay federal and state income
taxes on its taxable income. Instead, the stockholders are liable for
individual federal and state income taxes on their respective shares of the
Corporation's taxable income.
Profit-Sharing Plan
The Corporation sponsors a profit-sharing plan covering full-time
employees who meet specified age and length of service requirements.
Contributions are determined annually based on a percentage of net income as
approved by the Board of Directors. Contributions amounted to $367,000 in 1995
$278,000 in 1996 and $386,000 in 1997. The Board of Directors intends to
terminate the plan after receipt of a determination letter from the IRS. No
contributions were made to the plan after December 31, 1997.
Environmental Remediation
The Corporation accrues environmental remediation costs if it is probable
that an asset has been impaired or a liability incurred at the financial
statement date and the amount can be reasonably be estimated.
Unaudited Interim Financial Statements
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
NOTE 2--CASH AND CASH EQUIVALENTS
The Corporation maintains cash and cash equivalent balances at several
financial institutions in North and South Carolina. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. At December 31, 1996 and 1997, the Corporation's uninsured bank
balances totalled approximately $1,339,000 and $760,000, respectively.
NOTE 3--LINES OF CREDIT
The Corporation has entered into four credit line arrangements with a
local bank providing maximum borrowings of $15,750,000. Amounts borrowed under
these agreements are due on May 31, 1998 and require monthly interest payments
at the prevailing prime rate minus 1/4%. On May 31, 1998, any unpaid principal
balances shall be set up as a term note. The credit lines are guaranteed by
related parties and secured by inventory, accounts receivable, and equipment.
F-66
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
These credit lines and certain other long term debt obligations contain
restrictions on the combined amounts of stockholders' compensation, dividends
which may be paid, the issuance of additional debt, and other covenants. In
addition, the loan agreements provide that certain financial ratios and other
financial requirements be maintained.
The lines of credit were renewed on May 31, 1998 for a year under the
same terms. These obligations were repaid in full on July 2, 1998 in connection
with the sale of assets (see Note 10).
No advances were outstanding at December 31, 1996; advances outstanding
at December 31, 1997, and June 30, 1998, totalled $600,000 and $1,300,000,
respectively.
NOTE 4--BONDS PAYABLE RELATED PARTY
Bonds payable related party includes obligations to majority stockholders
that are due currently and includes interest at the applicable federal rate.
The obligations are unsecured.
NOTE 5--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1996 1997 1998
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Notes payable to individuals, due in
monthly installments of $4,371 including
interest at 7.5%; collateralized by
Deeds of Trust.......................... $ 221,146 $ 184,016 $ 164,364
Notes payable to bank, due in monthly
installments of approximately $48,700
plus interest ranging from the
prevailing prime rate minus 1/4% to the
prevailing prime rate plus 1/2%;
collateralized by inventories, property
and equipment, assignment of leases on
certain properties, and Deeds of Trust.. 2,535,298 5,950,639 5,667,300
Note payable to bank, due in monthly
installments of $15,747 including
interest at 6.75%. The loan is
collaterized by inventories and property
and equipment........................... 368,109 199,130 110,199
---------- ---------- ---------
3,124,553 6,333,785 5,941,863
Less current installments................ 1,121,949 804,606 5,941,863
---------- ---------- ---------
$2,002,604 $5,529,179 $ --
========== ========== =========
</TABLE>
Maturities of long-term debt at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
December 31
-----------
<S> <C>
1998......................................................... $804,606
1999......................................................... 697,313
2000......................................................... 1,684,049
2001......................................................... 1,611,178
2002......................................................... 1,536,639
----------
$6,333,785
==========
</TABLE>
Interest expense for years ended December 31, 1995, 1996 and 1997
totalled approximately $354,000, $293,000 and $553,000, respectively.
F-67
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In connection with the sale of assets and corporate dissolution described
in Note 10, the notes payable balances outstanding at June 30, 1998, were
repaid during 1998 and 1999. Accordingly, these balances have been reflected as
current liabilities at June 30, 1998.
NOTE 6--STOCK OPTION PLANS
In accordance with a non-qualified stock option plan for key employees,
options have been granted to purchase 281 shares of common stock. The purchase
price of these options are fixed at prices ranging from $4,000 to $7,461 per
share.
Options granted, exercised and canceled during 1995, 1996 and 1997 are as
follows,
<TABLE>
<CAPTION>
December 31,
--------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Options outstanding on January 1.......................... 148 148 145
Granted................................................... -- -- --
Exercised................................................. -- 3 52
Canceled.................................................. -- -- --
Options outstanding at December 31........................ 148 145 93
</TABLE>
The weighted average exercise price for options outstanding at December
31, 1995, 1996 and 1997 was $6,175, $6,220 and $7,461. Options exercised during
1996 and 1997 had a weighted average exercise price of $4,000 in each year.
All options outstanding at December 31, 1997, were exercised on July 1,
1998, for $7,461 per share, in connection with the sale of assets and corporate
dissolution (see Note 10).
NOTE 7--STOCKHOLDER DISTRIBUTIONS
During the years ended December 31, 1995, 1996, and 1997, and the six-
month period ended June 30, 1998, the Corporation made distributions to its
stockholders of amounts estimated to compensate for the individual tax impact
of Sub chapter "S" earnings passed through to each stockholder. Total
distributions amounted to approximately $1,281,000, $1,692,000, $1,922,000, and
$1,200,000 in each of the respective periods.
NOTE 8--SALE TO RELATED PARTY
During 1997, the Corporation sold land and buildings with a book value of
approximately $1,697,000 to a related party, realizing a gain of approximately
$5,000.
NOTE 9--COMMITMENTS AND CONTINGENT LIABILITIES
Lessee Arrangements
The Corporation conducts substantially all of its operations utilizing
leased facilities. Some of the operating leases provide that the Corporation
pay taxes, maintenance and other occupancy expenses applicable to leased
premises. Generally, the leases provide for renewal for various periods at
stipulated rates. Some leases also provide for contingent rents, which are
based on store sales. These contingent amounts are payable in addition to
minimum rental payments.
F-68
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
At December 31, 1997, minimum rental payments under noncancellable
operating leases are as follows:
<TABLE>
<CAPTION>
Years Ending Related Parties Other
------------ --------------- ----------
<S> <C> <C>
1998............................................ $ 1,505,118 $1,080,622
1999............................................ 1,505,118 879,891
2000............................................ 1,505,118 848,379
2001............................................ 1,505,118 705,236
2002............................................ 1,505,118 565,215
Thereafter...................................... 4,013,647 2,116,449
----------- ----------
Total minimum lease payments.................. $11,539,237 $6,195,792
=========== ==========
</TABLE>
Rental expense charged to operations is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rentals under operating leases.... $2,469,107 $2,948,423 $3,125,215
Contingent rentals under operating
leases................................... 15,604 20,573 24,955
---------- ---------- ----------
$2,484,711 $2,968,996 $3,150,170
========== ========== ==========
</TABLE>
The principal owners of the Corporation and other companies which they
own or with which they are associated are considered related parties. Rental
expense listed above included minimum rental payments to related parties of
approximately $1,466,000, $1,485,000 and $1,521,000 for years ended December
31, 1995, 1996 and 1997, respectively.
Lessor Arrangements
The Corporation subleases facilities to others primarily through
noncancellable operating leases with terms ranging from five to twenty years.
The following is a schedule of future minimum rental income for noncancellable
operating leases with remaining terms of one year or more at December 31, 1997:
<TABLE>
<CAPTION>
Years Ending
------------
<S> <C>
1998........................................................ $ 160,572
1999........................................................ 157,642
2000........................................................ 132,642
2001........................................................ 120,792
2002........................................................ 105,192
Thereafter.................................................. 452,890
----------
Total minimum rental income.................................. $1,129,730
==========
</TABLE>
The Corporation has guaranteed the repayment of principal and interest on
certain obligations of a related corporation. These obligations are
collateralized by all inventories and equipment of the Corporation. At December
31, 1997 and June 30, 1998 such guarantees totalled approximately $3,300,000
and $3,150,000, respectively.
F-69
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
At December 31, 1997 and June 30, 1998 the Corporation had letters of
credit outstanding totaling $350,000 and $250,000, respectively, which may be
drawn upon to cover a corrective action arising from operating underground
storage tanks and to cover workers' compensation claims.
At December 31, 1997 and June 30, 1998 the Corporation had contracted
with outside parties for approximately $800,000 for various construction
projects.
The Corporation is subject to laws and regulations relating to the
protection of the environment. While it is not possible to quantify with
certainty the potential impact of actions regarding environmental matters,
particularly any future remediation and other compliance efforts, in the
opinion of management, compliance with the present environmental protection
laws will not have a material adverse effect on the financial position,
competitive position, or capital expenditures of the Corporation.
The Corporation is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially affect
the financial position of the Corporation.
NOTE 10--SUBSEQUENT EVENT--SALE OF ASSETS AND CORPORATE DISSOLUTION
Effective July 2, 1998, the Corporation sold certain assets to The
Pantry, Inc., including the operating assets of the Corporation's seventy-five
(75) convenience stores, inventory and the "Quick Stop" name. The sales price
was $50,000,000 in cash, plus inventory at cost. The Corporation retained
primarily cash and cash equivalents, real estate and debt associated with the
real estate.
In connection with the acquisition, the Corporation changed its name from
"Quick Stop Food Mart, Inc." to "Southern Carolina Property, Inc." paid off all
line of credit balances and equipment loans outstanding at July 2, 1998, and
negotiated long term real estate operating leases with The Pantry, Inc. In
addition, certain operating lease obligations between the Corporation and
related parties were renegotiated between these related parties and The Pantry,
Inc.
All stock options outstanding at December 31, 1997, were exercised prior
to July 2, 1998, for $7,461 per share.
Effective January 29, 1999, the board of directors elected to dissolve
the Corporation and distribute all remaining assets and liabilities to the
shareholders. The Corporation is currently redeeding real estate and
renegotiating mortgages associated with the real estate.
F-70
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Express Stop, Inc.
Fayetteville, North Carolina
We have audited the accompanying balance sheet of Express Stop, Inc. as
of December 31, 1997, and the related statement of income, retained earnings,
and cash flows for the year then ended. These financial statements are the
representation of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Express Stop, Inc.
as of December 31, 1997 and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ Griffin, Maxwell, & Frazelle, P.A.
Fayetteville, North Carolina
September 25, 1998
F-71
<PAGE>
EXPRESS STOP, INC.
BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents (Note 2)............... $1,654 $1,315
Certificates of deposit.......................... 279 283
Accounts receivable: (Note 5)
Trade.......................................... 36 13
Merchandise distributors....................... 353 158
Credit cards................................... 190 252
Inventories (Notes 3 and 5)...................... 1,364 1,393
Prepaid expenses and other....................... 34 86
------ ------
Total current assets......................... 3,910 3,500
------ ------
LONG-TERM RECEIVABLES AND OTHER ASSETS
Environmental remediation receivables (Note 11).. 1,100 1,100
Advances to affiliated companies, unsecured...... 116 251
Investment in partnership (Note 4)............... 109 149
Other (Note 12).................................. 77 185
------ ------
1,402 1,685
------ ------
PROPERTY AND EQUIPMENT (Note 5)
Equipment........................................ 4,387 4,146
Vehicles......................................... 160 137
Leasehold improvements........................... 914 1,026
Construction and equipment installations in
progress........................................ -- 575
------ ------
5,461 5,884
Less accumulated depreciation and amortization... 3,337 3,271
------ ------
2,124 2,613
------ ------
$7,436 7,798
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt (Note 5).... $ 177 $ 532
Accounts payable:
Trade.......................................... 2,151 1,751
Other.......................................... 69 60
Accrued expenses:
Salaries....................................... 185 102
Profit sharing................................. 25 --
Other.......................................... 58 69
------ ------
Total current liabilities.................... 2,665 2,514
------ ------
LONG-TERM DEBT, less current maturities (Note 5)... 1,073 612
------ ------
OTHER NONCURRENT LIABILITIES
Environmental remediation liabilities (Note 11).. 1,100 1,100
Deferred income, net (Note 7).................... 81 76
Other............................................ 56 56
------ ------
1,237 1,232
------ ------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 11)
STOCKHOLDERS' EQUITY
Common stock, par value $15 per share, authorized
and issued 2,000 shares........................... 30 30
Retained earnings................................ 2,431 3,410
------ ------
2,461 3,440
------ ------
$7,436 $7,798
====== ======
</TABLE>
See Notes to Financial Statements.
F-72
<PAGE>
EXPRESS STOP, INC.
STATEMENTS OF INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------ ---------------------------
December 31, September 30, September 30,
1997 1997 1998
------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues:
Merchandise sales................... $18,439 $13,630 $15,910
Fuel sales (Note 6)................. 29,984 22,631 20,384
Video sales......................... 1,432 1,042 1,402
Commissions and other (Note 10)..... 347 176 233
------- ------- -------
50,202 37,479 37,929
------- ------- -------
Cost of sales:
Merchandise......................... 13,960 10,241 12,028
Fuel (Note 6)....................... 27,222 20,714 18,257
------- ------- -------
41,182 30,955 30,285
------- ------- -------
Gross Profit...................... 9,020 6,524 7,644
------- ------- -------
Operating expenses: (Notes 7, 8, 9 and
10)
Store expenses...................... 5,291 3,901 3,889
General and administrative.......... 851 611 721
Depreciation and amortization....... 753 537 572
------- ------- -------
6,895 5,049 5,182
------- ------- -------
Income from operations................ 2,125 1,475 2,462
------- ------- -------
Financial revenue (expense):
Interest and dividends.............. 49 32 66
Interest expense.................... (122) (95) (89)
Gain on sale of equipment........... 5 7 48
Equity in partnership earnings (Note
4)................................. 42 31 41
------- ------- -------
(26) (25) 66
------- ------- -------
Net income............................ $ 2,099 $ 1,450 $ 2,528
======= ======= =======
</TABLE>
See Notes to Financial Statements.
F-73
<PAGE>
EXPRESS STOP, INC.
STATEMENTS OF RETAINED EARNINGS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
December 31, September 30, September 30,
1997 1997 1998
------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Balance, beginning.................... $ 1,370 $1,370 $2,431
Net income............................ 2,099 1,450 2,528
Less cash dividends on common stock,
$519.00, $419.00, and $775.00 per
share, respectively.................. (1,038) (838) (1,549)
------- ------ ------
Balance, ending....................... $ 2,431 $1,982 $3,410
======= ====== ======
</TABLE>
See Notes to Financial Statements.
F-74
<PAGE>
EXPRESS STOP, INC.
STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
December 31, September 30, September 30,
1997 1997 1998
------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers......... $ 49,723 $ 36,881 $ 37,650
Cash paid to suppliers and
employees........................... (47,037) (35,676) (35,393)
Other operating revenue.............. 347 175 233
Interest and dividends received...... 49 32 66
Interest paid........................ (122) (95) (89)
-------- -------- --------
Net cash provided by operating
activities........................ 2,960 1,317 2,467
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certificates of deposit.. (161) (161) (4)
Repayments by (advances to)
affiliated companies................ (26) 90 (135)
Purchase of property and equipment... (689) (512) (1,124)
Proceeds from sale of equipment...... 19 47 111
Partnership distributions received... 42 32 1
-------- -------- --------
Net cash used in investing
activities........................ (815) (504) (1,151)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings... -- 200 269
Principal payments on long-term
borrowings.......................... (81) -- --
Repayments to affiliates............. (195) (209) (375)
Dividend payments to shareholders.... (1,038) (838) (1,549)
-------- -------- --------
Net cash used in financing
activities........................ (1,314) (847) (1,655)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents..................... 831 (34) (339)
Cash and cash equivalents at beginning
of period............................ 823 823 1,654
-------- -------- --------
Cash and cash equivalents at end of
period............................... $ 1,654 $ 789 $ 1,315
======== ======== ========
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income........................... $ 2,099 $ 1,450 $ 2,528
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization....... 773 537 572
Distributive share of partnership
income............................. (42) (31) (41)
Gain on sale of assets.............. (5) (7) (48)
Change in assets and liabilities:
Accounts receivable................. (257) (422) 19
Inventory........................... (208) (227) (29)
Prepaid expenses.................... 29 24 (52)
Deposits............................ 134 -- --
Other assets........................ (43) -- 29
Accounts payable.................... 410 79 (389)
Accrued expenses.................... 37 (86) (97)
Deferred income..................... 33 -- (25)
-------- -------- --------
Net cash provided by operating
activities........................ $ 2,960 $ 1,317 $ 2,467
======== ======== ========
</TABLE>
See Notes to Financial Statements
F-75
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
The Company's operations consist primarily of the operation of
convenience stores located in North and South Carolina.
A summary of the Company's significant accounting policies follows:
Estimates:
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Statements of cash flows:
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity date of three months
or less to be cash equivalents.
Financial instruments:
The carrying value of cash, receivables and accounts payable approximate
fair value due to the short maturity of these instruments. The fair value of
investment in partnership is not subject to estimation because of its illiquid
nature. The fair values of long-term debt, which are approximately equal to
their carrying values, are estimated based on interest rates commercially
available for the same or similar debt.
Inventories:
Inventories are valued at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
Property and equipment:
Property and equipment is stated at cost, less accumulated depreciation
and amortization. Depreciation is provided primarily by the use of accelerated
methods over the estimated useful lives of the assets.
Impairment of assets:
The Company reviews long-lived assets on a store-by-store basis whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If an evaluation were required, the projected
future undiscounted cash flows attributable to each store would be compared to
the carrying value of the long-lived assets of that store to determine if a
write-down to fair value is required.
F-76
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Investment in partnership:
Investment in partnership is accounted for using the equity method. The
initial investment was recorded at cost. Subsequently, the carrying amount has
been increased to reflect the Company's share of income, and has been reduced
to reflect the Company's share of losses and cash distributions.
Advertising:
The Company expenses advertising as incurred. Advertising expense was
$57,000 for the year ended December, 31, 1997.
Income taxes:
The Company, with the consent of its stockholders, has elected to be
taxed under sections of the federal and state income tax law, which provide
that, in lieu of corporation income taxes, the stockholders separately account
for their pro rata shares of the Company's items of income, deductions, losses
and credits. Therefore, these statements do not include any provision for
corporation income taxes.
Unaudited interim financial statements
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
NOTE 2--CASH
The Company maintains cash deposits in several commercial banks. The
amounts on deposit at December 31, 1997 exceeded the insurance limits provided
by the Federal Deposit Insurance Corporation by approximately $1,667,000.
NOTE 3--INVENTORIES
Inventories consist of the following: (in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
<S> <C> <C>
Merchandise..................................... $ 987 $1,059
Fuel............................................ 377 334
------ ------
$1,364 $1,393
====== ======
</TABLE>
F-77
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 4--INVESTMENT IN PARTNERSHIP
The Company owns a 50% interest in a general partnership (Mexican
Express) which sells branded food items in two of the Company's store
locations. The Company has included $43,000 of income in the statement of
operations for the year ended December 31, 1997.
NOTE 5--LINE OF CREDIT AND LONG-TERM DEBT
The Company, its stockholders and an affiliated partnership have been
granted a financing arrangement which provides for 1) a term loan up to
$1,700,000, payable $23,500 per month including interest; 2) a term loan up to
$950,000, payable $12,500 per month including interest; 3) a term loan up to
$750,000, payable $9,900 per month including interest; and 4) a line of credit
of up to $500,000 payable accrued interest only per month with credit line due
upon demand. Interest on the first two advances is calculated at LIBOR rate
plus 2.15%. Interest on the third and fourth advances is calculated at LIBOR
rate plus 2.00%. Collateral includes equipment with a cost of $2,719,000 and a
book value of $1,103,000, inventory with a book value of $575,000, accounts
receivable of $288,000, deed of trust on property owned by affiliates, and the
personal guarantee of the stockholders. Total advances to all parties to this
agreement amounted to $1,805,000 as of December 31, 1997. All of these advances
were made subject to the term loan agreements described in 1) and 2) above.
Long-term debt consists of the following as of December 31, 1997: (in
thousands)
<TABLE>
<S> <C>
Outstanding advances under the above financing agreement........... $1,190
Note payable to bank, due in monthly installments of $435 including
interest at 7.59% to September, 2006 collateralized by equipment
with a book value of $61,000 and a deed of trust on real estate
owned by the stockholders......................................... 33
Note payable to utility company, due in monthly installments of
$1,082 including interest at 7% to March, 2000. Collateralized by
equipment with a book value of $22,000............................ 27
------
1,250
Less current maturities............................................ 177
------
$1,073
======
</TABLE>
The prime rate of interest was 8.50% and the LIBOR rate was 5.95% as of
December 31, 1997.
Approximate principal maturities of long-term debt for the years
following December 31, 1997 are as follows: (in thousands)
<TABLE>
<S> <C>
1998................................................................ $177
1999................................................................ 192
2000................................................................ 197
2001................................................................ 210
2002................................................................ 227
Later............................................................... 247
------
$1,250
======
</TABLE>
F-78
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of September 30, 1998, the Company and its stockholders and affiliates
had borrowed $750,000 subject to the term loan agreement described in 3) above
and $500,000 subject to the line of credit described in 4) above, to finance
the construction and equipping of two additional stores. (Unaudited)
NOTE 6--EXCISE AND USE TAXES
The Company collects and remits various Federal and State excise and use
taxes on petroleum products. Sales and cost of sales included approximately
$9,655,000 of such taxes for the year ended December 31, 1997.
NOTE 7--DEFERRED INCOME
The Company has received funds from a major oil company in conjunction
with a modernization assistance program to help pay for new or newly modernized
retail outlets. The Company opened one such outlet in 1994, two in 1996, and
one in 1997. Amounts received are amortized over 15 years. The unamortized
amount is refundable to the oil company if the Company changes brands of
gasoline carried. As of December 31, 1997 accumulated amortization was $12,500,
and $7,000 was credited to expense in 1997.
NOTE 8--DEFINED CONTRIBUTION RETIREMENT PLAN
The Company has adopted a defined contribution retirement plan covering
all employees who have completed three years of service. Contributions totaled
$25,000 for the year ended December 31, 1997.
NOTE 9--LEASE COMMITMENTS AND RENTAL EXPENSE
The Company leases store buildings, land, store equipment and office
facilities under operating leases. The real estate leases require the payment
by the Company of property taxes, utilities and routine maintenance.
Rent expense for operating leases of real estate and equipment amounted
to $725,000 and $257,000, respectively for the year ended December 31, 1997.
Future minimum lease payments as of December 31, 1997 for operating
leases with an initial or remaining term in excess of one year are as follows:
(in thousands)
<TABLE>
<CAPTION>
Real Estate Equipment
----------- ---------
<S> <C> <C>
1998................................................. $ 700 $160
1999................................................. 521 107
2000................................................. 437 7
2001................................................. 437 --
2002................................................. 408 --
Thereafter........................................... 2,031 --
------ ----
$4,534 $274
====== ====
</TABLE>
F-79
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 10--RELATED PARTY TRANSACTIONS
The majority of the above leases are with the stockholders or with
entities controlled by the stockholders. Rents paid under these real estate and
equipment leases amounted to $583,000 and $195,000, respectively for the year
ended December 31, 1997.
Commissions and other income include $80,000 paid to the Company by
entities controlled by the stockholders, for accounting, data processing and
administrative services provided.
NOTE 11--COMMITMENTS AND CONTINGENCIES
The State of South Carolina Administrative Law Judge Division has
affirmed a decision by the Department of Revenue to revoke the business license
of one of the Company's stores because of an alleged violation of the South
Carolina Video Games Machine Act. The Company has appealed this action, and the
order has been stayed by the Court of Common Pleas for Richmond County, South
Carolina. No further action has been taken or is expected, and the Company does
not anticipate that any material loss will be incurred.
The South Carolina Department of Health and Environmental Control has
made inquiries about a third party settlement received by the Company for
damages incurred by the faulty supply and installation of petroleum tanks and
equipment at one of its stores. The purpose of the inquiry is to determine if
any outside funding source would have to be exhausted prior to payment of
future remediation costs at this site. No action has been taken or is expected
to be commenced, and the Company intends to vigorously contest this matter if
it is asserted in the future. The Company has deferred $56,000 of the
settlement received from the third party. Legal counsel has estimated that the
potential loss, although unlikely, could range from $0 to $82,000 in excess of
the deferral.
The Company is involved in certain other legal proceedings arising in the
course of normal business activities. In the opinion of management, the
ultimate settlement of these proceedings will not have a material adverse
effect on the financial statements.
The shareholders have contracted for the construction of two new store
buildings in the total amount of $1,335,000. None of these funds were expended
as of December 31, 1997.
The Company is subject to Federal and state environmental laws and
regulations governing the use and maintenance of underground storage tanks
(USTs). These laws and regulations require expenditures for compliance, and
establish requirements for the installation and upgrading of tank systems,
continual monitoring and inspection, recordkeeping, identification of leaking
or otherwise defective tank systems, and possible corrective actions.
The Environmental Protection Agency has required that leak detection
procedures be implemented at all stores, and that corrosion protection and
overfill/spill prevention devices be installed by the end of 1998. The Company
anticipates that it will meet the 1998 deadline for all of its USTs.
North and South Carolina have established trust funds for the sharing,
recovery, and reimbursement of costs incurred as a result of releases from
USTs. The Company participates in these programs by virtue of the payment of
registration fees on each UST and taxes on the purchase
F-80
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
of motor fuels. The trust funds essentially provide insurance of up to
$1,000,000 per site for cleanup of environmental contamination, exclusive of
per-site deductibles, contamination which occurred prior to the establishment
of the trusts, and the removal and disposal of defective USTs.
As of December 31, 1997, the Company is responsible for the remediation
of contamination at six sites. $1,100,000 has been accrued for these estimated
future remediation costs. The Company expects to recover all of these
expenditures from either trust funds ($750,000) or insurance companies
($350,000). Reimbursement from the state trust funds will be dependent on the
continued financial viability of the funds.
Although the Company is not aware of releases or contamination at other
locations which it operates, any such event could require material remediation
costs, some or all of which may not be reimbursable from trust funds, insurance
or other third parties.
NOTE 12--SUBSEQUENT EVENTS
In May 1998, the Company sold its store operation located in Mebane,
North Carolina to an unrelated third party. The sales price was $240,000 for
fixtures and equipment and $50,000 for inventory, and a gain of $33,000 was
realized upon completion of the transaction. The Company took a note receivable
from the buyer, collateralized by a security agreement on the assets acquired,
in the amount of $145,000, repayable in sixty monthly installments of $2,940
including interest at 8.00%.
At September 25, 1998, the Company has reached an agreement in principal
to sell substantially all of its operating assets to The Pantry, Inc. The sales
price is $20,300,000 plus the cost of inventory acquired. $2,500,000 of the
purchase price is subject to an escrow agreement until March 1999, and may be
forfeited upon the occurrence of specific events or conditions relating to the
operating of video poker machines in the State of South Carolina.
F-81
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Taylor Oil Company
We have audited the accompanying unconsolidated balance sheets of Taylor
Oil Company as of December 31, 1997 and 1998 and the related unconsolidated
statements of income, changes in shareholders equity and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying financial statements include only the financial position
and related results of operations and cash flows of Taylor Oil Company. As
discussed in note 7, the Company reflects its investment in Triad Terminal
Company, a wholly owned subsidiary, at cost. Generally accepted accounting
principles require that the financial position and results of operations of
majority owned subsidiaries be consolidated with those of the parent company.
However, in our opinion, presentation of consolidated financial statements
would currently be misleading as these statements are to be utilized in the
sale of the Companys retail operations. As such, inclusion of the financial
position, results of operations and cash flows of Triad Terminal Company would
diminish the usefulness of these financial statements for their intended
purpose.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Taylor Oil Company
as of December 31, 1997 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Edwards, Falls & Renegar, P.L.L.C.
Winston-Salem, North Carolina
February 12, 1999
F-82
<PAGE>
TAYLOR OIL COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 2,739,844 $ 3,116,388
Receivables.......................................... 1,258,015 1,142,935
Inventories (Note 3)................................. 3,208,083 2,706,987
Prepaid expenses..................................... 138,229 158,404
Notes receivable (Note 4)............................ 212,732 418,025
----------- -----------
Total current assets............................... 7,556,903 7,542,739
----------- -----------
Operational property and equipment, net (Note 5)....... 12,048,953 11,628,753
----------- -----------
Other assets:
Environmental receivables............................ 116,670 --
Notes receivable (Note 4)............................ 585,165 167,140
Investment property, net............................. 349,769 329,846
Investment in subsidiary (Note 7).................... 1,035,000 2,235,000
Cash value of life insurance......................... 2,302,320 2,654,932
----------- -----------
Total other assets................................. 4,388,924 5,386,918
=========== ===========
Total assets........................................... $23,994,780 $24,558,410
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-83
<PAGE>
TAYLOR OIL COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1998
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Current maturities of long-term debt (Note 9)........ $ 194,687 $ 291,407
Accounts payable.....................................
Trade.............................................. 2,976,407 2,429,091
Money orders....................................... 488,145 250,856
Accrued compensation and related taxes............... 331,552 365,857
Other accrued taxes.................................. 1,071,319 1,261,783
----------- -----------
Total current liabilities........................ 5,062,110 4,598,994
----------- -----------
Noncurrent liabilities
Long-term debt (Note 9).............................. 2,123,474 1,932,027
Environmental costs.................................. 184,796 110,929
----------- -----------
Total noncurrent liabilities..................... 2,308,270 2,042,956
----------- -----------
Shareholders equity
Common stock, $10 par value, 300,000 shares
authorized; 200,000 issued and outstanding.......... 2,000,000 2,000,000
Additional paid-in capital........................... 163,800 1,363,800
Retained earnings.................................... 14,460,600 14,552,660
----------- -----------
Total shareholders equity........................ 16,624,400 17,916,460
----------- -----------
Total liabilities and shareholders equity.............. $23,994,780 $24,558,410
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE>
TAYLOR OIL COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Merchandise sales..................... $ 22,707,097 $ 22,661,868 $ 25,586,745
Petroleum sales....................... 105,208,948 98,440,549 84,591,573
Commissions........................... 137,711 142,569 267,518
------------ ------------ ------------
Total revenues...................... 128,053,756 121,244,986 110,445,836
------------ ------------ ------------
Cost of sales
Merchandise........................... 15,874,846 15,453,283 17,022,253
Petroleum............................. 95,257,354 87,474,554 74,421,614
------------ ------------ ------------
Total cost of sales................. 111,132,200 102,927,837 91,443,867
------------ ------------ ------------
Gross profit............................ 16,921,556 18,317,149 19,001,969
------------ ------------ ------------
Operating expenses
Store expenses........................ 11,265,038 9,793,200 9,920,619
Store expenses--related parties (Note
6)................................... 1,196,982 1,187,408 1,188,978
General and administrative expenses... 1,887,641 1,932,235 1,926,520
Impairment of long-lived assets....... 261,319 -- 219,420
Depreciation and amortization......... 1,653,319 1,892,212 1,986,879
------------ ------------ ------------
Total operating expenses............ 16,264,299 14,805,055 15,242,416
------------ ------------ ------------
Income from operations.................. 657,257 3,512,094 3,759,553
Other income, net of expenses........... 207,611 159,426 272,507
------------ ------------ ------------
Net income.............................. $ 864,868 $ 3,671,520 $ 4,032,060
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE>
TAYLOR OIL COMPANY
STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------------
Additional Total
Number Par Paid-in Retained Shareholders'
of Shares Value Capital Earnings Equity
--------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1,
1996................... 200,000 $2,000,000 $ 163,800 $12,104,212 $14,268,012
Net income............ -- -- -- 864,868 864,868
Dividends paid........ -- -- -- (1,130,000) (1,130,000)
------- ---------- ---------- ----------- -----------
BALANCES, DECEMBER 31,
1996................... 200,000 2,000,000 163,800 11,839,080 14,002,880
Net income............ -- -- -- 3,671,520 3,671,520
Dividends paid........ -- -- -- (1,050,000) (1,050,000)
------- ---------- ---------- ----------- -----------
BALANCES, DECEMBER 31,
1997................... 200,000 2,000,000 163,800 14,460,600 16,624,400
Net income............ -- -- -- 4,032,060 4,032,060
Property
contribution......... -- -- 1,200,000 -- 1,200,000
Dividends paid........ -- -- -- (3,940,000) (3,940,000)
------- ---------- ---------- ----------- -----------
BALANCES, DECEMBER 31,
1998................... 200,000 $2,000,000 $1,363,800 $14,552,660 $17,916,460
======= ========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE>
TAYLOR OIL COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 864,868 $3,671,520 $4,032,060
Adjustments to reconcile net income to net cash
provided by operating activities
Impairment of long-lived assets............... 261,319 -- 219,420
Depreciation and amortization................. 1,673,242 1,912,134 2,006,801
Loss (gain) on sale of property and
equipment.................................... 99,860 51,795 (8,958)
Provision for environmental expenses.......... 65,708 2,415 42,803
Increase in cash value of life insurance...... (307,005) (329,395) (352,612)
Changes in operating assets and liabilities
Receivables and prepaids..................... (76,707) 211,697 94,905
Inventories................................... (623,352) 470,145 501,096
Accounts payable.............................. 1,063,344 (1,002,313) (784,605)
Accrued expenses.............................. (995,384) 684,334 224,769
---------- ---------- ----------
Net cash provided by operating activities...... 2,025,893 5,672,332 5,975,679
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in notes receivable.................. (120,000) (600,000) --
Collections on notes receivable............... 293,044 60,538 212,732
Proceeds from sale of property and equipment.. 448,195 134,836 118,500
Capital expenditures.......................... (3,149,431) (2,299,660) (1,895,640)
Proceeds from sale of investment in
affiliate.................................... -- 900,000 --
---------- ---------- ----------
Net cash used in investing activities.......... (2,528,192) (1,804,286) (1,564,408)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (repayments of) credit
lines........................................ 1,200,000 (2,000,000) --
Principal repayments of long-term debt........ (230,049) (1,165,539) (94,727)
Net proceeds from issuance of long-term debt.. 1,000,000 2,000,000 --
Dividends paid................................ (1,130,000) (1,050,000) (3,940,000)
---------- ---------- ----------
Net cash provided by (used in) financing
activities.................................... 839,951 (2,215,539) (4,034,727)
---------- ---------- ----------
Net increase in cash and cash equivalents...... 337,652 1,652,507 376,544
Cash and cash equivalents, beginning of year... 749,685 1,087,337 2,739,844
---------- ---------- ----------
Cash and cash equivalents, end of year......... $1,087,337 $2,739,844 $3,116,388
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest......... $ 177,592 $ 95,775 $ 58,436
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization:
The Company is engaged primarily in retail sales of petroleum products
and convenience items through stores located in North Carolina and Virginia.
Basis of presentation:
The financial statements include only the accounts of Taylor Oil Company.
These statements do not include the accounts of Triad Terminal Company, a
wholly owned subsidiary, which is engaged in the petroleum thruput and storage
business.
Cash equivalents:
The Company considers all highly liquid debt instruments with a maturity
of three months or less to be cash equivalents.
Inventories:
Inventories are valued at the lower of cost or market with cost
determined by the last-in, first-out (LIFO) method.
Depreciation:
Depreciation expense is computed using the straight-line method over the
estimated useful lives of the assets.
Long-lived assets:
In accordance with SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of particular assets may not be recoverable.
For purposes of evaluating the recoverability of long-lived assets, the
recoverability test is performed using undiscounted net cash flows of the
individual stores and consolidated undiscounted net cash flows for long lived
assets not identifiable to individual stores.
Environmental cleanup matters:
The Company expenses environmental expenditures related to existing
conditions resulting from past or current operations and from which no current
or future benefit is discernible. Expenditures which extend the life of the
related property or mitigate or prevent future environmental contamination are
capitalized. The Company determines its liability on a site by site basis and
records an undiscounted liability when it is probable and can be reasonably
estimated. The Companys estimated costs are reduced by anticipated
reimbursements from state administered trust funds.
F-88
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Futures contracts:
The Company periodically enters into futures contracts to hedge its
exposure to price fluctuations on crude oil and refined products transactions.
Recognized gains and losses on hedge contracts are reported as a component of
the related transaction.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2--CONCENTRATIONS OF CREDIT RISK AND CONTINGENT LIABILITIES
Financial instruments which potentially subject the company to credit
risk consist of temporary cash investments, trade accounts receivable and notes
receivable. The Company regularly maintains cash balances in excess of
federally insured limits only with financial institutions of high credit
standing. Credit risk with respect to retail accounts receivable is limited due
to the large number of customers in different industries and localities, all of
whom are regularly reviewed for credit worthiness. Wholesale accounts
receivable risk is minimized by performing ongoing credit evaluations of each
customers financial condition. Risk of loss from notes receivable, which
generally arise from the sale of company properties, is limited by maintaining
a deed of trust on the underlying property.
Taylor Oil Company is contingently liable as a guarantor of a $1,000,000
line of credit and two letters of credit totaling $750,000 for related
corporations.
Historically, the Companys credit losses have been insignificant.
NOTE 3--INVENTORIES
<TABLE>
<CAPTION>
December 31,
1997 1998
---------- ----------
<S> <C> <C>
Inventories at FIFO cost
Merchandise...................................... $1,674,158 $2,171,856
Petroleum products............................... 2,409,994 1,218,674
---------- ----------
4,084,152 3,390,530
Less adjustment to LIFO cost
Merchandise...................................... (204,953) (229,360)
Petroleum products............................... (671,116) (454,183)
---------- ----------
Inventories at LIFO cost........................... $3,208,083 $2,706,987
========== ==========
</TABLE>
F-89
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following summarizes the income effect from application of the LIFO
(last-in, first-out) inventory costing method as opposed to the FIFO (first-in,
first-out) method:
<TABLE>
<CAPTION>
Increase (Decrease) in
Income
Year Ended December 31,
----------------------------
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Merchandise.................................. ($ 38,555) $ 15,536 ($24,407)
Petroleum products........................... (665,054) 651,884 216,933
--------- -------- --------
($703,609) $667,420 $192,526
========= ======== ========
</TABLE>
NOTE 4--NOTES RECEIVABLE
<TABLE>
<CAPTION>
December 31,
1997 1998
-------- --------
<S> <C> <C>
Notes receivable (3) from buyers of Company property
and equipment, secured by deeds of trust, payable in
monthly installments and balloon payments with
interest at nine and one-half percent................ $247,897 $235,165
Note receivable from shareholder, unsecured, payable
in quarterly installments of $50,000 plus interest at
eight percent, through September, 2000............... 550,000 350,000
-------- --------
797,897 585,165
Less principal due within one year.................... (212,732) (418,025)
-------- --------
Noncurrent notes receivable........................... $585,165 $167,140
======== ========
</TABLE>
Maturities of notes receivable are as follows:
<TABLE>
<S> <C>
1999.............................................................. $418,025
2000.............................................................. 155,559
2001.............................................................. 6,080
2002.............................................................. 5,501
--------
$585,165
========
</TABLE>
NOTE 5--OPERATIONAL PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
1997 1998
----------- -----------
<S> <C> <C>
Land............................................. $ 2,556,686 $ 2,786,686
Buildings........................................ 4,110,521 4,404,954
Petroleum equipment.............................. 17,069,454 16,980,210
Other equipment.................................. 533,495 594,488
Leasehold improvements........................... 2,993,319 2,985,785
Vehicles......................................... 491,925 502,141
Petroleum tank bottoms........................... 168,260 --
Construction in progress......................... 12,960 --
----------- -----------
27,936,620 28,254,264
Less accumulated depreciation.................... (15,887,667) (16,625,511)
----------- -----------
$12,048,953 $11,628,753
=========== ===========
</TABLE>
F-90
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 6--CONVENIENCE STORE LEASES
As of December 31, 1998, the Company leases 38 convenience store
properties, of which 30 are owned by Taylor Oil Company shareholders or other
related parties. Two other ancillary properties are leased by Taylor, one of
which is subleased. The following is a schedule of Taylors minimum future lease
payments per these operating lease agreements, most of which are for initial 10
year terms with renewal options.
<TABLE>
<CAPTION>
Gross Sublease
Rentals Income Net Rentals
------------ -------- -----------
<S> <C> <C> <C>
1999..................................... $ 1,356,660 $25,800 $ 1,330,860
2000..................................... 1,266,870 -- 1,266,870
2001..................................... 1,072,260 -- 1,072,260
2002..................................... 1,064,860 -- 1,064,860
2003..................................... 1,009,805 -- 1,009,805
Thereafter............................... 4,775,180 -- 4,775,180
------------ ------- -----------
$ 10,545,635 $25,800 $10,519,835
============ ======= ===========
</TABLE>
Total net rent expense for 1996, 1997 and 1998 was $1,308,267, $1,361,498
and $1,369,278 respectively. Of these totals, related parties were paid
$1,196,982 in 1996, $1,187,408 in 1997 and $1,188,978 in 1998.
NOTE 7--EQUITY INVESTMENTS
In May 1998, Taylor Oil Company shareholders made a contribution to the
Company of their twenty-five percent interest in Triad Terminal Company, a
pipeline terminal and petroleum storage facility. This capital contribution,
the market value of which was $1,200,000, increased Taylors ownership of Triad
to one hundred percent. Prior to April 1997, Taylor also owned a fifty percent
interest in Triad Terminal Company of Selma which was sold, at that time, to
Triad Terminal Company.
The Company reflects its investment in Triad Terminal Company at cost.
Generally accepted accounting principles require that the financial position
and results of operations of majority owned subsidiaries be consolidated with
those of the parent company. These financial statements therefore do not
present the financial position or results of operations of Taylor Oil Company
in accordance with generally accepted accounting principles for consolidated
entities.
The following is a summary of transactions between Taylor and these
related parties:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Taylor management services income.............. $456,000 $448,602 $444,000
Taylor expenses
Thruput and storage.......................... $383,535 $204,276 $364,142
Convenience store rentals.................... $232,692 $186,598 $203,640
</TABLE>
F-91
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 8--BANK LINES OF CREDIT
The Company has established credit lines totaling $5,000,000 with a North
Carolina bank consisting of a seasonal line for $3,000,000 and a revolving term
line for $2,000,000. Interest on both lines, which is based on LIBOR, is
payable monthly. Advances from the seasonal line, of which there were none at
December 31, 1998, are to be repaid annually. The revolving term loan
stipulates monthly payments equal to .00833 of the principal balance
outstanding with any remaining unpaid principal due on June 1, 2003. At
December 31, 1998, $2,000,000 was owed on the revolving term line of which
$199,920 has been reported as a current liability with the balance included in
long-term debt.
NOTE 9--LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
----------------------
<S> <C> <C>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Notes payable (2) to sellers for purchase of
convenience store property and equipment,
payable in quarterly installments with interest
at nine percent................................ $ 318,161 $ 223,434
Revolving term line--Note 8..................... 2,000,000 2,000,000
---------- ----------
2,318,161 2,223,434
Less principal due within one year.............. (194,687) (291,407)
---------- ----------
Noncurrent debt................................. $2,123,474 $1,932,027
========== ==========
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1999........................................................... $ 291,407
2000........................................................... 257,648
2001........................................................... 248,290
2002........................................................... 225,769
2003........................................................... 1,200,320
-----------
$ 2,223,434
===========
</TABLE>
NOTE 10--INCOME TAXES
Taylor Oil Company operates as an S corporation whereby only incidental
income taxes are paid at the corporate level. The earnings and other tax
attributes of the corporation flow through to the shareholders and become part
of their individual income tax returns.
NOTE 11--EMPLOYEE PROFIT SHARING PLAN
Taylor maintains a combination 401(k)/profit sharing plan for the benefit
of all employees meeting age and length of service requirements. Under the
plan, for each $1 of salary deferred by plan participants, up to three percent
of total compensation, Taylor will contribute $1. Taylor makes additional
contributions for the benefit of all eligible employees, with discretionary
contributions allocated based on participant compensation. Total Company
retirement plan expense was $300,000 for 1996, $338,000 for 1997 and $388,000
for 1998.
F-92
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 12--SUBSEQUENT EVENT
On January 14, 1999, Taylor Oil Company executed an agreement with The
Pantry, Inc. to sell its retail operations no later than March 18, 1999. The
Company, or its shareholders, will continue to own the convenience store real
property which will be leased to The Pantry pursuant to concurrently negotiated
long-term lease agreements. Taylor will pay severance benefits to its employees
aggregating approximately $1.3 million shortly after the sale is consummated.
F-93
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
The Pantry, Inc.
Common Stock
----------------
PROSPECTUS
----------------
Merrill Lynch & Co.
NationsBanc Montgomery Securities LLC
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses expected to be
incurred by the Company in connection with the sale and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimated except the Securities and Exchange
Commission registration fee, the National Association of Securities Dealers,
Inc. filing fee and the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
Payable by
the Company
-----------
<S> <C>
SEC registration fee........................................... $27,800
National Association of Securities Dealers, Inc. filing fee.... 10,500
Nasdaq National Market listing fee............................. *
Accounting fees and expenses................................... *
Legal fees and expenses........................................ *
Printing expenses.............................................. *
Premium related to Director's and Officer's liability
insurance..................................................... *
Registrar and Transfer Agent's fees............................ *
Miscellaneous fees and expenses................................ *
-------
Total........................................................ $ *
=======
</TABLE>
- --------
* To be provided by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the DGCL provides for the indemnification of officers,
directors and other corporate agents in terms sufficiently broad to indemnify
such persons under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act").
The Company intends to enter into agreements to indemnify its directors.
These agreements, among other things, will indemnify the Company's directors
for certain expenses (including attorneys' fees) and liabilities (including
judgments, fines, ERISA excise taxes and penalties, penalties and amounts paid
in settlement) incurred by such person in any action or proceeding, including
but not limited to any action by or in the right of the Company, on account of
services by that person as a director of the Company or as a director or
officer of any other company or enterprise that the person provides services to
at the request of the Company. The Company has purchased directors' and
officers' liability insurance. In the event that the Company shall be obligated
to pay the expenses and liabilities of any proceeding against its directors,
the Company will be entitled to assume the defense thereof. The Company will
not be obligated to indemnify any director or officer when it is determined
that such director's or officer's actions were in violation of the law or in
bad faith.
II-1
<PAGE>
The Purchase Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Company, and its directors and officers, severally but not
jointly, and by the Company of the Underwriters, for certain liabilities,
including liabilities arising under the Securities Act, and affords certain
rights of contribution with respect thereto.
Item 15. Recent Sales of Unregistered Securities
In November 1995, the Company sold (i) 329 shares of its common stock and
75.012 shares of its Series A preferred stock to Freeman Spogli in
consideration of $125,120 in cash, and (ii) 13,700 shares of its common stock
and 3,123.600 shares of its Series A preferred stock to affiliates of Chase in
consideration of $5,206,000 in cash.
In December 1996, the Company sold 17,500 shares of its Series B
preferred stock and warrants to purchase 46,000 shares of common stock to
Freeman Spogli in consideration of an aggregate of $17,500,002 in cash.
In October 1997, the Company sold (i) 59,421 shares of its common stock
to Freeman Spogli in consideration of $26,739,450 in cash, (ii) 11,690 shares
of its common stock to Chase in consideration of $5,260,500 in cash, and (iii)
889 shares of its common stock to Peter J. Sodini in consideration of (x)
$185,450 in cash and (y) $215,050 in the form of a secured promissory note to
the Company. Also in October 1997, all of the Company's issued and outstanding
Series A preferred stock was contributed back to The Pantry and cancelled.
In July 1998, the Company sold (i) 36,190 shares of its common stock to
Freeman Spogli in consideration of $20,809,250 in cash and (ii) 7,288 shares of
its common stock to Chase in consideration of $4,190,600 in cash.
The sale and issuance of the securities described above were deemed to be
exempt from registration under the Securities Act in reliance upon Section 4(2)
thereof, as transactions not involving a public offering. The purchasers in
such private offerings represented their intention to acquire the securities
for investment only and not with a view to distribution thereof. Appropriate
legends were affixed to the stock certificates issued in such transactions. All
recipients had adequate access, through employment or other relationships, to
information about the Company. No underwriter was employed with respect to any
such sales.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Purchase Agreement.
2.1(1) Stock Purchase Agreement dated August 26, 1997 by and between PH
Holding Corporation ("PH Holding") and Docks U.S.A., Inc.
2.2(1) Assignment and Assumption Agreement dated October 23, 1997 between PH
Holding and The Pantry.
2.3(2) Asset Purchase Agreement dated June 5, 1998 between Quick Stop Food
Mart, Inc. and the Company.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
-------- -----------------------
<C> <S>
2.4(3) Asset Purchase Agreement dated July 6, 1998 between Stallings Oil
Company and the Company.
2.5(4) Asset Purchase Agreement dated September 28, 1998, as amended on
November 5, 1998, by and among Express Stop, Inc., Bryan Oil
Company, Inc., Market Express of Shallotte, Inc., Lennon Oil
Company and the Company.
2.6(9) Purchase Agreement dated November 30, 1998 among Lil Champ Food
Stores, Inc. and the Selling Shareholders of Miller: Thomas A.
Miller, Joseph E. Miller, The Miller Investments Trust U/A dated
October 11, 1995 and The George C. Miller, Jr. Estate Trust U/A
dated June 30, 1989, and Miller Brothers and Circle Investments,
Ltd. and Miller.
2.7* Asset Purchase Agreement dated January 14, 1999 between Taylor Oil
Company and the Pantry.
3.1(1) Restated Certificate of Incorporation of The Pantry, as amended to
date.
3.2(11) Bylaws of The Pantry, as amended to date.
4.1(5) Indenture dated as of October 23, 1997 among The Pantry, Sandhills,
Lil' Champ (together with Sandhills, the "Guarantors") and United
States Trust Company of New York, as Trustee, with respect to the
10 1/4% Senior Subordinated Notes due 2007 (including the form of
10 1/4% Senior Subordinated Note due 2007).
4.2 Amended and Restated Registration Rights Agreement dated July 2,
1998 among The Pantry, FS Equity Partners III, L.P. ("FSEP III"),
FS Equity Partners IV, L.P. ("FSEP IV") FS Equity Partners
International, L.P. ("FSEP International"), Peter J. Sodini, Chase
Manhattan Capital, L.P., CB Capital Investors, L.P., and Baseball
Partners.
4.3 Amended and Restated Stockholders' Agreement dated July 2, 1998
among The Pantry, FSEP III, FSEP IV, FSEP International, Chase
Manhattan Capital, L.P., CB Capital Investors, L.P., Baseball
Partners and Peter J. Sodini.
10.1(6)(7) The Pantry, Inc. 1998 Stock Option Plan adopted January 1, 1998.
10.2 Form of Incentive Stock Option Agreement.
10.3(1) Stock Purchase Agreement dated October 23, 1997 among The Pantry,
FSEP III, FSEP International, CB Capital Investors, L.P. and Peter
J. Sodini.
10.4(1) Contribution to Capital Agreement dated October 23, 1997 among The
Pantry, FSEP III, FSEP International, Chase Manhattan Capital,
L.P., and Baseball Partners.
10.5(1) Stock Pledge Agreement dated October 23, 1997 between Peter J.
Sodini and The Pantry.
10.6(1) Secured Promissory Note dated October 23, 1997 between Peter J.
Sodini and The Pantry.
10.7(1)(7) Employment Agreement dated June 3, 1996 between Dennis R. Crook and
The Pantry (same form of agreement with Daniel McCormack and
Douglas Sweeney).
10.8(10) Amended and Restated Credit Agreement dated as of January 27, 1999
among The Pantry, the financial institutions listed therein
(collectively, "Lenders"), First Union National Bank ("First
Union"), as administrative agent, and Canadian Imperial Bank of
Commerce ("CIBC"), as syndication agent for Lenders.
10.9(1) Company Security Agreement dated as of October 23, 1997 between The
Pantry and First Union, as administrative agent.
10.10(1) Company Pledge Agreement dated as of October 23, 1997 between The
Pantry and First Union, as administrative agent.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.11(1) Company Trademark Security Agreement dated as of October 23, 1997
between The Pantry and First Union, as administrative agent.
10.12(1) Collateral Account Agreement dated as of October 23, 1997 between
The Pantry and First Union, as administrative agent.
10.13(1)(7) Employment Agreement dated October 1, 1997 between Peter J. Sodini
and The Pantry.
10.14(1) Form of Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (North
Carolina) dated October 23, 1997 among The Pantry, David R.
Cannon, as Trustee, and First Union as Agent.
10.15(1) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (South
Carolina) dated October 23, 1997 between The Pantry and First
Union, as Agent.
10.16(1) Form of Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (Tennessee)
dated October 23, 1997 among The Pantry, David R. Cannon, as
Trustee, and First Union, as Agent.
10.17(1) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases (Kentucky) dated October 23, 1997
between The Pantry and First Union, as Agent.
10.18(1) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (Indiana) dated
as of October 23, 1997 between The Pantry and First Union, as
Agent.
10.19(1) Form of Mortgage, Security Agreement, Assignment of Rents and
Leases and Fixture Filing (Florida) dated October 23, 1997
between Lil' Champ and First Union, as Agent.
10.20(1) Form of Deed to Secure Debt, Security Agreement, and Assignment of
Rents (Georgia) dated October 23, 1997 between Lil' Champ and
First Union, as Agent.
10.21 Form of Subsidiary Guaranty.
10.22 Form of Subsidiary Security Agreement.
10.23 Form of Subsidiary Pledge Agreement.
10.24 Form of Subsidiary Trademark Security Agreement.
10.25(8) The Pantry Inc. 1998 Stock Subscription Plan.
10.26 Form of Stock Subscription Agreement.
10.27 Stock Purchase Agreement dated July 2, 1998 among The Pantry, FSEP
IV and CB Capital Investors, L.P.
10.28 Distribution Service Agreement dated as of March 29, 1998 among
The Pantry, Lil' Champ and McLane Company, Inc., as amended
(asterisks located within the exhibit denote information which
has been deleted pursuant to a request for confidential treatment
filed with the Securities and Exchange Commission).
12.1 Statement re Computation of Earnings to Fixed Charges Ratio.
21.1 Subsidiaries of The Pantry.
23.1* Consent of Riordan & McKinzie (included as part of Exhibit 5.1).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of Cherry, Bekaert & Holland, L.L.P.
23.5 Consent of Griffin, Maxwell, Frazelle, P.A.
</TABLE>
II-4
<PAGE>
23.6 Consent of Edwards, Falls & Renegar, P.L.L.C.
24.1 Powers of Attorney (included on signature page).
- --------
* To be filed by amendment.
(1) Incorporated by reference to the exhibit designated by the same number in
the Company's Registration Statement on Form S-4 (Registration No. 333-
42811) (the "Form S-4").
(2) Incorporated by reference to the exhibit designated by exhibit number 2.1
in the Company's Current Report on Form 8-K dated July 17, 1998.
(3) Incorporated by reference to the exhibit designated by exhibit number 2.3
in the Company's Current Report on Form 8-K dated July 17, 1998.
(4) Incorporated by reference to the exhibit designated by exhibit number 2.1
in the Company's Current Report on Form 8-K dated November 6, 1998.
(5) Incorporated by reference to the exhibit designated by exhibit number 4.5
in the Company's Form S-4.
(6) Incorporated by reference to the exhibit designated by the same number in
the Company's Quarterly Report on Form 10-Q for the quarterly period ended
December 25, 1997.
(7) Represents a management contract or compensation plan arrangement.
(8) Incorporated by reference to the exhibit designated by the same number in
the Company's Annual Report on Form 10-K dated December 23, 1998.
(9) Incorporated by reference to the exhibit designated by exhibit 2.1 in the
Company's Current Report on Form 8-K dated February 5, 1999.
(10) Incorporated by reference to the exhibit designated by exhibit 10.1 in the
Company's Current Report on Form 8-K dated February 5, 1999.
(11) Incorporated by reference to the exhibit designated by the same number in
the Company's Annual Report on Form 10-K for the year ended September 28,
1995.
(b) Financial Statement Schedules
Schedule
--------
Schedule II Valuation and Qualifying Accounts
Schedules other than those referred to above have been omitted because
they are not applicable or not required or because the information is included
elsewhere in the Consolidated Financial Statements or the Notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-5
<PAGE>
The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sanford,
State of North Carolina, on the 10th day of March, 1999.
THE PANTRY, INC.
/s/ Peter J. Sodini
By: _________________________________
Peter J. Sodini
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter J. Sodini and William T. Flyg, and both of
them, his true and lawful attorneys-in-fact and agents, both with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments, including post-
effective amendments, to this Registration Statement, and any registration
statement relating to the offering covered by this Registration Statement and
filed pursuant to Rule 462(b) under the Securities Act of 1993, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and both of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact and agents or their
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Peter J. Sodini President, Chief Executive March 10, 1999
____________________________________ Officer and Director
Peter J. Sodini (Principal Executive
Officer)
/s/ William T. Flyg Senior Vice President and March 10, 1999
____________________________________ Chief Financial Officer
William T. Flyg (Principal Financial
Officer)
/s/ Joseph J. Duncan Vice President and Corporate March 10, 1999
____________________________________ Controller (Principal
Joseph J. Duncan Accounting Officer)
/s/ William M. Wardlaw Director March 10, 1999
____________________________________
William M. Wardlaw
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Charles P. Rullman Director March 10, 1999
____________________________________
Charles P. Rullman
/s/ Jon D. Ralph Director March 10, 1999
____________________________________
Jon D. Ralph
/s/ Todd W. Halloran Director March 10, 1999
____________________________________
Todd W. Halloran
/s/ Christopher C. Behrens Director March 10, 1999
____________________________________
Christopher C. Behrens
/s/ Peter M. Starrett Director March 10, 1999
____________________________________
Peter M. Starrett
</TABLE>
II-8
<PAGE>
THE PANTRY, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars In Thousands)
<TABLE>
<CAPTION>
Additions Deductions
Balance at Charged to Additions for Payments Balance
Beginning of Costs and Charged to or Write- at End
Period Expenses Goodwill offs of Period
------------ ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Year ended September 26,
1996:
Allowance for doubtful
accounts............. $ 251 $ (46) -- $ (55) $ 150
Reserve for
environmental
issues............... 5,720 617 -- (105) 6,232
Reserve for closed
stores............... 463 707 -- (210) 960
Deferred tax asset
valuation allowance.. 573 1,209 -- -- 1,782
------- ------ ------ ----- -------
$7,007 $2,487 -- (370) $ 9,124
======= ====== ====== ===== =======
Year ended September 25,
1997:
Allowance for doubtful
accounts............. $ 150 $ -- -- $ -- $ 150
Reserve for
environmental
issues............... 6,232 1,574 -- -- 7,806
Reserve for closed
stores............... 960 -- -- (10) 950
Deferred tax asset
valuation allowance.. 1,782 (96) $ -- -- 1,686
------- ------ ------ ----- -------
$ 9,124 $1,478 -- $ (10) $10,592
======= ====== ====== ===== =======
Year ended September 24,
1998:
Allowance for doubtful
accounts............. $ 150 $ 130 -- $ -- $ 280
Reserve for
environmental
issues............... 7,806 6,181 3,150 -- 17,137
Reserve for closed
stores............... 950 50 603 -- 1,603
Deferred tax asset
valuation allowance.. 1,686 750 -- -- 2,436
------- ------ ------ ----- -------
$10,592 $7,111 $3,753 $ -- $21,456
======= ====== ====== ===== =======
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Purchase Agreement.
2.1(1) Stock Purchase Agreement dated August 26, 1997 by and between PH
Holding Corporation ("PH Holding") and Docks U.S.A., Inc.
2.2(1) Assignment and Assumption Agreement dated October 23, 1997 between
PH Holding and The Pantry.
2.3(2) Asset Purchase Agreement dated June 5, 1998 between Quick Stop Food
Mart, Inc. and the Company.
2.4(3) Asset Purchase Agreement dated July 6, 1998 between Stallings Oil
Company and the Company.
2.5(4) Asset Purchase Agreement dated September 28, 1998, as amended on
November 5, 1998, by and among Express Stop, Inc., Bryan Oil
Company, Inc., Market Express of Shallotte, Inc., Lennon Oil
Company and the Company.
2.6(9) Purchase Agreement dated November 30, 1998 among Lil Champ Food
Stores, Inc. and the Selling Shareholders of Miller: Thomas A.
Miller, Joseph E. Miller, The Miller Investments Trust U/A dated
October 11, 1995 and The George C. Miller, Jr. Estate Trust U/A
dated June 30, 1989, and Miller Brothers and Circle Investments,
Ltd. and Miller.
2.7* Asset Purchase Agreement dated January 14, 1999 between Taylor Oil
Company and The Pantry.
3.1(1) Restated Certificate of Incorporation of The Pantry, as amended to
date.
3.2(11) Bylaws of The Pantry, as amended to date.
4.1(5) Indenture dated as of October 23, 1997 among The Pantry, Sandhills,
Lil' Champ (together with Sandhills, the "Guarantors") and United
States Trust Company of New York, as Trustee, with respect to the
10 1/4% Senior Subordinated Notes due 2007 (including the form of
10 1/4% Senior Subordinated Note due 2007).
4.2 Amended and Restated Registration Rights Agreement dated July 2,
1998 among The Pantry, FS Equity Partners III, L.P. ("FSEP III"),
FS Equity Partners IV, L.P. ("FSEP IV") FS Equity Partners
International, L.P. ("FSEP International"), Peter J. Sodini, Chase
Manhattan Capital, L.P., CB Capital Investors, L.P., and Baseball
Partners.
4.3 Amended and Restated Stockholders' Agreement dated July 2, 1998
among The Pantry, FSEP III, FSEP IV, FSEP International, Chase
Manhattan Capital, L.P., CB Capital Investors, L.P., Baseball
Partners and Peter J. Sodini.
10.1(6)(7) The Pantry, Inc. 1998 Stock Option Plan adopted January 1, 1998.
10.2 Form of Incentive Stock Option Agreement.
10.3(1) Stock Purchase Agreement dated October 23, 1997 among The Pantry,
FSEP III, FSEP International, CB Capital Investors, L.P. and Peter
J. Sodini.
10.4(1) Contribution to Capital Agreement dated October 23, 1997 among The
Pantry, FSEP III, FSEP International, Chase Manhattan Capital,
L.P., and Baseball Partners.
10.5(1) Stock Pledge Agreement dated October 23, 1997 between Peter J.
Sodini and The Pantry.
10.6(1) Secured Promissory Note dated October 23, 1997 between Peter J.
Sodini and The Pantry.
10.7(1)(7) Employment Agreement dated June 3, 1996 between Dennis R. Crook and
The Pantry (same form of agreement with Daniel McCormack and
Douglas Sweeney).
10.8(10) Amended and Restated Credit Agreement dated as of January 27, 1999
among The Pantry, the financial institutions listed therein
(collectively, "Lenders"), First Union National Bank ("First
Union"), as administrative agent, and Canadian Imperial Bank of
Commerce ("CIBC"), as syndication agent for Lenders.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.9(1) Company Security Agreement dated as of October 23, 1997 between
The Pantry and First Union, as administrative agent.
10.10(1) Company Pledge Agreement dated as of October 23, 1997 between The
Pantry and First Union, as administrative agent.
10.11(1) Company Trademark Security Agreement dated as of October 23, 1997
between The Pantry and First Union, as administrative agent.
10.12(1) Collateral Account Agreement dated as of October 23, 1997 between
The Pantry and First Union, as administrative agent.
10.13(1)(7) Employment Agreement dated October 1, 1997 between Peter J. Sodini
and The Pantry.
10.14(1) Form of Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (North
Carolina) dated October 23, 1997 among The Pantry, David R.
Cannon, as Trustee, and First Union as Agent.
10.15(1) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (South
Carolina) dated October 23, 1997 between The Pantry and First
Union, as Agent.
10.16(1) Form of Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (Tennessee)
dated October 23, 1997 among The Pantry, David R. Cannon, as
Trustee, and First Union, as Agent.
10.17(1) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases (Kentucky) dated October 23, 1997
between The Pantry and First Union, as Agent.
10.18(1) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (Indiana) dated
as of October 23, 1997 between The Pantry and First Union, as
Agent.
10.19(1) Form of Mortgage, Security Agreement, Assignment of Rents and
Leases and Fixture Filing (Florida) dated October 23, 1997
between Lil' Champ and First Union, as Agent.
10.20(1) Form of Deed to Secure Debt, Security Agreement, and Assignment of
Rents (Georgia) dated October 23, 1997 between Lil' Champ and
First Union, as Agent.
10.21 Form of Subsidiary Guaranty.
10.22 Form of Subsidiary Security Agreement.
10.23 Form of Subsidiary Pledge Agreement.
10.24 Form of Subsidiary Trademark Security Agreement.
10.25(8) The Pantry Inc. 1998 Stock Subscription Plan.
10.26 Form of Stock Subscription Agreement.
10.27 Stock Purchase Agreement dated July 2, 1998 among The Pantry, FSEP
IV and CB Capital Investors, L.P.
10.28 Distribution Service Agreement dated as of March 29, 1998 among
The Pantry, Lil' Champ and McLane Company, Inc., as amended
(asterisks located within the exhibit denote information which
has been deleted pursuant to a request for confidential treatment
filed with the Securities and Exchange Commission).
12.1 Statement re Computation of Earnings to Fixed Charges Ratio.
21.1 Subsidiaries of The Pantry.
23.1* Consent of Riordan & McKinzie (included as part of Exhibit 5.1).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Deloitte & Touche LLP.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
23.4 Consent of Cherry, Bekaert & Holland, L.L.P.
23.5 Consent of Griffin, Maxwell, Frazelle, P.A.
23.6 Consent of Edwards, Falls & Renegar, P.L.L.C.
24.1 Powers of Attorney (included on signature page).
</TABLE>
- --------
* To be filed by amendment.
(1) Incorporated by reference to the exhibit designated by the same number in
the Company's Registration Statement on Form S-4 (Registration No. 333-
42811) (the "Form S-4").
(2) Incorporated by reference to the exhibit designated by exhibit number 2.1
in the Company's Current Report on Form 8-K dated July 17, 1998.
(3) Incorporated by reference to the exhibit designated by exhibit number 2.3
in the Company's Current Report on Form 8-K dated July 17, 1998.
(4) Incorporated by reference to the exhibit designated by exhibit number 2.1
in the Company's Current Report on Form 8-K dated November 6, 1998.
(5) Incorporated by reference to the exhibit designated by exhibit number 4.5
in the Company's Form S-4.
(6) Incorporated by reference to the exhibit designated by the same number in
the Company's Quarterly Report on Form 10-Q for the quarterly period ended
December 25, 1997.
(7) Represents a management contract or compensation plan arrangement.
(8) Incorporated by reference to the exhibit designated by the same number in
the Company's Annual Report on Form 10-K dated December 23, 1998.
(9) Incorporated by reference to the exhibit designated by exhibit 2.1 in the
Company's Current Report on Form 8-K dated February 5, 1999.
(10) Incorporated by reference to the exhibit designated by exhibit 10.1 in the
Company's Current Report on Form 8-K dated February 5, 1999.
(11) Incorporated by reference to the exhibit designated by the same number in
the Company's Annual Report on Form 10-K for the year ended September 28,
1995.
<PAGE>
Exhibit 4.2
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
by and among
THE PANTRY, INC.,
FS EQUITY PARTNERS III, L.P.,
FS EQUITY PARTNERS IV, L.P.
FS EQUITY PARTNERS INTERNATIONAL, L.P.,
CHASE MANHATTAN CAPITAL, L.P.,
CB CAPITAL INVESTORS, L.P.,
BASEBALL PARTNERS
and
PETER J. SODINI
July 2, 1998
<PAGE>
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this "Agreement")
is made and entered into as of July 2, 1998 by and between The Pantry, Inc., a
Delaware corporation (the "Company"), FS Equity Partners III, L.P., a Delaware
limited partnership ("FSEP III"), FS Equity Partners IV, L.P., a Delaware
limited partnership ("FSEP IV"), FS Equity Partners International, L.P., a
Delaware limited partnership ("FSEP International;" FSEP III, FSEP IV and FSEP
International are sometimes collectively referred to herein as the "FS
Entities"), Peter J. Sodini, an individual ("Sodini"), Chase Manhattan Capital,
L.P., a Delaware limited partnership, as successor-in-interest to Chase
Manhattan Capital Corporation, a Delaware corporation ("Chase"), CB Capital
Investors, L.P., a Delaware limited partnership ("CBC"), and Baseball Partners,
a New York general partnership ("BP;" Chase, CBC and BP are sometimes
collectively referred to herein as the "Chase Entities"). The FS Entities, the
Chase Entities and Sodini are sometimes collectively referred to as the
"Holders" and individually as the "Holder."
R E C I T A L S
- - - - - - - -
A. The Company, FSEP III, FSEP International, Chase, CBC and BP have
previously entered into an Amended and Restated Registration Rights Agreement
(the "Common Stock Registration Rights Agreement") dated as of October 23, 1997
with respect to an aggregate of One Hundred Eighty-Six Thousand Twenty-Nine
(186,029) shares of the Company's common stock, par value $0.01 per share (the
"Common Stock"), held by such parties;
B. Pursuant to that certain Stock Purchase Agreement (the "Stock Purchase
Agreement") dated July 2, 1998 and entered into by and among the Company, FSEP
IV and CBC (collectively, the "Purchasers"), the Purchasers have agreed to
purchase and the Company has agreed to sell to the Purchasers an aggregate of
Forty-Three Thousand Four Hundred Seventy-Eight (43,478) shares of Common Stock
(all such shares of Common Stock purchased pursuant to the Stock Purchase
Agreement and the One Hundred Eighty-Six Thousand Twenty-Nine (186,029) shares
of Common Stock defined as Registrable Securities under the Common Stock
Registration Rights Agreement, together with any other securities for which or
into which they may be converted or exchanged, shall be referred to herein as
the "Registrable Securities");
C. Section 17 of the Common Stock Registration Rights Agreement provides
that the Common Stock Registration Rights Agreement may be amended by written
instrument executed by the Company and the holders of at least fifty percent
(50%) of the Registrable
<PAGE>
Securities, as defined therein, (i) held by the FSEP III and FSEP International
and (ii) held by the Chase Entities;
D. FSEP III, FSEP International and the Chase Entities collectively own
at least fifty percent (50%) of the Registrable Securities, as defined in the
Common Stock Registration Rights Agreement, held by each of FSEP III and FSEP
International and the Chase Entities, and hereby desire to amend and restate the
Common Stock Registration Rights Agreement in its entirety; and
E. The Board of Directors of the Company (the "Board") has approved this
Agreement and the transactions contemplated hereby, upon the terms and subject
to the conditions set forth herein.
A G R E E M E N T
- - - - - - - - -
1. Termination of Common Stock Registration Rights Agreement. Effective
---------------------------------------------------------
as of the date hereof, and simultaneous with the consummation of the
transactions contemplated by the Stock Purchase Agreement, the Common Stock
Registration Rights Agreement shall terminate and be of no further force or
effect.
2. Restrictions on Transfer. Notwithstanding any provision contained in
------------------------
this Agreement to the contrary, the Registrable Securities shall not be
transferable except upon the conditions specified in this Agreement, which
conditions are intended, among other things, to insure compliance with the
provisions of the Securities Act of 1933, as amended (the "Securities Act"), in
respect of the transfer of such Registrable Securities. Each Holder, on the
execution and delivery of this Agreement, agrees that such Holder will not
transfer the Registrable Securities prior to delivery to the Company of an
opinion of counsel (as such opinion and such counsel are described in Section 3
of this Agreement), or until registration of such Registrable Securities under
the Securities Act has become effective.
3. Opinion of Counsel. In connection with any exercise or transfer of
------------------
the Registrable Securities, the following provisions shall apply:
(a) If in the opinion of Riordan & McKinzie, or such other counsel as
shall reasonably be approved by the Company, the proposed transfer of
Registrable Securities may be effected without registration of such Registrable
Securities under the Securities Act, each Holder shall be entitled to transfer
such Registrable Securities in accordance with the proposed method of
disposition.
(b) If, in the opinion of such counsel the proposed transfer of such
Registrable Securities may not be effected without registration of such
Registrable Securities under the Securities Act, then none of the Holders shall
be entitled to transfer such Registrable Securities until such registration is
effected.
<PAGE>
(c) Chase may transfer Registrable Securities within the "Chase
Capital Group" without complying with the above opinion procedures provided that
the transferee agrees to be bound by all provisions of this Agreement. "Chase
Capital Group" means and includes (i) Chase, (ii) CBC, (iii) entities that are
Affiliates (as defined in the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of Chase or CBC and (iv) entities the majority of the equity
owners of which are employees, officers or directors of any of the foregoing.
BP may transfer Registrable Securities to a member of the Chase Capital Group in
the manner described in Section 6(b) of that certain Amended and Restated
Stockholders' Agreement dated as of an even date herewith (the "Stockholders'
Agreement") by and among the Company and the Holders.
4. Demand Registration.
-------------------
(a) Upon the written request of the Holder or Holders of at least
fifty percent (50%) of the Registrable Securities (the "Initiating Holders") the
Company shall be obligated to effect the registration under the Securities Act
of such Registrable Securities as are requested to be registered by the
Initiating Holders, all in accordance with the following provisions of this
Agreement, provided that the obligation of the Company to effect such
registration shall not be deemed to have been satisfied until the registration
statement with respect thereto has become effective under the Securities Act and
only so long as no stop order suspending the effectiveness of the registration
statement or the qualification or registration of any of the Registrable
Securities for sale in any jurisdiction in which the Company shall be required
pursuant to Section 6(d) to register or qualify such Registrable Securities
shall not have been issued and no proceedings for that purpose shall have been
initiated or threatened by the Securities and Exchange Commission (the
"Commission") or any similar state agency. Within ten (10) days of the request
for registration by the Initiating Holders, the Company shall give written
notice of such request to all Holders, who shall be entitled, by written notice
to the Company and subject to Section 5(a) hereof, to include shares of
Registrable Securities in any registration prepared by the Company pursuant to
this Section 4(a). The Company shall not be obligated to effect more than three
(3) demand registrations pursuant to this Section 4(a).
(b) In addition to the registration rights provided pursuant to
Section 4(a) hereof, at any time and from time to time after six months
following a firm commitment underwritten initial public offering of the
Company's Common Stock (an "IPO"), upon the written request of the Initiating
Holders, or at the request of any Holder which agrees to register Registrable
Securities having a value of Five Million Dollars ($5,000,000) or more after an
IPO, the Company shall be obligated to effect the registration under the
Securities Act on Form S-3 (if the Company is then eligible to use such
registration form), or any similar short form registration adopted by the
Commission for which the Company may then be eligible, of all or any portion of
the Registrable Securities held by such Holder, all in accordance with the
applicable provisions of this Agreement.
<PAGE>
(c) Whenever the Company shall be requested by the Initiating Holders
pursuant to Section 4(a) or by a Holder pursuant to Section 4(b) to effect the
registration of Registrable Securities under the Securities Act, the Company
shall, as provided in Section 5, effect the registration under the Securities
Act of the Registrable Securities which the Company has been requested to
register pursuant to Section 4(a) or (b), all to the extent requisite to permit
the disposition by such Holder of the Registrable Securities so registered.
(d) In connection with requesting registration of Registrable
Securities pursuant to Section 4(a) or (b), if the Initiating Holders or a
Holder in the case of Section 4(b) advise the Company that they intend to
publicly offer or distribute Registrable Securities to be covered by the
registration statement pursuant to a firm commitment underwriting with an
investment banking firm or firms selected by the Holders, the Company and any
other person entitled to include shares of Common Stock in such registration
statement shall enter into the same underwriting agreement with such underwriter
or underwriters as shall such Holders, containing representations, warranties
and agreements not substantially different from those customarily made by an
issuer or selling shareholder in underwriting agreements with respect to
secondary distributions.
(e) Neither the Company nor any of its security holders (other than
the Holders) shall have the right to include any securities of the Company in a
registration requested pursuant to Section 4(a) or (b) unless (i) such
securities are of the same class as any of the Registrable Securities included
in such registration and (ii) the offering is either (x) not being underwritten
and the Holders of a majority of the Registrable Securities requesting
registration consent to such inclusion in writing or (y) a firm commitment
underwriting and the managing underwriter has informed the Holders that
inclusion of such securities will not adversely affect the price range or the
probability of success of the offering and such securities are allocated as
provided in Section 4(f) and sold on the same terms and conditions as apply to
the Registrable Securities being sold. If any security holders of the Company
(other than the Holders) register securities of the Company in a registration in
accordance with the provisions of Section 4(a) or (b), such security holders
shall pay their pro rata share of the Registration Expenses, as defined below,
unless the Company has agreed to pay such expenses and, in the opinion of
counsel to the Holders, such payment would not affect the ability of the
Registrable Securities to be registered or qualified under the blue sky laws of
any jurisdiction.
(f) If the Company or any of its security holders request the right to
include equity securities in a registration statement filed pursuant to Section
4(a) or (b) and such securities are proposed to be sold in a firm commitment
underwritten offering and the managing underwriters advise the Company that, in
their opinion, the total number of securities requested to be included in such
registration exceeds the number of securities which can be sold in such offering
without adversely affecting the price range or probability of success of such
offering, the securities to be included in such offering shall include (i)
first, all of the Registrable Securities being registered, (ii) second, pro rata
among the other holders of the Company's securities requesting inclusion in such
registration on the basis of the number of shares of
<PAGE>
securities requested to be registered by such holders and (iii) third, such
other securities being offered by the Company.
5. "Piggyback" Registrations.
-------------------------
(a) If the Company at any time or from time to time after the IPO,
proposes to file with the Commission a registration statement under the
Securities Act (other than a registration statement on Form S-4 or S-8, or any
form substituting therefor, or filed in connection with an exchange offer) for
the sale of shares of Common Stock, it will at each such time give written
notice to each Holder of its intention so to do. Upon the written request of
any Holder, the Company will use its best efforts to cause each Registrable
Security which the Company has been requested to register by any Holder, in the
aggregate, to be included in such registration statement under the Securities
Act, all to the extent required to permit the sale or other disposition by each
such Holder of the Registrable Securities so registered. Notwithstanding the
foregoing, if the managing underwriter or underwriters, if any, of the offering
to be effected pursuant to such registration statement delivers a written
opinion to each Holder requesting the registration of Registrable Securities
that the total number of shares of Common Stock which it and any other persons
or entities intend to include in such offering would adversely affect the price
range or probability of success of such offering, then the Company shall include
in such registration: (i) first, all securities the Company proposes to sell,
and (ii) second, all Registrable Securities requested to be included in such
registration by any Holders and all securities of the Company requested to be
included in such registration by any other holders of Securities who are
entitled to include securities in such registration pursuant to written
registration rights agreements approved by the Board of Directors of the Company
(the "Other Stockholders") in excess of the number of shares of its securities
of the Company proposes to sell which, in the opinion of such underwriters, can
be sold without adversely affecting the price range or probability of success of
such offering (allocated pro rata among such Holders and the Other Stockholders
on the basis of the number of shares of such securities requested to be included
therein).
(b) If all or substantially all of the securities (other than the
Registrable Securities) to be registered for sale pursuant to a registration
statement, the intention to file which caused a notice to be given pursuant to
Section 5(a), are to be offered for sale for the account of the Company and are
to be distributed by or through an underwriter or underwriters of recognized
standing pursuant to underwriting terms appropriate for such transactions, then
each Holder agrees that such Holder shall forbear from selling Registrable
Securities to the public (except as part of such underwritten registration)
pursuant to a registration statement or pursuant to Rule 144 or 144A under the
Securities Act for a period of fourteen (14) business days prior to and one
hundred twenty (120) days following the effective date of the registration
statement to which reference is made in Section 5(a).
(c) Notwithstanding anything contained herein to the contrary, if the
FS Entities are permitted to include any Registrable Securities in the IPO then
each other Holder shall also be permitted to include a pro rata portion of the
Registrable Securities held thereby.
<PAGE>
6. Company's Obligations in Registration. If and whenever the Company is
-------------------------------------
obligated by the provisions of this Agreement to effect the registration of
Registrable Securities under the Securities Act, the Company will, as
expeditiously as possible,
(a) prepare and file with the Commission a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become and remain effective during the period required
for the distribution of the securities covered by the registration statement,
provided that, if the Registrable Securities covered by such registration
statement are not to be sold to or through underwriters acting for the Company,
the Company shall not be required to keep such registration statement effective,
or to prepare and file any amendment or supplement thereto, after the expiration
of one hundred eighty (180) days following the date on which such registration
statement becomes effective under the Securities Act or such longer period
during which the Commission requires that such registration statement be kept
effective with respect to any of the Registrable Securities so registered;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective and
to comply with the provisions of the Securities Act with respect to the
disposition of all Registrable Securities covered by such registration
statement, whenever any Holder shall desire to dispose of the same, subject,
however, to the proviso contained in Section 6(a) and provided that in any event
the Company's obligations under this Section 6(b) shall terminate on the first
anniversary of the effective date of any such registration statement;
(c) furnish to each Holder such number of copies of such registration
statement, each amendment and supplement thereto, the prospectus included in
such registration statement (including each preliminary prospectus) and such
other documents as such Holder may reasonably request in order to facilitate the
disposition of such Registrable Securities;
(d) make the Chairman of the Board of Directors of the Company, the
Chief Executive Officer and other members of the management of the Company
available to cooperate fully in any offering of Registrable Securities
hereunder, which cooperation shall include, among other things, the
participation of such persons in meetings with potential investors and the
assistance of such persons with the preparation of all materials for such
investors;
(e) use its best efforts to register or qualify the Registrable
Securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as each Holder shall reasonably request, and
do any and all other acts and things to so register or qualify which may be
necessary or advisable to enable such Holder to consummate the disposition in
such jurisdictions of such Registrable Securities;
<PAGE>
(f) if at any time a prospectus relating to the Registrable Securities
covered by such registration statement is required to be delivered under the
Securities Act and any event occurs as a result of which the prospectus included
in such registration statement as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if it is necessary at any time to amend the
prospectus to comply with the Securities Act, the Company promptly will prepare
and file with the Commission an amendment or supplement which will correct such
statement or omission or an amendment which will effect such compliance and
shall use its best efforts to cause any amendment of such registration statement
containing an amended prospectus to be made effective as soon as possible; and
(g) furnish to each Holder at the time of the disposition of
Registrable Securities by such Holder an opinion of counsel for the Company, in
form and substance satisfactory to such Holder, to the effect that (i) a
registration statement covering such Registrable Securities has been filed with
the Commission under the Securities Act and has been made effective by order of
the Commission, (ii) such registration statement and the prospectus contained
therein comply in all material respects with the requirements of the Securities
Act, and nothing has come to said counsel's attention which would cause it to
believe that either such registration statement or the prospectus contains any
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, (iii) the
prospectus meeting the delivery requirements of the Securities Act is available
for delivery, (iv) no stop order has been issued by the Commission suspending
the effectiveness of such registration statement and, to the best of such
counsel's knowledge, no proceedings for the issuance of such a stop order are
threatened or contemplated, and (v) there has been compliance with the
applicable provisions of the securities or blue sky laws of each jurisdiction in
which the Company shall be required pursuant to Section 6(d) hereof to register
or qualify such Registrable Securities, assuming the accuracy and completeness
of the information furnished to such counsel with respect to each filing related
to such laws.
7. Payment of Registration Expenses. The costs and expenses of all
--------------------------------
"piggyback" registrations and qualifications under the Securities Act pursuant
to Section 5 hereof, all registrations and qualifications under the Securities
Act pursuant to Section 4(b) hereof and three (3) demand registrations and
qualifications under the Securities Act pursuant to Section 4(a), and of all
other actions which the Company is required to take or effect pursuant to this
Agreement shall be paid by the Company (including without limitation all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company and for each Holder and expenses of any special audit
incident to or required in connection with any such registration) (collectively,
"Registration Expenses"), provided that the Company shall not be obligated to
pay the underwriters' discount or commission in respect of such Registrable
Securities.
<PAGE>
8. Information From Each Holder. Notices and requests delivered by any
----------------------------
Holder to the Company pursuant to this Agreement shall contain such information
regarding the Holder, such Holder's Registrable Securities and the intended
method of disposition thereof as shall reasonably be required in connection with
the action to be taken.
9. Restrictions on Public Sale by the Company and Others. The Company
-----------------------------------------------------
shall not effect any public sale or distribution of any of its equity
securities, or cause to be effected any other registration of such securities
(other than securities issued pursuant to an employee benefit plan), during the
fourteen (14) business days prior to, and during the one hundred twenty (120)-
day period beginning on the effective date of a registration statement covering
the Registrable Securities (the "Holdback Period"), and the Company shall cause
each holder of its equity securities (other than securities purchased in a
registered public offering) issued after November 30, 1995 to agree not to
effect any public sale or distribution of any securities during such period,
except as part of such registration, if permitted. Each Holder agrees not to
effect any public sale or distribution of such securities during any Holdback
Period with respect to securities that the Company issued or agreed to be issued
prior to November 30, 1995, except pursuant to a registration covering the
Registrable Securities effected pursuant to Section 5 hereof.
10. Participation in Underwritten Registrations. No Holder may
-------------------------------------------
participate in any underwritten registration hereunder unless such Holder (i)
agrees to sell such Holder's securities on the basis provided in any
underwriting arrangements approved by the Holders and (ii) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements and this Agreement, provided that (x) if the FS
Entities or any of their Affiliates, or the Chase Entities or any of their
Affiliates participate in such registration, such parties will not be required
to make any representations or warranties except those that relate solely to
such parties and (y) the liability of the FS Entities or any of their
Affiliates, and the Chase Entities or any of their Affiliates to any underwriter
under such underwriting agreement will be limited to liability arising from
misstatements in, or omissions from, written information regarding such parties
provided by or on behalf of such parties for inclusion in the prospectus and
shall be limited to proceeds received by such Holder from the offering.
11. Company's Indemnification. In the event of any registration under the
-------------------------
Securities Act of Registrable Securities pursuant to this Agreement, the Company
hereby agrees to indemnify and hold harmless each Holder and each other person,
if any, who controls each such Holder within the meaning of Section 15 of the
Securities Act and each other person (including any underwriter) who
participates in the offering of such Registrable Securities, against any loss,
claim, damage or liability, joint or several, to which any Holder or such
controlling person or a participating person may become subject under the
Securities Act, the Exchange Act or other federal or state law or regulation, at
common law or otherwise, to the extent that such loss, claim, damage or
liability (or proceeding in respect thereof) arises out of or is based upon any
untrue statement or alleged untrue statement of any material fact contained in
any registration statement under which such Registrable Securities were
registered under the
<PAGE>
Securities Act, in any preliminary prospectus or final prospectus contained
therein, or in any amendment or supplement thereto, or arises out of or is based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse each Holder and each such controlling person or participating
person for any legal or other expense reasonably incurred by such Holder or such
controlling person or participating person in connection with investigating or
defending any such loss, claim, damage, liability or proceeding, provided that
the Company will not be liable in any such case to the extent that any such
loss, claim, damage, liability or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, said preliminary or final prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Holder or such controlling or participating person, as the case may be,
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the Company may otherwise have.
12. Indemnification of Each Holder. It shall be a condition of the
------------------------------
Company's obligation under this Agreement to effect any registration under the
Securities Act that there shall have been delivered to the Company an agreement
or agreements duly executed by each Holder whereby each Holder, severally but
not jointly, agrees to indemnify and hold harmless the Company, each other
person referred to in subparts (1), (2) and (3) of Section 11(a) of the
Securities Act in respect of such registration statement and each other person,
if any, which controls the Company within the meaning of Section 15 of the
Securities Act, against any loss, claim, damage or liability, joint or several,
to which the Company or such other person or such person controlling the Company
may become subject under the Securities Act, the Exchange Act or other federal
or state law or regulation, at common law or otherwise, but only to the extent
that such loss, claim, damage or liability (or proceeding in respect thereof)
arises out of or is based upon any untrue statement or alleged untrue statement
of a material fact contained in any registration statement under which such
Registrable Securities were registered under the Securities Act, in any
preliminary prospectus or final prospectus contained therein or in any amendment
or supplement thereto, or arises out of or is based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, which, in each such
case, has been made in or omitted from such registration statement, said
preliminary or final prospectus or said amendment or supplement in reliance upon
and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder specifically for use in the preparation
thereof. Such indemnification shall be limited to proceeds received by such
Holder from the offering.
13. Notification of and Participation in Actions. Promptly after receipt
--------------------------------------------
by an indemnified party under this Agreement of notice of the commencement of
any action, such indemnified party shall, if a claim in respect thereof is to be
made against the indemnifying party under this Agreement, notify the
indemnifying party in writing of the commencement thereof, but the omission so
to notify the indemnifying party will not affect the liability of the
<PAGE>
indemnifying party hereunder except to the extent it is actually prejudiced by
such omission and will not relieve it from any liability which it may have to
any indemnified party otherwise than under this Agreement. In case any such
action is brought against any indemnified party and it notifies an indemnifying
party of the commencement thereof, the indemnifying party will be entitled to
participate in and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so as to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under this Agreement for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation.
14. Contribution.
------------
(a) If the indemnification provided for in this Agreement from the
indemnifying party is unavailable to an indemnified party hereunder in respect
of any losses, claims, damages or liabilities to which such indemnified party
would be otherwise entitled under this Agreement, then the indemnifying party,
in lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities in such proportion as is appropriate to reflect the
relative fault of the indemnifying party and the indemnified parties in
connection with the actions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative fault of such indemnifying party and indemnified parties shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact, has been made by, or relates to
information supplied by, such indemnifying party or indemnified parties, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action. The amount paid or payable by a party as a
result of the losses, claims, damages and liabilities referred to above shall be
deemed to include any legal or other fees or expenses reasonably incurred by
such party in connection with any investigation or proceeding. In no event
shall any Holder be required to contribute an amount greater than the dollar
amount of the net proceeds received by such Holder with respect to the sale of
Registrable Securities to which such losses, claims, damages or liabilities
relates.
(b) The Company and each Holder agree that it would not be just and
equitable if contribution pursuant to this Agreement were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
Neither the Company nor any Holder, if guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act), shall be entitled
to contribution. The contribution provided for in this Agreement shall survive
the transfer of the Registrable Securities and shall remain in full force and
effect regardless of any investigation made by or on behalf of any indemnified
party.
<PAGE>
15. Public Information. At any time after the Company has completed its
------------------
initial public offering of Common Stock, if any Holder desires to make sales of
any Registrable Securities in reliance on Rule 144 promulgated under the
Securities Act the Company covenants and agrees that either there will be
available adequate current public information with respect to the Company as
required by paragraph (c) of said Rule 144 or the Company will use its best
efforts to make such information available without delay if such information is
not available. Without limiting the foregoing, after the Company has completed
its initial public offering of Common Stock, the Company will timely file with
the Commission all reports required to be filed under Sections 13 and 15(d) of
the Exchange Act and will promptly furnish to each Holder, upon request, a
written statement that the Company has complied with all such reporting
requirements.
16. Subsequent Offerings of Shares. The Company hereby grants to each
------------------------------
Holder the right of first refusal to purchase, pro rata, all or any part of any
Additional Securities, as defined below, which the Company may, from time to
time, propose to sell and issue. A Holder's pro rata share, for purposes of
this right of first refusal, shall be such Holder's percentage interest in the
shares of Common Stock then outstanding (assuming, for purposes of such
percentage interest, complete conversion of all outstanding convertible
securities and complete exercise of any and all outstanding options and warrants
of the Company). This right of first refusal shall be subject to the following
provisions:
(a) "Additional Securities" shall mean any shares of capital stock of
the Company, including any shares of Common Stock or of preferred stock, whether
now authorized or not, and any rights, options or warrants to purchase such
shares, and securities of any type whatsoever that are, or may become,
convertible into such shares, provided that "Additional Securities" do not
include (i) any securities that are issued on a proportional basis to all of the
holders of Common Stock, (ii) any securities that are issued or issuable in
connection with any public offering of shares of Common Stock by the Company,
(iii) any securities issued pursuant to the acquisition of another corporation
by the Company, (iv) any of the Company's Common Stock (or related options
exercisable for such Common Stock) issued to employees, officers and directors
of, and consultants to, the Company, pursuant to any arrangement approved by the
Board of Directors of the Company, (v) any securities issued upon conversion or
exercise of any convertible securities, options or warrants, provided that the
rights of first refusal established by this Section 16 first applied or were
properly waived with respect to the initial sale or grant by the Company of such
convertible securities, options or warrants, (vi) any securities issued in
connection with any stock split, stock dividend or recapitalization by the
Company, and (vii) any securities issued in connection with an issuance of debt
securities of the Company where the primary purpose of such issuance is to
provide debt financing for the Company.
(b) In the event the Company proposes to undertake an issuance of
Additional Securities, it shall give each Holder written notice of its
intention, describing the type of Additional Securities, and the price and terms
upon which the Company proposes to issue the same. Each Holder shall have
fifteen (15) days from the date of receipt of any such
<PAGE>
notice to agree to purchase up to such Holder's pro rata share of such
Additional Securities for the price and upon the terms specified in the notice
by giving written notice to the Company and stating therein the quantity of
Additional Securities to be purchased.
(c) If a Holder fails to exercise the right of first refusal within
such fifteen (15) days period, the Company shall have ninety (90) days
thereafter to sell the Additional Securities with respect to which a Holder's
option was not exercised, at the price and upon terms no more favorable to the
purchasers of such securities than specified in the Company's notice. In the
event the Company has not sold the Additional Securities within said ninety (90)
day period, the Company shall not thereafter issue or sell any Additional
Securities, without first offering such securities to the Holders in the manner
provided in Section 16.
(d) The rights granted to a Holder under this Section 16 shall
terminate (i) upon completion of the Company's initial public offering of Common
Stock pursuant to an effective registration statement that results in gross
proceeds to the Company of Twenty Million Dollars ($20,000,000) or more or (ii)
upon the sale by a Holder of more than fifty percent (50%) of the shares of
Common Stock held by such Holder on the date of such sale, provided that a
transfer within the Chase Capital Group will not count against this limitation
if made in accordance with the provisions of Section 6 of the Stockholders
Agreement of even date herewith.
17. Amendments. This Agreement may not be amended, supplemented, canceled
----------
or discharged except by written instrument executed by the Company and the
holders of at least fifty percent (50%) of the Registrable Securities held by
the FS Entities and fifty percent (50%) of the Registrable Securities held by
the Chase Entities.
18. Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
and be binding upon the successors and assigns of each of the parties, provided,
however, that the registration and other rights set forth in this Agreement may
only be assigned to a purchaser of at least fifty percent (50%) of the
Registrable Securities held by such party on the date of such sale, provided
that the Chase Entities may transfer their rights within the Chase Capital Group
subject to and in accordance with the provisions of Section 6 of the
Stockholders' Agreement.
19. Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same Agreement and
each of which shall be deemed an original.
20. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of North Carolina, without regard to
principles of conflicts of laws.
21. Entire Agreement. This Agreement is intended by the parties hereto as
----------------
a final expression of their agreement, and is intended to be a complete and
exclusive statement of the parties hereto in respect of the subject matter
contained herein. This Agreement is intended to
<PAGE>
and does hereby supersede and restate entirely in all respects the Common Stock
Registration Rights Agreement.
[THE REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by an officer or partner thereunto duly authorized, all as of the date
first written above.
THE PANTRY, INC.,
a Delaware corporation
By: /s/ Peter J. Sodini
--------------------
Name:
---------------
Title:
--------------
FS EQUITY PARTNERS III, L.P.,
a Delaware limited partnership
By: FS Capital Partners, L.P.
Its: General Partner
By: FS Holdings, Inc.
Its: General Partner
By: /s/ Charles P. Rullman
-----------------------
Name: Charles P. Rullman
------------------
Title: Vice President
--------------
FS EQUITY PARTNERS IV, L.P.,
a Delaware limited partnership
By: FS Capital Partners LLC
Its: General Partner
By: /s/ Jon D. Ralph
-----------------
Name: Jon D. Ralph
------------
Title:
------------
[Signatures continued on following page]
<PAGE>
[Signatures continued from previous page]
FS EQUITY PARTNERS INTERNATIONAL, L.P.,
a Delaware limited partnership
By: FS&Co. International, L.P.
Its: General Partner
By: FS International Holdings Limited
Its: General Partner
By: /s/ Charles P. Rullman
-----------------------
Name: Charles P. Rullman
-------------------
Title:
-------------------
CHASE MANHATTAN CAPITAL, L.P.
a Delaware limited partnership
By: /s/ Christopher Behrens
------------------------
Name:
-------------------
Title:
------------------
CB CAPITAL INVESTORS, L.P.,
a Delaware limited partnership
By: CB Capital Investors, Inc.
Its: General Partners
By: /s/ Christopher Behrens
------------------------
Name:
-------------------
Title:
------------------
[Signatures continued on following page]
<PAGE>
[Signatures continued from previous page]
BASEBALL PARTNERS,
a New York general partnership
By: /s/ Christopher Behrens
------------------------
Name:
Title: General Partner
PETER J. SODINI
/s/ Peter J. Sodini
--------------------
Peter J. Sodini
<PAGE>
Exhibit 4.3
AMENDED AND RESTATED
STOCKHOLDERS' AGREEMENT
by and among
THE PANTRY, INC.,
FS EQUITY PARTNERS III, L.P.,
FS EQUITY PARTNERS IV, L.P.,
FS EQUITY PARTNERS INTERNATIONAL, L.P.,
CHASE MANHATTAN CAPITAL, L.P.,
CB CAPITAL INVESTORS, L.P.,
BASEBALL PARTNERS
and
PETER J. SODINI
July 2, 1998
<PAGE>
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
--------------------------------------------
THIS AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT (this "Agreement")
is made and entered into as of July 2, 1998 by and among The Pantry, Inc., a
Delaware corporation (the "Company"), FS Equity Partners III, L.P., a Delaware
limited partnership ("FSEP III"), FS Equity Partners IV, L.P., a Delaware
limited partnership ("FSEP IV"), FS Equity Partners International, L.P., a
Delaware limited partnership ("FSEP International"), Chase Manhattan Capital,
L.P., a Delaware limited partnership as successor-in-interest to Chase Manhattan
Capital Corporation, a Delaware corporation ("CMC"), CB Capital Investors, L.P.,
a Delaware limited partnership ("CBC"), Baseball Partners, a New York general
partnership ("BP"), and Peter J. Sodini, an individual ("Sodini").
RECITALS
1. The Company, FSEP III, FSEP International, CMC, CBC, BP and
Sodini wish to amend and restate that certain Stockholders' Agreement dated as
of October 22, 1997 (the "Old Stockholders' Agreement") by and among such
parties, as further set forth below.
2. The execution and delivery of this Agreement is a condition to
the consummation of the transactions contemplated by that certain Stock Purchase
Agreement dated as of an even date herewith by and among the Company, FSEP IV,
and CBC (the "Stock Purchase Agreement").
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:
1. Definitions. As used in this Agreement, the following
-----------
capitalized terms shall have the following meanings:
Affiliate: Such term shall have the meaning set forth in Rule 12b-2
---------
of the General Rules and Regulations promulgated under the Securities Exchange
Act of 1934, as amended.
Chase Entities: CMC, CBC, BP and any member of the Chase Capital
--------------
Group to which any of CMC, CBC or BP transfers shares of Common Stock in
accordance
1
<PAGE>
with Section 6.
Common Stock: The Common Stock, par value $0.01 per share, of the
------------
Company.
Employee: Any employee, director or consultant of the Company.
--------
FS Entities: FSEP III, FSEP IV and FSEP International.
-----------
Person: Any individual, corporation, entity, partnership, joint
------
venture, association, joint-stock company, trust, unincorporated organization or
government or agency or political subdivision thereof.
Public Market Sale: A sale of securities into the public market
------------------
pursuant to Rule 144 or an effective registration statement.
SBIC: A Small Business Investment Company licensed by the U.S. Small
----
Business Administration (or any successor agency) (the "SBA") that owns shares
of Common Stock.
Securities Act: The Securities Act of 1933, as amended.
--------------
SEC: Securities and Exchange Commission.
---
Voting Securities: All of the outstanding shares of the capital stock
-----------------
of the Company then possessing general voting power with respect to the election
of directors.
2. Right of First Offer.
--------------------
(a) Offer. Subject to Section 6(a), if either Sodini or any of
-----
the Chase Entities determines to solicit, or causes to be solicited, proposals
for the acquisition (whether by means of a sale of stock, exchange or other
method of sale) of any shares of Common Stock, or receives an unsolicited offer
to so acquire any such shares and such Person determines to pursue such an offer
for the acquisition of such shares, such Person shall first give the FS Entities
written notice (the "Notice") of such intention, which notice shall include a
term sheet stating, among other material terms, the minimum sales price that
such Person would accept for such shares (the "Target Price"). The FS Entities
shall have the right for a period of 20 days following the delivery of the
Notice (the "Acceptance Period") to accept the offer to purchase all but not
less than all such shares at the Target Price and upon the other terms provided
with the Notice.
(b) Acceptance. The FS Entities shall, if either so desires,
----------
exercise their rights by delivering to such Person written notice of election
prior to 5:00 p.m.
2
<PAGE>
Los Angeles time on or before the last day of the Acceptance Period. The
acceptance of the offer to purchase all such shares of Common Stock shall
identify the committed source of financing for such purchase or provide evidence
that the FS Entities are able to effect the purchase. Such Person and the FS
Entities shall, as soon as reasonably possible, negotiate in good faith a
definitive acquisition agreement containing appropriate provisions customary for
a transaction of the type contemplated. If no definitive agreement is agreed
upon within 30 days after negotiations are so commenced, such Person shall be
free to resume its efforts to sell such shares of Common Stock to other
prospective buyers, as further set forth in Section 2(c) below.
(c) Rejection. If the FS Entities elect not to exercise their
---------
purchase rights under Section 2(b) during the Acceptance Period or if such
Person and the FS Entities are unable to conclude negotiations of a definitive
agreement during the 30-day period described above, such Person shall have the
right for a period of 60 days thereafter to sell such shares of Common Stock or,
within such 60-day period, to enter into a definitive agreement to sell such
shares within 30 days of the date of such agreement for a sales price equal to
or greater than the Target Price and upon terms that are not materially less
favorable to such Person than the terms provided to the FS Entities in the
Notice.
(d) Below Target Price Offer. If such Person receives a written offer
------------------------
for such shares of Common Stock at any time during such 60-day period which is
acceptable to such Person but is less than the Target Price or upon terms
materially less favorable to such Person than the terms provided to the FS
Entities in the Notice (the "Below Target Price Offer"), such Person shall
promptly deliver a copy of the Below Target Price Offer to the FS Entities.
During the 20-day period following delivery of such written offer, the FS
Entities shall have the right to accept the offer to purchase all, but not less
than all, of such shares of Common Stock on the terms reflected in the Below
Target Price Offer. The FS Entities shall, if they so desire, exercise such
right by delivering to such Person written notice of election prior to 5:00 p.m.
Los Angeles time on or before the final day of such additional 20-day period
(and shall identify the committed source of financing or evidence that the FS
Entities are able to effect the purchase), and such Person and the FS Entities
shall then negotiate a definitive acquisition agreement, in each case in the
manner contemplated by Section 2(b) above. If the FS Entities do not elect to
accept the offer to purchase such shares on such terms within such 20-day period
or if such Person and the FS Entities are unable to conclude negotiations of a
definitive agreement within 30 days of the date of the acceptance of the Below
Target Price Offer, such Person shall have 60 days to consummate the sale of
such shares at a price and upon terms that are not materially less favorable to
such Person than the price and terms specified in the Below Target Price Offer.
(e) Exempt Transfers. The FS Entities' rights under this Section 2
----------------
shall not apply to (i) transfers by Sodini or the Chase Entities in connection
with a public offering of shares of Common Stock pursuant to a registration
statement filed with and
3
<PAGE>
declared effective by the SEC, (ii) transfers pursuant to Rule 144 of the
Securities Act or (iii) transfers permitted by Section 6 below.
(f) Transferees Bound. The obligations of each of Sodini and the
-----------------
Chase Entities pursuant to this Section 2 shall be binding upon any transferee
of any of the shares of Common Stock held by such Persons, and Sodini and each
of the Chase Entities shall obtain and deliver to the FS Entities a written
commitment to be bound by such provisions from such transferee prior to any
transfer.
3. Obligation to Sell Securities.
-----------------------------
(a) Sale Requirement. Subject to Section 6(a), if the FS Entities
----------------
find a third-party buyer, who is not an Affiliate of the FS Entities, for all,
but not less than all, of the shares of Common Stock held by the FS Entities
(whether such sale is by way of purchase, merger or other form of transaction),
upon the request of the FS Entities, Sodini and each of the Chase Entities shall
sell all of their respective shares of Common Stock to such third-party buyer
pursuant to the terms and conditions negotiated by the FS Entities for the sale
of all the shares of Common Stock held by the FS Entities. Sodini and each of
the Chase Entities further agrees to timely take such other actions as the FS
Entities may reasonably request to enforce each of Sodini's and the Chase
Entities' respective obligation to sell his and its shares of Common Stock and
otherwise as necessary in connection with the approval of the consummation of
such sale, including any approval by the Company's stockholders of such sale.
(b) Conditions to Sale Requirement. The obligations of each of Sodini
------------------------------
and the Chase Entities pursuant to this Section 3 are subject to the
satisfaction of the following conditions:
(i) Upon the consummation of a transaction as described in
Section 3(a) (the "Proposed Transaction"), Sodini and the Chase Entities
will each receive the same form and amount of consideration per share, or
if the FS Entities are given an option as to the form and amount of
consideration to be received, Sodini and the Chase Entities will be given
the same option;
(ii) No FS Entity or Affiliate of an FS Entity who holds any debt
or other securities issued by the Company (i.e., securities other than
shares of Common Stock) shall, pursuant to the Proposed Transaction,
receive in consideration of such debt or other securities an amount greater
than the sum of, without duplication, a) the face amount or liquidation
value of such securities, plus b) any accrued but unpaid interest or
dividends (including cumulative dividends, if applicable) plus c) any
prepayment or redemption premium or penalty set forth in the terms of the
agreements evidencing such securities;
4
<PAGE>
(iii) Neither Sodini nor any Chase Entity shall be obligated to make
any out-of-pocket expenditure prior to the consummation of the Proposed
Transaction (excluding modest expenditures for postage, copies, etc.) and
neither Sodini nor any Chase Entity shall be obligated to pay more than his
or its "pro rata share" of reasonable expenses incurred in connection with
a consummated Proposed Transaction to the extent such costs are incurred
for the benefit of the FS Entities, Sodini and all Chase Entities selling
shares of Common Stock and are not otherwise paid by the Company or the
third-party (costs incurred by or on behalf of an FS Entity for its sole
benefit will not be considered costs of the Proposed Transaction
hereunder);
(iv) In the event that either Sodini or the Chase Entities are
required to make any representations or indemnities in connection with the
Proposed Transaction (other than representations and indemnities concerning
each such Person's valid ownership of his or its shares of Common Stock,
free of all liens and encumbrances (other than those arising under
applicable securities laws), and such Person's authority, power, and right
to enter into and consummate such purchase or merger agreement without
violating any other agreement), then each of Sodini and each Chase Entity
shall not be liable with respect to a sale of such shares for more than his
or its "pro rata share" of any liability for misrepresentation or indemnity
and such liability shall be capped at no more than his or its "pro rata
share" of the total purchase price received in such Proposed Transaction by
such Person for such shares; and
(v) Neither Sodini nor any Chase Entity shall be obligated to take
any action, or refrain from taking any action, that he or it reasonably
believes will result in his or in its or any of its Affiliates' violation
of any law or order.
(vi) As used in this Section 3, a "pro rata share" shall mean the
ratio of (i) the total number of shares of Common Stock to be sold by such
Person in a Proposed Transaction, to (ii) the total number of shares of
Common Stock to be sold by all entities in such Proposed Transaction.
(c) Transferees Bound. The obligations of each of Sodini and the
-----------------
Chase Entities pursuant to this Section 3 shall be binding upon any transferee
of any of his or their shares of Common Stock and each of Sodini and each Chase
Entity shall obtain and deliver to the FS Entities a written commitment to be
bound by such provisions from such transferee prior to any transfer.
5
<PAGE>
4. Tag Along Rights.
----------------
(a) Rights. Neither the FS Entities nor the Chase Entities (each of
------
the foregoing may from time to time be the "Selling Holder") shall sell or
otherwise dispose of to any Person (the "Buyer") (other than transfers within
the Chase Capital Group pursuant to Section 6) any shares of Common Stock held
or beneficially owned by the Selling Holder unless the non-Selling Holder (the
"Non-Selling Holder") together with Sodini or any other holder of shares of
Common Stock who have rights to participate in sales or other dispositions of
such shares by any of the Stockholders pursuant to written agreements by and
between such Stockholder and any such holder (collectively, and together with
the Non-Selling Holders, the "Co-Sale Right Holders"), are given an opportunity
to sell or otherwise dispose of to the Buyer their respective Pro Rata Share
(determined in accordance with Section 4(b) below) of any shares of Common Stock
held by such Co-Sale Right Holders (the "Tag Along Rights").
(b) TAR Offer. Prior to the consummation by the Selling Holder of any
---------
sale or other disposition of the Selling Holder's shares of Common Stock which
is subject to the provisions of Section 4(a), the Selling Holder shall cause the
bona fide offer from the Buyer to purchase or otherwise acquire such Selling
Holder's shares of Common Stock from the Selling Holder to be reduced to writing
(the "TAR Offer") and shall deliver written notice of the TAR Offer, together
with a true copy of the TAR Offer (the "TAR Notice"), to each of the Co-Sale
Right Holders in the event such proposed sale or other disposition is subject to
the Tag Along Rights (a "TAR Sale"). Each TAR Offer shall include an offer to
purchase or otherwise acquire from each Co-Sale Right Holder (individually, a
"TAR Offeree" and collectively, the "TAR Offerees"), at the same time, at the
same price and on the same terms as apply to the sale or other disposition by
the Selling Holder to the Buyer and according to the terms and subject to the
conditions of this Agreement, not less than the amount of the shares of Common
Stock held by such TAR Offeree as shall be equal to the product of (i) the total
number of shares of Common Stock which the Buyer desires to purchase or
otherwise acquire, times (ii) the TAR Offeree's Pro Rata Share, which is a
fraction, the numerator of which is the total number of shares of shares of
Common Stock subject to the TAR Offer held by such TAR Offeree on the date of
the TAR Notice and the denominator of which is the total number of shares of
Common Stock held on such date by the Selling Holder and all the TAR Offerees
who elect, pursuant to Section 4(c) below, to accept the TAR Offer. Pursuant to
Section 4(d), the Selling Holder may then sell to the Buyer the number of shares
of Common Stock remaining after the shares of Common Stock to be sold by the TAR
Offerees are subtracted from the number of shares of Common Stock to be sold by
the Selling Holder as contained in the TAR Offer.
(c) Acceptance Notice. If a TAR Offeree desires to accept the TAR
-----------------
Offer with respect to his or its shares of Common Stock, such TAR Offeree shall
do so by delivering to the Selling Holder a written notice stating such TAR
Offeree's irrevocable acceptance of the TAR Offer with respect to such TAR
Offeree's shares of Common Stock and setting forth the amount of the shares of
Common Stock that such TAR Offeree desires to sell
6
<PAGE>
to the Buyer (the "Acceptance Notice"), which Acceptance Notice shall be
delivered to the Selling Holder within 20 days after the delivery of the TAR
Notice to such TAR Offeree. Such Acceptance Notice shall constitute such TAR
Offeree's agreement to sell to the Buyer the lesser of (i) the amount of such
TAR Offeree's shares of Common Stock which such TAR Offeree is entitled to sell
to the Buyer pursuant to this Section 4 and (ii) the amount of such TAR
Offeree's shares of Common Stock which such TAR Offeree desires to sell to the
Buyer as set forth in such TAR Offeree's Acceptance Notice. In addition, such
Acceptance Notice shall include (i) a written undertaking of the TAR Offeree to
deliver, at least three business days prior to the expected date of the
consummation of such sale or other disposition to the Buyer as indicated in the
TAR Notice, such documents (including stock assignments and stock certificates,
if any) as shall be reasonably required to transfer the amount of such TAR
Offeree's shares of Common Stock that such TAR Offeree agrees to sell to the
Buyer pursuant to the TAR Offer and (ii) a limited power-of-attorney authorizing
the Selling Holder to transfer such shares to the Buyer pursuant to the terms of
the TAR Offer. If a TAR Offeree does not deliver an Acceptance Notice to the
Selling Holder in accordance with the provisions of this Section 4(c), such TAR
Offeree shall be deemed to have irrevocably rejected the TAR Offer.
(d) Consummation. If there is a decrease in the price to be paid by
------------
the Buyer for the shares of Common Stock to be sold from the price set forth in
the TAR Offer, which decrease is acceptable to the Selling Holder or other
material change in terms which are less favorable to the Selling Holder but
which are acceptable to the Selling Holder, the Selling Holder shall notify the
TAR Offerees of such decrease or other material terms, and each TAR Offeree
shall have five business days from the date of receipt of the notice of such
decrease to reduce the shares of Common Stock he or it will sell to such Buyer
as previously indicated in the applicable Acceptance Notice. The Selling Holder
shall act as agent for the TAR Offerees in connection with such sale or other
disposition and shall cause to be remitted promptly to each of the TAR Offerees
the total consideration for the shares of Common Stock sold by such TAR Offeree
pursuant thereto, which consideration shall be in the same form as the
consideration received by the Selling Holder and shall be net of such TAR
Offeree's applicable portion of the expenses of such sale or other disposition,
as provided in Section 4(e) below. The Selling Holder shall furnish, or shall
cause to be furnished, promptly such other evidence of the consummation and time
of consummation of such sale or other disposition and the terms thereof as shall
be reasonably requested. If the Selling Holder does not complete such sale or
other disposition, the Selling Holder shall return to the TAR Offerees all
documents (including stock assignments and stock certificates, if any) and
powers-of-attorney which the TAR Offerees delivered to the Selling Holder
pursuant to the terms of this Section 4 or otherwise in connection with such
sale or other disposition.
(e) Expenses. Each Co-Sale Right Holder shall bear such holder's pro
--------
rata share of the reasonable expenses incurred by the Selling Holder in
connection with any sales or other dispositions of such Co-Sale Right Holder's
shares of Common Stock made pursuant to the Tag Along Rights.
7
<PAGE>
(f) Exempt Sales. The Tag Along Rights and obligations set forth in
------------
this Section 4 shall not apply to a Public Market Sale.
5. Affiliate Transactions.
----------------------
(a) Neither the Company nor any Affiliate will enter into any
transaction with any stockholder of the Company or any Affiliate thereof or with
any member of management of the Company unless the terms and conditions of such
transaction are no less favorable to the Company or its Affiliate, as the case
may be, than would be obtained in a comparable arm's length transaction with an
unaffiliated third party.
(b) As long as the Chase Entities (or any of them) own shares of
Common Stock, no FS Entity or any Affiliate of an FS Entity will be entitled to
payment of fees except for services rendered in connection with a material
acquisition, merger, divestiture, reorganization or restructuring, provided that
such fee is no more favorable to the FS Entity or an Affiliate of the FS Entity
than would be available from a nationally recognized investment banking firm,
and provided, further, that such fee shall not be payable without the consent of
the Majority Chase Entities, as defined below, if the FS Entity is selling its
entire interest in an acquisition, merger, reorganization or restructuring
transaction. The foregoing shall not prevent payment after the date hereof of a
fee of $1,000,000 to an FS Entity or an Affiliate of an FS Entity in connection
with the consummation of the transactions contemplated by the Stock Purchase
Agreement.
6. Transfers; Transfers Within Chase Capital Group.
-----------------------------------------------
(a) Prior to February 18, 1998, no Chase Entity shall sell, assign,
transfer, hypothecate, encumber or otherwise dispose of (collectively, a
"Transfer") any shares of Common Stock or any right, title or interest therein,
without the consent of the FS Entities. Except as otherwise set forth in Section
3, prior to February 18, 1998, no FS Entity shall sell, assign, transfer,
hypothecate, encumber or otherwise dispose of any shares of Common Stock, or any
right, title or interest therein, without the consent of the Majority Chase
Entities. Any attempt to Transfer any shares of Common Stock, or any right,
title or interest therein, other than in compliance with this Agreement, shall
be null and void, and the Company shall not give effect to any such attempted
transaction or transfer.
(b) For purposes of this Agreement, "Chase Capital Group" means and
includes (i) The Chase Manhattan Corporation, (ii) entities that are Affiliates
of The Chase Manhattan Corporation and (iii) entities the majority of the equity
owners of which are employees, officers or directors of any of the foregoing.
Notwithstanding anything in this Agreement to the contrary, any member of the
Chase Capital Group may Transfer its shares of Common Stock to other members of
the Chase Capital Group without restriction, provided that any transferee agrees
to be bound by provisions in this Agreement, and members of the Chase Capital
Group may purchase shares of Common Stock from BP upon the Transfer of
8
<PAGE>
such shares of Common Stock by BP to such members, including without limitation,
any Transfer resulting from the enforcement of a security interest by Chase in
such shares existing as of the date hereof pursuant to the terms of a pledge
agreement between Chase and BP (the "Pledge Agreement"), provided that the
Transfer of such shares of Common Stock by BP or Chase in connection with the
enforcement by Chase of its rights under the Pledge Agreement to any person
other than a member of the Chase Capital Group shall be subject to Section 2
hereof, and provided, further, that, to the extent the terms of the Pledge
Agreement are contrary to or otherwise inconsistent with the terms of this
Agreement, the terms of this Agreement shall supersede all such contrary or
inconsistent terms. In the event of a Transfer within the Chase Capital Group,
all references to "Chase" or the "Chase Entities" shall thereafter refer to each
of the members of the Chase Capital Group with respect to the shares of Common
Stock owned by such member. The FS Entities' Tag Along Rights pursuant to
Section 4 will not apply to Transfers within the Chase Capital Group, or to
Transfers from BP to the Chase Capital Group.
7. Regulatory Compliance Cooperation.
---------------------------------
(a) In the event that an SBIC determines that it has a Regulatory
Problem (as defined below), the Company agrees to use commercially reasonable
efforts to take all such actions as are reasonably requested by such SBIC in
order (i) to effectuate and facilitate any transfer by such SBIC of any
Securities (as defined below) of the Company then held by such SBIC to any
Person designated by such SBIC and approved by the FS Entities (with such
approval not to be unreasonably withheld), (ii) to permit such SBIC (or any
Affiliate of such SBIC) to exchange all or any portion of the voting Securities
then held by such Person on a share-for-share basis for shares of a class of
non-voting Securities of the Company, which non-voting Securities shall be
identical in all respects to such voting Securities, except that such new
Securities shall be non-voting and shall be convertible into voting Securities
on such terms as are requested by such SBIC in light of regulatory
considerations then prevailing, (iii) to continue and preserve the voting
interests with respect to the Company arising out of such SBIC's ownership of
voting Securities before the transfers and amendments referred to above
(including entering into such additional agreements as are requested by such
SBIC to permit any Person(s) designated by such SBIC and approved by the FS
Entities (with such approval not to be unreasonably withheld) to exercise any
voting power which is relinquished by such SBIC upon any exchange of voting
Securities for nonvoting Securities of the Company) and (iv) entering into such
additional agreements, adopting such amendments to this Agreement, the
Certificate of Incorporation and Bylaws of the Company and other relevant
agreements and taking such additional actions, in each case as are reasonably
requested by such SBIC in order to effectuate the intent of the foregoing.
If an SBIC elects to transfer Securities of the Company to a Regulated
Holder (as defined below) in order to avoid a Regulatory Problem, the Company
shall enter into such agreements with such Regulated Holder as it may reasonably
request in order to assist such Regulated Holder in complying with applicable
laws, rules and regulations to which
9
<PAGE>
it is subject. Such agreements may include restrictions on the redemption,
repurchase or retirement of Securities of the Company that would result or be
reasonably expected to result in such Regulated Holder holding more voting
securities or total securities (equity and debt) than it is permitted to hold
under such regulations.
(b) In the event an SBIC has the right to acquire any of the Company's
Securities (as the result of a preemptive offer, pro rata offer or otherwise),
at such SBIC's request the Company will offer to sell to such SBIC non-voting
Securities on the same terms as would have existed had such SBIC acquired the
Securities so offered and immediately requested their exchange for non-voting
Securities pursuant to paragraph (a) above.
(c) In the event that any subsidiary of the Company ever offers to
sell any of its Securities to an SBIC, then the Company will cause such
subsidiary to enter into agreements with such SBIC substantially similar to this
Section 7 and Section 8.
(d) For purposes of this Section 7:
(i) "Regulated Holder" means any holder of the Company's
Securities that is (or that is a subsidiary of a bank holding company that
is) subject to the various provisions of Regulation Y of the Board of
Governors of the Federal Reserve Systems, 12 C.F.R., Part 225 (or any
successor to Regulation Y);
(ii) "Regulatory Problem" means (A) any set of facts or
circumstances wherein it has been asserted by any governmental regulatory
agency (or an SBIC believes that there is a significant risk of such
assertion) that such Person (or any bank holding company that controls such
Person) is not entitled to hold, or exercise any material right with
respect to, all or any portion of the Securities of the Company which such
Person holds or (B) when such Person and its Affiliates would own, control
or have power (including voting rights) over a greater quantity of
Securities of the Company than is permitted under any law or regulation or
any requirement of any governmental authority applicable to such Person or
to which such Person is subject; and
(iii) "Securities" means with respect to any Person, such Person's
capital stock or any options, warrants or other Securities which are
directly or indirectly convertible into, or exercisable or exchangeable
for, such Person's capital stock (whether or not such derivative Securities
are issued by the Company). Whenever a reference herein to Securities
refers to any derivative Securities, the rights of an SBIC shall apply to
such derivative Securities and all underlying Securities directly or
indirectly issuable upon conversion, exchange or exercise of such
derivative Securities.
10
<PAGE>
(e) Any transferee of Securities from Buyer must agree in writing
to be bound by all of the provisions of this Agreement.
8. Information Rights and Related Covenants.
----------------------------------------
(a) Within 75 days after the closing of a purchase of shares of
Common Stock pursuant to the terms of the Stock Purchase Agreement, the Company
shall provide to each SBIC a certificate of its chief financial officer (i)
verifying (and describing in reasonable detail) the use of the proceeds of such
SBIC's financing and (ii) certifying compliance by the Company with the
provisions of this Agreement and any purchase or subscription agreement to which
such SBIC is a party. In addition to any other rights granted hereunder, the
Company shall provide each SBIC, any Affiliate of such SBIC and the SBA access
to its books and records for the purpose of verifying the use of the proceeds of
such Person's financing and for all other purposes required by the SBA.
(b) Promptly after the end of each fiscal year (but in any event
prior to February 28 of each year), the Company shall provide to each SBIC a
written assessment, in form and substance satisfactory to such SBIC, of the
economic impact of such SBIC's financing hereunder, specifying the full-time
equivalent jobs created or retained, the impact of the financing on the
Company's business in terms of expanded revenue and taxes and other appropriate
economic benefits, including, but not limited to, technology development or
commercialization, minority business development, urban or rural business
development, expansion of exports and assistance to manufacturing firms.
(c) Upon the request of an SBIC or any Affiliates of an SBIC, the
Company will (i) provide to such Person such financial statements and other
information as such Person may from time to time request for the purpose of
assessing the Company's financial condition and (ii) furnish to such Person all
information requested by it in order for it to prepare and file SBA Form 468 and
any other information requested or required by any governmental agency asserting
jurisdiction over such Person.
(d) For a period of one year following the date hereof, neither
the Company nor any of its subsidiaries will change its business activity if
such change would render the Company ineligible to receive financial assistance
from a Small Business Investment Company under the Small Business Investment Act
and the regulations thereunder. If the Company breaches this covenant, then, in
addition to all other remedies available to each SBIC, such SBIC may demand that
the Company immediately repurchase all securities acquired by such SBIC at the
purchase price paid therefor.
(e) The Company will at all times comply with the non-
discrimination requirements of 13 C.F.R., Parts 112, 113 and 117.
11
<PAGE>
9. Observer Rights. From and after August 19, 1996, the Chase
---------------
Entities shall no longer be entitled to designate one non-voting observer (the
"Observer") to be admitted to each meeting of the Board of Directors of the
Company and each subsidiary, including telephonic meetings.
10. Representation on the Board of Directors. Subject to the terms
----------------------------------------
and conditions of this Section 10, and provided that the Chase Entities own at
least ten percent (10%) of the outstanding Common Stock of the Company, at each
annual or special meeting of stockholders of Company, or in any written consent
executed in lieu of a stockholder meeting, at or pursuant to which persons are
being elected to fill positions on the Board of Directors of Company, each of
the FS Entities and the Chase Entities agrees to exercise, or cause to be
exercised, voting rights with respect to Voting Securities then owned or held of
record by such entity in such a manner that a candidate designated by a majority
vote of the shares of Common Stock held by the Chase Entities (the "Majority
Chase Entities") shall be elected to fill and continue to hold one of the
positions on the Board of Directors of the Company. If at any time from and
after the date hereof, the Majority Chase Entities shall notify the FS Entities
of their desire to remove any director previously designated by the Majority
Chase Entities to serve on the Board of Directors of the Company, each of the FS
Entities agrees to exercise or cause to be exercised voting rights with respect
to Voting Securities owned or held of record by such entity so as to remove such
director of the Company. If at any time from and after the date hereof, any
director previously designated by the Majority Chase Entities to serve on the
Board of Directors of the Company ceases to be a director (whether by reason of
death, resignation, removal or otherwise), the Majority Chase Entities shall be
entitled to designate a successor director to fill the vacancy created thereby,
and each of the FS Entities agrees to exercise its voting rights with respect to
Voting Securities owned or held of record by such entity so as to elect such
designee as a director of Company. The Majority Chase Entities may not assign
their rights pursuant to this Section 10 and such rights will terminate if the
Majority Chase Entities hold less than ten percent (10%) of the Company's
outstanding Common Stock.
11. Copy of Agreement. A copy of this Agreement and all amendments
-----------------
hereto shall be filed with the Secretary of the Company and shall be kept at the
principal executive offices of the Company.
12. Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of Delaware without regard
to the conflicts of laws rules thereof.
13. Successors and Assigns. Except for the right set forth in
----------------------
Section 10 of this Agreement, which is not assignable, the FS Entities and the
Chase Entities may assign their respective rights under this Agreement in
connection with the transfer or sale of at least 50% of the Securities held by
each; provided, however, that any such transfer or sale must be in compliance
with this Agreement and all applicable federal and state securities laws. Any
12
<PAGE>
transferee of Securities will be bound by all obligations of the transferring
party hereunder and shall obtain a written undertaking to be so bound prior to
any such transfer. Each of the Chase Entities only may assign its rights under
this Agreement to only one (1) assignee and such assignee shall not be entitled
to further assign such rights.
14. Continuation of Rights and Obligations. All of the FS Entities'
--------------------------------------
and the Chase Entities' other rights and obligations shall continue in full
force and effect following the Company's initial public offering of shares of
Common Stock pursuant to an effective registration statement.
15. Amendment and Waiver. This Agreement may be amended, modified or
--------------------
supplemented, and compliance with any provision hereof may be waived, only with
the written consent of the FS Entities, the Majority Chase Entities and Sodini,
and any amendment, modification, supplement or waiver so consented to in writing
shall be binding upon the parties hereto and all transferees of shares of Common
Stock held by any of the FS Entities, the Majority Chase Entities and Sodini.
16. Interpretation. The headings of the sections contained in this
--------------
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not affect the meaning or interpretation of this
Agreement.
17. Notices. All notices and other communications provided for or
-------
permitted hereunder shall be in writing and shall be deemed to have been duly
given if delivered personally or delivered by telecopier (with receipt
confirmed) or three (3) days after deposit in the mail, by registered or
certified mail (return receipt requested) postage prepaid, (i) if to the FS
Entities, at Freeman Spogli & Co. Incorporated, 11100 Santa Monica Boulevard,
Suite 1900, Los Angeles, California 90025, Attention: William M. Wardlaw,
telecopier: (310) 444-1870, (ii) if to the Chase Entities, at Chase Capital
Partners, L.P., 380 Madison Avenue, 12th Floor, New York, New York 10017,
Attention: Christopher C. Behrens, telecopier: (212) 622-3101 and (iii) if to
Sodini, The Pantry, Inc., 1801 Douglas Drive, Sanford, North Carolina 27330,
telecopier: (919) 774-3329 (or at such other address or telecopier number for
any party as shall be specified by like notice provided that notices of a change
of address or telecopier number shall be effective only upon receipt thereof).
18. Legends. All certificates evidencing shares of Common Stock that
-------
are issued to the FS Entities, the Chase Entities and Sodini shall be legended
as follows (in addition to any other legend required to be placed thereon):
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS WITH RESPECT TO THE TRANSFER AND VOTING THEREOF AS SET
FORTH IN THAT CERTAIN AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
DATED AS OF JULY 2, 1998
13
<PAGE>
WHICH MAY BE VIEWED AT THE PRINCIPAL PLACE OF BUSINESS OF THE
CORPORATION AND A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER
WITHOUT CHARGE UPON WRITTEN REQUEST THEREFOR."
19. Further Assurances. The Company covenants and agrees that it
------------------
will act in good faith to preserve for the FS Entities, the Chase Entities and
Sodini the benefits of this Agreement and that it will take no voluntary action
to impair the benefits hereof or to avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder or to deny
to the FS Entities, the Chase Entities or Sodini any of the benefits or
protections contemplated hereby.
20. Injunctive Relief. It is acknowledged that it will be impossible
-----------------
to measure in money the damages that would be suffered if the parties hereto
fail to comply with any of the obligations herein imposed on them and that, in
the event of any such failure, an aggrieved party hereto will be irreparably
damaged and will not have an adequate remedy at law. Any such party shall,
therefore, be entitled to injunctive relief, including specific performance, to
enforce such obligations, and if any action should be brought in equity to
enforce any of the provisions of this Agreement, none of the parties hereto
shall raise the defense that there is an adequate remedy at law.
21. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
22. Entire Agreement. This Agreement is intended by the parties
----------------
hereto as a final expression of their agreement, and is intended to be a
complete and exclusive statement of the parties hereto in respect of the subject
matter contained herein. This Agreement is intended to and does hereby
supersede entirely in all respects the Old Stockholders' Agreement, which shall
terminate and have no further force or effect.
14
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
THE PANTRY, INC.,
a Delaware corporation
By:/s/ Peter J. Sodini
-----------------------------------
Name:
-----------------------------
Title:
-----------------------------
FS EQUITY PARTNERS III, L.P.,
a Delaware limited partnership
By: FS Capital Partners, L.P.
Its: General Partner
By: FS Holdings, Inc.
Its: General Partner
By: /s/ Charles P. Rullman
-----------------------
Name: Charles P. Rullman
--------------------
Title: Vice President
-------------------
FS EQUITY PARTNERS IV, L.P.,
a Delaware limited partnership
By: FS Capital Partners LLC
Its: General Partner
By:/s/ Jon D. Ralph
------------------------------
Name: Jon D. Ralph
------------------------
Title:
----------------------
15
<PAGE>
FS EQUITY PARTNERS INTERNATIONAL, L.P.,
a Delaware limited partnership
By: FS&Co. International, L.P.
Its: General Partner
By: FS International Holdings Limited
Its: General Partner
By:/s/ Charles P. Rullman
-------------------------------
Name: Charles P. Rullman
---------------------------
Title:
-------------------------
CHASE MANHATTAN CAPITAL, L.P.
a Delaware limited partnership
By: Chase Manhattan Capital Corporation
Its: General Partner
By:/s/ Christopher Behrens
-------------------------------
Name:
--------------------------
Title:
--------------------------
CB CAPITAL INVESTORS, L.P.,
a Delaware limited partnership
By: CB Capital Investors, Inc.
Its: General Partner
By:/s/ Christopher Behrens
-------------------------------
Name:
--------------------------
Title:
--------------------------
BASEBALL PARTNERS,
a New York general partnership
By:/s/ Christopher Behrens
------------------------------------
Name:
------------------------------
Title: General Partner
16
<PAGE>
PETER J. SODINI
By:/s/ Peter J. Sodini
------------------------------
Peter J. Sodini
17
<PAGE>
Exhibit 10.2
THE PANTRY, INC.
Incentive Stock Option Agreement
THIS INCENTIVE STOCK OPTION AGREEMENT (this "Agreement") is entered
into as of [_________________] 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,
1
<PAGE>
second and third anniversaries of the Vesting Commencement Date. The "Vesting
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. After the death of Optionee, only a Successor may exercise the
Option.
2
<PAGE>
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 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");
3
<PAGE>
(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; pro vided, 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 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
4
<PAGE>
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 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
5
<PAGE>
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.
(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
6
<PAGE>
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, 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
7
<PAGE>
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.
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
8
<PAGE>
Title: President and Chief Executive Officer
OPTIONEE:
-----------------------------------------------
Name: [____________]
9
<PAGE>
Exhibit 10.21
SUBSIDIARY GUARANTY
This SUBSIDIARY GUARANTY is entered into as of October 23, 1997
by THE UNDERSIGNED (each a "Guarantor" and collectively, "Guarantors") in
favor of and for the benefit of FIRST UNION NATIONAL BANK, as
administrative agent for and representative of (in such capacity herein
called "Guarantied Party") the financial institutions ("Lenders") party to
the Credit Agreement referred to below and any Interest Rate Exchangers (as
hereinafter defined), and, subject to subsection 3.12, for the benefit of
the other Beneficiaries (as hereinafter defined).
RECITALS
A. The Pantry, Inc., a Delaware corporation ("Company"), has
entered into that certain Credit Agreement dated as of October 23, 1997
with Guarantied Party, Syndication Agent and Lenders (said Credit
Agreement, as it may hereafter be amended, supplemented or otherwise
modified from time to time, being the "Credit Agreement"; capitalized terms
defined therein and not otherwise defined herein being used herein as
therein defined).
B. Company may from time to time enter, or may from time to time
have entered, into one or more Interest Rate Agreements (collectively, the
"Lender Interest Rate Agreements") with or one or more Lenders (in such
capacity, collectively, "Interest Rate Exchangers") in accordance with the
terms of the Credit Agreement, and it is desired that the obligations of
Company under the Lender Interest Rate Agreements, including the obligation
of Company to make payments thereunder in the event of early termination
thereof (all such obligations being the "Interest Rate Obligations"),
together with all obligations of Company under the Credit Agreement and the
other Loan Documents, be guarantied hereunder.
C. A portion of the proceeds of the Loans may be advanced to
Guarantors and thus the Guarantied Obligations (as hereinafter defined) are
being incurred for and will inure to the benefit of Guarantors (which
benefits are hereby acknowledged).
D. It is a condition precedent to the making of the initial
Loans under the Credit Agreement that Company's obligations thereunder be
guarantied by Guarantors.
E. Guarantors are willing irrevocably and unconditionally to
guaranty such obligations of Company.
NOW, THEREFORE, based upon the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and in order to induce Lenders and Guarantied Party to enter
into the Credit Agreement and to make Loans and other extensions of credit
thereunder and to induce Interest Rate
1
<PAGE>
Exchangers to enter into the Lender Interest Rate Agreements, Guarantors
hereby agree as follows:
SECTION 1. DEFINITIONS
1.1 Certain Defined Terms. As used in this Guaranty, the
---------------------
following terms shall have the following meanings unless the context
otherwise requires:
"Beneficiaries" means Guarantied Party, Syndication Agent,
Lenders and any Interest Rate Exchangers.
"Guarantied Obligations" has the meaning assigned to that term in
subsection 2.1.
"Guaranty" means this Subsidiary Guaranty dated as of October 23,
1997, as it may be amended, supplemented or otherwise modified from time to
time.
"payment in full", "paid in full" or any similar term means
payment in full of the Guarantied Obligations, including all principal,
interest, costs, fees and expenses (including reasonable legal fees and
expenses) of Beneficiaries as required under the Loan Documents and the
Lender Interest Rate Agreements.
1.2 Interpretation.
--------------
(a) References to "Sections" and "subsections" shall be to
Sections and subsections, respectively, of this Guaranty unless otherwise
specifically provided.
(b) In the event of any conflict or inconsistency between the
terms, conditions and provisions of this Guaranty and the terms, conditions
and provisions of the Credit Agreement, the terms, conditions and
provisions of this Guaranty shall prevail.
SECTION 2. THE GUARANTY
2.1 Guaranty of the Guarantied Obligations. Subject to the
--------------------------------------
provisions of subsection 2.2(a), Guarantors jointly and severally hereby
irrevocably and unconditionally guaranty the due and punctual payment in
full of all Guarantied Obligations when the same shall become due, whether
at stated maturity, by required prepayment, declaration, acceleration,
demand or otherwise (including amounts that would become due but for the
operation of the automatic stay under Section 362(a) of the Bankruptcy
Code, 11 U.S.C. (S) 362(a)). The term "Guarantied Obligations" is used
herein in its most comprehensive sense and includes:
(a) any and all Obligations of Company and any and all Interest
Rate Obligations, in each case now or hereafter made, incurred or created,
whether absolute or contingent, liquidated or unliquidated, whether due or
not due, and however arising under or in connection with the Credit
Agreement and the other Loan Documents and the Lender Interest Rate
Agreements, including those arising under successive borrowing
2
<PAGE>
transactions under the Credit Agreement which shall either continue the
Obligations of Company or from time to time renew them after they have been
satisfied and including interest which, but for the filing of a petition in
bankruptcy with respect to Company, would have accrued on any Guarantied
Obligations, whether or not a claim is allowed against Company for such
interest in the related bankruptcy proceeding; and
(b) those expenses set forth in subsection 2.8 hereof.
2.2 Limitation on Amount Guarantied; Contribution by Guarantors.
-----------------------------------------------------------
(a) Anything contained in this Guaranty to the contrary notwithstanding, if
any Fraudulent Transfer Law (as hereinafter defined) is determined by a
court of competent jurisdiction to be applicable to the obligations of any
Guarantor under this Guaranty, such obligations of such Guarantor hereunder
shall be limited to a maximum aggregate amount equal to the largest amount
that would not render its obligations hereunder subject to avoidance as a
fraudulent transfer or conveyance under Section 548 of Title 11 of the
United States Code or any applicable provisions of comparable state law
(collectively, the "Fraudulent Transfer Laws"), in each case after giving
effect to all other liabilities of such Guarantor, contingent or otherwise,
that are relevant under the Fraudulent Transfer Laws (specifically
excluding, however, any liabilities of such Guarantor (x) in respect of
intercompany indebtedness to Company or other affiliates of Company to the
extent that such indebtedness would be discharged in an amount equal to the
amount paid by such Guarantor hereunder and (y) under any guaranty of
Subordinated Indebtedness which guaranty contains a limitation as to
maximum amount similar to that set forth in this subsection 2.2(a),
pursuant to which the liability of such Guarantor hereunder is included in
the liabilities taken into account in determining such maximum amount) and
after giving effect as assets to the value (as determined under the
applicable provisions of the Fraudulent Transfer Laws) of any rights to
subrogation, reimbursement, indemnification or contribution of such
Guarantor pursuant to applicable law or pursuant to the terms of any
agreement (including any such right of contribution under subsection
2.2(b).
(b) Guarantors under this Guaranty together desire to allocate
among themselves, in a fair and equitable manner, their obligations arising
under this Guaranty. Accordingly, in the event any payment or distribution
is made on any date by any Guarantor under this Guaranty (a "Funding
Guarantor") that exceeds its Fair Share (as defined below) as of such date,
that Funding Guarantor shall be entitled to a contribution from each of the
other Guarantors in the amount of such other Guarantor's Fair Share
Shortfall (as defined below) as of such date, with the result that all such
contributions will cause each Guarantor's Aggregate Payments (as defined
below) to equal its Fair Share as of such date. "Fair Share" means, with
respect to a Guarantor as of any date of determination, an amount equal to
(i) the ratio of (x) the Adjusted Maximum Amount (as defined below) with
respect to such Guarantor to (y) the aggregate of the Adjusted Maximum
Amounts with respect to all Guarantors multiplied by (ii) the aggregate
---------- --
amount paid or distributed on or before such date by all Funding Guarantors
under this Guaranty in respect of the obligations guarantied. "Fair Share
Shortfall" means, with respect to a Guarantor as of any date of
determination, the excess, if any, of the Fair
3
<PAGE>
Share of such Guarantor over the Aggregate Payments of such Guarantor.
"Adjusted Maximum Amount" means, with respect to a Guarantor as of any date
of determination, the maximum aggregate amount of the obligations of such
Guarantor under this Guaranty, determined as of such date in accordance
with subsection 2.2(a); provided that, solely for purposes of calculating
--------
the "Adjusted Maximum Amount" with respect to any Guarantor for purposes of
this subsection 2.2(b), any assets or liabilities of such Guarantor arising
by virtue of any rights to subrogation, reimbursement or indemnification or
any rights to or obligations of contribution hereunder shall not be
considered as assets or liabilities of such Guarantor. "Aggregate Payments"
means, with respect to a Guarantor as of any date of determination, an
amount equal to (i) the aggregate amount of all payments and distributions
made on or before such date by such Guarantor in respect of this Guaranty
(including in respect of this subsection 2.2(b)) minus (ii) the aggregate
-----
amount of all payments received on or before such date by such Guarantor
from the other Guarantors as contributions under this subsection 2.2(b).
The amounts payable as contributions hereunder shall be determined as of
the date on which the related payment or distribution is made by the
applicable Funding Guarantor. The allocation among Guarantors of their
obligations as set forth in this subsection 2.2(b) shall not be construed
in any way to limit the liability of any Guarantor hereunder.
2.3 Payment by Guarantors; Application of Payments. Subject to
----------------------------------------------
the provisions of subsection 2.2(a), Guarantors hereby jointly and
severally agree, in furtherance of the foregoing and not in limitation of
any other right which any Beneficiary may have at law or in equity against
any Guarantor by virtue hereof, that upon the failure of Company to pay any
of the Guarantied Obligations when and as the same shall become due,
whether at stated maturity, by required prepayment, declaration,
acceleration, demand or otherwise (including amounts that would become due
but for the operation of the automatic stay under Section 362(a) of the
Bankruptcy Code, 11 U.S.C. (S) 362(a)), Guarantors will upon demand pay,
or cause to be paid, in cash, to Guarantied Party for the ratable benefit
of Beneficiaries, an amount equal to the sum of the unpaid principal amount
of all Guarantied Obligations then due as aforesaid, accrued and unpaid
interest on such Guarantied Obligations (including interest which, but for
the filing of a petition in bankruptcy with respect to Company, would have
accrued on such Guarantied Obligations, whether or not a claim is allowed
against Company for such interest in the related bankruptcy proceeding) and
all other Guarantied Obligations then owed to Beneficiaries as aforesaid.
All such payments shall be applied promptly from time to time by Guarantied
Party as provided in subsection 2.4D of the Credit Agreement.
2.4 Liability of Guarantors Absolute. Each Guarantor agrees
--------------------------------
that its obligations hereunder are irrevocable, absolute, independent and
unconditional and shall not be affected by any circumstance which
constitutes a legal or equitable discharge of a guarantor or surety other
than payment in full of the Guarantied Obligations. In furtherance of the
foregoing and without limiting the generality thereof, each Guarantor
agrees as follows:
(a) This Guaranty is a guaranty of payment when due and not of
collectibility.
4
<PAGE>
(b) Guarantied Party may enforce this Guaranty upon the
occurrence of an Event of Default under the Credit Agreement
notwithstanding the existence of any dispute between Company and any
Beneficiary with respect to the existence of such Event of Default.
(c) The obligations of each Guarantor hereunder are independent
of the obligations of Company under the Loan Documents or the Lender
Interest Rate Agreements and the obligations of any other guarantor
(including any other Guarantor) of the obligations of Company under the
Loan Documents or the Lender Interest Rate Agreements, and a separate
action or actions may be brought and prosecuted against such Guarantor
whether or not any action is brought against Company or any of such other
guarantors and whether or not Company is joined in any such action or
actions.
(d) Payment by any Guarantor of a portion, but not all, of the
Guarantied Obligations shall in no way limit, affect, modify or abridge any
Guarantor's liability for any portion of the Guarantied Obligations which
has not been paid. Without limiting the generality of the foregoing, if
Guarantied Party is awarded a judgment in any suit brought to enforce any
Guarantor's covenant to pay a portion of the Guarantied Obligations, such
judgment shall not be deemed to release such Guarantor from its covenant to
pay the portion of the Guarantied Obligations that is not the subject of
such suit, and such judgment shall not, except to the extent satisfied by
such Guarantor, limit, affect, modify or abridge any other Guarantor's
liability hereunder in respect of the Guarantied Obligations.
(e) Any Beneficiary, upon such terms as it deems appropriate,
without notice or demand and without affecting the validity or
enforceability of this Guaranty or giving rise to any reduction,
limitation, impairment, discharge or termination of any Guarantor's
liability hereunder, from time to time may (i) renew, extend, accelerate,
increase the rate of interest on, or otherwise change the time, place,
manner or terms of payment of the Guarantied Obligations, (ii) settle,
compromise, release or discharge, or accept or refuse any offer of
performance with respect to, or substitutions for, the Guarantied
Obligations or any agreement relating thereto and/or subordinate the
payment of the same to the payment of any other obligations; (iii) request
and accept other guaranties of the Guarantied Obligations and take and hold
security for the payment of this Guaranty or the Guarantied Obligations;
(iv) release, surrender, exchange, substitute, compromise, settle, rescind,
waive, alter, subordinate or modify, with or without consideration, any
security for payment of the Guarantied Obligations, any other guaranties of
the Guarantied Obligations, or any other obligation of any Person
(including any other Guarantor) with respect to the Guarantied Obligations;
(v) enforce and apply any security now or hereafter held by or for the
benefit of such Beneficiary in respect of this Guaranty or the Guarantied
Obligations and direct the order or manner of sale thereof, or exercise any
other right or remedy that such Beneficiary may have against any such
security, in each case as such Beneficiary in its discretion may determine
consistent with the Credit Agreement or the applicable Lender Interest Rate
Agreement and any applicable security agreement, including foreclosure on
any such security pursuant to one or more judicial or nonjudicial sales,
whether or not every aspect of any
5
<PAGE>
such sale is commercially reasonable, and even though such action operates
to impair or extinguish any right of reimbursement or subrogation or other
right or remedy of any Guarantor against Company or any security for the
Guarantied Obligations; and (vi) exercise any other rights available to it
under the Loan Documents or the Lender Interest Rate Agreements.
(f) This Guaranty and the obligations of Guarantors hereunder
shall be valid and enforceable and shall not be subject to any reduction,
limitation, impairment, discharge or termination for any reason (other than
payment in full of the Guarantied Obligations), including the occurrence of
any of the following, whether or not any Guarantor shall have had notice or
knowledge of any of them: (i) any failure or omission to assert or enforce
or agreement or election not to assert or enforce, or the stay or
enjoining, by order of court, by operation of law or otherwise, of the
exercise or enforcement of, any claim or demand or any right, power or
remedy (whether arising under the Loan Documents or the Lender Interest
Rate Agreements, at law, in equity or otherwise) with respect to the
Guarantied Obligations or any agreement relating thereto, or with respect
to any other guaranty of or security for the payment of the Guarantied
Obligations; (ii) any rescission, waiver, amendment or modification of, or
any consent to departure from, any of the terms or provisions (including
provisions relating to events of default) of the Credit Agreement, any of
the other Loan Documents, any of the Lender Interest Rate Agreements or any
agreement or instrument executed pursuant thereto, or of any other guaranty
or security for the Guarantied Obligations, in each case whether or not in
accordance with the terms of the Credit Agreement or such Loan Document,
such Lender Interest Rate Agreement or any agreement relating to such other
guaranty or security; (iii) the Guarantied Obligations, or any agreement
relating thereto, at any time being found to be illegal, invalid or
unenforceable in any respect; (iv) the application of payments received
from any source (other than payments received pursuant to the other Loan
Documents or any of the Lender Interest Rate Agreements or from the
proceeds of any security for the Guarantied Obligations, except to the
extent such security also serves as collateral for indebtedness other than
the Guarantied Obligations) to the payment of indebtedness other than the
Guarantied Obligations, even though any Beneficiary might have elected to
apply such payment to any part or all of the Guarantied Obligations; (v)
any Beneficiary's consent to the change, reorganization or termination of
the corporate structure or existence of Company or any of its Subsidiaries
and to any corresponding restructuring of the Guarantied Obligations; (vi)
any failure to perfect or continue perfection of a security interest in any
collateral which secures any of the Guarantied Obligations; (vii) any
defenses, set-offs or counterclaims which Company may allege or assert
against any Beneficiary in respect of the Guarantied Obligations, including
failure of consideration, breach of warranty, payment, statute of frauds,
statute of limitations, accord and satisfaction and usury; and (viii) any
other act or thing or omission, or delay to do any other act or thing,
which may or might in any manner or to any extent vary the risk of any
Guarantor as an obligor in respect of the Guarantied Obligations.
6
<PAGE>
2.5 Waivers by Guarantors. Each Guarantor hereby waives, for
---------------------
the benefit of Beneficiaries:
(a) any right to require any Beneficiary, as a condition of
payment or performance by such Guarantor, to (i) proceed against Company,
any other guarantor (including any other Guarantor) of the Guarantied
Obligations or any other Person, (ii) proceed against or exhaust any
security held from Company, any such other guarantor or any other Person,
(iii) proceed against or have resort to any balance of any deposit account
or credit on the books of any Beneficiary in favor of Company or any other
Person, or (iv) pursue any other remedy in the power of any Beneficiary
whatsoever;
(b) any defense arising by reason of the incapacity, lack of
authority or any disability or other defense of Company including any
defense based on or arising out of the lack of validity or the
unenforceability of the Guarantied Obligations or any agreement or
instrument relating thereto or by reason of the cessation of the liability
of Company from any cause other than payment in full of the Guarantied
Obligations;
(c) any defense based upon any statute or rule of law which
provides that the obligation of a surety must be neither larger in amount
nor in other respects more burdensome than that of the principal;
(d) any defense based upon any Beneficiary's errors or omissions
in the administration of the Guarantied Obligations, except behavior which
amounts to bad faith;
(e) (i) any principles or provisions of law, statutory or
otherwise, which are or might be in conflict with the terms of this
Guaranty and any legal or equitable discharge of such Guarantor's
obligations hereunder, (ii) the benefit of any statute of limitations
affecting such Guarantor's liability hereunder or the enforcement hereof,
(iii) any rights to set-offs, recoupments and counterclaims, and (iv)
promptness, diligence and any requirement that any Beneficiary protect,
secure, perfect or insure any security interest or lien or any property
subject thereto;
(f) notices, demands, presentments, protests, notices of protest,
notices of dishonor and notices of any action or inaction, including
acceptance of this Guaranty, notices of default under the Credit Agreement,
the Lender Interest Rate Agreements or any agreement or instrument related
thereto, notices of any renewal, extension or modification of the
Guarantied Obligations or any agreement related thereto, notices of any
extension of credit to Company and notices of any of the matters referred
to in subsection 2.4 and any right to consent to any thereof; and
(g) any defenses or benefits that may be derived from or afforded
by law which limit the liability of or exonerate guarantors or sureties, or
which may conflict with the terms of this Guaranty.
7
<PAGE>
2.6 Guarantors' Rights of Subrogation, Contribution, Etc. Each
----------------------------------------------------
Guarantor hereby waives any claim, right or remedy, direct or indirect,
that such Guarantor now has or may hereafter have against Company or any of
its assets in connection with this Guaranty or the performance by such
Guarantor of its obligations hereunder, in each case whether such claim,
right or remedy arises in equity, under contract, by statute, under common
law or otherwise and including (a) any right of subrogation, reimbursement
or indemnification that such Guarantor now has or may hereafter have
against Company, (b) any right to enforce, or to participate in, any claim,
right or remedy that any Beneficiary now has or may hereafter have against
Company, and (c) any benefit of, and any right to participate in, any
collateral or security now or hereafter held by any Beneficiary. In
addition, until the Guarantied Obligations shall have been indefeasibly
paid in full and the Commitments shall have terminated and all Letters of
Credit shall have expired or been cancelled, each Guarantor shall withhold
exercise of any right of contribution such Guarantor may have against any
other guarantor (including any other Guarantor) of the Guarantied
Obligations (including any such right of contribution under subsection
2.2(b)). Each Guarantor further agrees that, to the extent the waiver or
agreement to withhold the exercise of its rights of subrogation,
reimbursement, indemnification and contribution as set forth herein is
found by a court of competent jurisdiction to be void or voidable for any
reason, any rights of subrogation, reimbursement or indemnification such
Guarantor may have against Company or against any collateral or security,
and any rights of contribution such Guarantor may have against any such
other guarantor, shall be junior and subordinate to any rights any
Beneficiary may have against Company, to all right, title and interest any
Beneficiary may have in any such collateral or security, and to any right
any Beneficiary may have against such other guarantor. If any amount shall
be paid to any Guarantor on account of any such subrogation, reimbursement,
indemnification or contribution rights at any time when all Guarantied
Obligations shall not have been paid in full, such amount shall be held in
trust for Guarantied Party on behalf of Beneficiaries and shall forthwith
be paid over to Guarantied Party for the benefit of Beneficiaries to be
credited and applied against the Guarantied Obligations, whether matured or
unmatured, in accordance with the terms hereof.
2.7 Subordination of Other Obligations. Any indebtedness of
----------------------------------
Company or any Guarantor now or hereafter held by any Guarantor (the
"Obligee Guarantor") is hereby subordinated in right of payment to the
Guarantied Obligations, and any such indebtedness collected or received by
the Obligee Guarantor after an Event of Default has occurred and is
continuing shall be held in trust for Guarantied Party on behalf of
Beneficiaries and shall forthwith be paid over to Guarantied Party for the
benefit of Beneficiaries to be credited and applied against the Guarantied
Obligations but without affecting, impairing or limiting in any manner the
liability of the Obligee Guarantor under any other provision of this
Guaranty.
2.8 Expenses. Guarantors jointly and severally agree to pay, or
--------
cause to be paid, on demand, and to save Beneficiaries harmless against
liability for, any and all costs and expenses (including fees and
disbursements of counsel and allocated costs of
8
<PAGE>
internal counsel) incurred or expended by any Beneficiary in connection
with the enforcement of or preservation of any rights under this Guaranty.
2.9 Continuing Guaranty. This Guaranty is a continuing
-------------------
guaranty and shall remain in effect until all of the Guarantied Obligations
shall have been paid in full and the Commitments shall have terminated and
all Letters of Credit shall have expired or been cancelled. Each Guarantor
hereby irrevocably waives any right to revoke this Guaranty as to future
transactions giving rise to any Guarantied Obligations.
2.10 Authority of Guarantors or Company. It is not necessary
----------------------------------
for any Beneficiary to inquire into the capacity or powers of any Guarantor
or Company or the officers, directors or any agents acting or purporting to
act on behalf of any of them.
2.11 Financial Condition of Company. Any Loans may be granted
------------------------------
to Company or continued from time to time, and any Lender Interest Rate
Agreements may be entered into from time to time, in each case without
notice to or authorization from any Guarantor regardless of the financial
or other condition of Company at the time of any such grant or continuation
or at the time such Lender Interest Rate Agreement is entered into, as the
case may be. No Beneficiary shall have any obligation to disclose or
discuss with any Guarantor its assessment, or any Guarantor's assessment,
of the financial condition of Company. Each Guarantor has adequate means
to obtain information from Company on a continuing basis concerning the
financial condition of Company and its ability to perform its obligations
under the Loan Documents and the Lender Interest Rate Agreements, and each
Guarantor assumes the responsibility for being and keeping informed of the
financial condition of Company and of all circumstances bearing upon the
risk of nonpayment of the Guarantied Obligations. Each Guarantor hereby
waives and relinquishes any duty on the part of any Beneficiary to disclose
any matter, fact or thing relating to the business, operations or
conditions of Company now known or hereafter known by any Beneficiary.
2.12 Rights Cumulative. The rights, powers and remedies given
-----------------
to Beneficiaries by this Guaranty are cumulative and shall be in addition
to and independent of all rights, powers and remedies given to
Beneficiaries by virtue of any statute or rule of law or in any of the
other Loan Documents, any of the Lender Interest Rate Agreements or any
agreement between any Guarantor and any Beneficiary or Beneficiaries or
between Company and any Beneficiary or Beneficiaries. Any forbearance or
failure to exercise, and any delay by any Beneficiary in exercising, any
right, power or remedy hereunder shall not impair any such right, power or
remedy or be construed to be a waiver thereof, nor shall it preclude the
further exercise of any such right, power or remedy.
2.13 Bankruptcy; Post-Petition Interest; Reinstatement of
----------------------------------------------------
Guaranty. (a) So long as any Guarantied Obligations remain outstanding, no
--------
Guarantor shall, without the prior written consent of Guarantied Party
acting pursuant to the instructions of Requisite Obligees (as defined in
subsection 3.14), commence or join with any other Person in commencing any
bankruptcy, reorganization or insolvency
9
<PAGE>
proceedings of or against Company. The obligations of Guarantors under this
Guaranty shall not be reduced, limited, impaired, discharged, deferred,
suspended or terminated by any proceeding, voluntary or involuntary,
involving the bankruptcy, insolvency, receivership, reorganization,
liquidation or arrangement of Company or by any defense which Company may
have by reason of the order, decree or decision of any court or
administrative body resulting from any such proceeding.
(b) Each Guarantor acknowledges and agrees that any interest on
any portion of the Guarantied Obligations which accrues after the
commencement of any proceeding referred to in clause (a) above (or, if
interest on any portion of the Guarantied Obligations ceases to accrue by
operation of law by reason of the commencement of said proceeding, such
interest as would have accrued on such portion of the Guarantied
Obligations if said proceedings had not been commenced) shall be included
in the Guarantied Obligations because it is the intention of Guarantors and
Beneficiaries that the Guarantied Obligations which are guarantied by
Guarantors pursuant to this Guaranty should be determined without regard to
any rule of law or order which may relieve Company of any portion of such
Guarantied Obligations. Guarantors will permit any trustee in bankruptcy,
receiver, debtor in possession, assignee for the benefit of creditors or
similar person to pay Guarantied Party, or allow the claim of Guarantied
Party in respect of, any such interest accruing after the date on which
such proceeding is commenced.
(c) In the event that all or any portion of the Guarantied
Obligations are paid by Company, the obligations of Guarantors hereunder
shall continue and remain in full force and effect or be reinstated, as the
case may be, in the event that all or any part of such payment(s) are
rescinded or recovered directly or indirectly from any Beneficiary as a
preference, fraudulent transfer or otherwise, and any such payments which
are so rescinded or recovered shall constitute Guarantied Obligations for
all purposes under this Guaranty.
2.14 Notice of Events. As soon as any Guarantor obtains
----------------
knowledge thereof, such Guarantor shall give Guarantied Party written
notice of any condition or event which has resulted in (a) a material
adverse change in the financial condition of any Guarantor or Company or
(b) a breach of or noncompliance with any term, condition or covenant
contained herein or in the Credit Agreement, any other Loan Document, any
Lender Interest Rate Agreement or any other document delivered pursuant
hereto or thereto.
2.15 Set Off. In addition to any other rights any Beneficiary
-------
may have under law or in equity, if any amount shall at any time be due and
owing by any Guarantor to any Beneficiary under this Guaranty, such
Beneficiary is authorized at any time or from time to time, without notice
(any such notice being hereby expressly waived), to set off and to
appropriate and to apply any and all deposits (general or special,
including indebtedness evidenced by certificates of deposit, whether
matured or unmatured) and any other indebtedness of such Beneficiary owing
to such Guarantor and any other property of such Guarantor held by any
Beneficiary to or for the credit or the
10
<PAGE>
account of such Guarantor against and on account of the Guarantied
Obligations and liabilities of such Guarantor to any Beneficiary under this
Guaranty.
2.16 Discharge of Guaranty Upon Sale of Guarantor. If all of
--------------------------------------------
the stock of any Guarantor or any of its successors in interest under this
Guaranty shall be sold or otherwise disposed of (including by merger or
consolidation) in an Asset Sale not prohibited by subsection 7.7 of the
Credit Agreement or otherwise consented to by Requisite Lenders, the
Guaranty of such Guarantor or such successor in interest, as the case may
be, hereunder shall automatically be discharged and released without any
further action by any Beneficiary or any other Person effective as of the
time of such Asset Sale; provided that, as a condition precedent to such
--------
discharge and release, Guarantied Party shall have received evidence
satisfactory to it that arrangements satisfactory to it have been made for
delivery to Guarantied Party of the applicable Net Asset Sale Proceeds.
SECTION 3. MISCELLANEOUS
3.1 Survival of Warranties. All agreements, representations and
----------------------
warranties made herein shall survive the execution and delivery of this
Guaranty and the other Loan Documents and the Lender Interest Rate
Agreements and any increase in the Commitments under the Credit Agreement.
3.2 Notices. Any communications between Guarantied Party and
-------
any Guarantor and any notices or requests provided herein to be given may
be given by mailing the same, postage prepaid, or by telex, facsimile
transmission or cable to each such party at its address set forth in the
Credit Agreement, on the signature pages hereof or to such other addresses
as each such party may in writing hereafter indicate. Any notice, request
or demand to or upon Guarantied Party or any Guarantor shall not be
effective until received.
3.3 Severability. In case any provision in or obligation under
------------
this Guaranty shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
provisions or obligations, or of such provision or obligation in any other
jurisdiction, shall not in any way be affected or impaired thereby.
3.4 Amendments and Waivers. No amendment, modification,
----------------------
termination or waiver of any provision of this Guaranty, and no consent to
any departure by any Guarantor therefrom, shall in any event be effective
without the written concurrence of Guarantied Party and, in the case of any
such amendment or modification, each Guarantor against whom enforcement of
such amendment or modification is sought. Any such waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which it was given.
11
<PAGE>
3.5 Headings. Section and subsection headings in this Guaranty
--------
are included herein for convenience of reference only and shall not
constitute a part of this Guaranty for any other purpose or be given any
substantive effect.
3.6 Applicable Law; Rules of Construction. THIS GUARANTY AND
-------------------------------------
THE RIGHTS AND OBLIGATIONS OF GUARANTORS AND BENEFICIARIES HEREUNDER SHALL
BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE
GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO
CONFLICTS OF LAWS PRINCIPLES. The rules of construction set forth in
subsection 1.3 of the Credit Agreement shall be applicable to this Guaranty
mutatis mutandis.
3.7 Successors and Assigns. This Guaranty is a continuing
----------------------
guaranty and shall be binding upon each Guarantor and its respective
successors and assigns. This Guaranty shall inure to the benefit of
Beneficiaries and their respective successors and assigns. No Guarantor
shall assign this Guaranty or any of the rights or obligations of such
Guarantor hereunder without the prior written consent of all Lenders. Any
Beneficiary may, without notice or consent, assign its interest in this
Guaranty in whole or in part. The terms and provisions of this Guaranty
shall inure to the benefit of any transferee or assignee of any Loan, and
in the event of such transfer or assignment the rights and privileges
herein conferred upon such Beneficiary shall automatically extend to and be
vested in such transferee or assignee, all subject to the terms and
conditions hereof.
3.8 Consent to Jurisdiction and Service of Process. ALL
----------------------------------------------
JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY GUARANTOR ARISING OUT OF OR
RELATING TO THIS GUARANTY, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN
ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY
AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH
GUARANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY
(I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE
JURISDICTION AND VENUE OF SUCH COURTS;
(II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS;
(III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN
ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN
RECEIPT REQUESTED, TO SUCH GUARANTOR AT ITS ADDRESS PROVIDED IN
ACCORDANCE WITH SUBSECTION 3.2;
12
<PAGE>
(IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS
SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH GUARANTOR IN ANY
SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE
AND BINDING SERVICE IN EVERY RESPECT;
(V) AGREES THAT BENEFICIARIES RETAIN THE RIGHT TO SERVE PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH
GUARANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND
(VI) AGREES THAT THE PROVISIONS OF THIS SUBSECTION 3.8 RELATING TO
JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST
EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-
1402 OR OTHERWISE.
3.9 Waiver of Trial by Jury. EACH GUARANTOR AND, BY ITS
-----------------------
ACCEPTANCE OF THE BENEFITS HEREOF, EACH BENEFICIARY HEREBY AGREES TO WAIVE
ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF THIS GUARANTY. The scope of this waiver is intended
to be all encompassing of any and all disputes that may be filed in any
court and that relate to the subject matter of this transaction, including
contract claims, tort claims, breach of duty claims and all other common
law and statutory claims. Each Guarantor and, by its acceptance of the
benefits hereof, each Beneficiary, each (i) acknowledges that this waiver
is a material inducement for such Guarantor and Beneficiaries to enter into
a business relationship, that such Guarantor and Beneficiaries have already
relied on this waiver in entering into this Guaranty or accepting the
benefits thereof, as the case may be, and that each will continue to rely
on this waiver in their related future dealings and (ii) further warrants
and represents that each has reviewed this waiver with its legal counsel,
and that each knowingly and voluntarily waives its jury trial rights
following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE,
MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN
BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SUBSECTION 3.9
AND EXECUTED BY GUARANTIED PARTY AND EACH GUARANTOR), AND THIS WAIVER SHALL
APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS
TO THIS GUARANTY. In the event of litigation, this Guaranty may be filed
as a written consent to a trial by the court.
3.10 No Other Writing. This writing is intended by Guarantors
----------------
and Beneficiaries as the final expression of this Guaranty and is also
intended as a complete and exclusive statement of the terms of their
agreement with respect to the matters covered hereby. No course of
dealing, course of performance or trade usage, and no parol evidence of any
nature, shall be used to supplement or modify any terms of this Guaranty.
There are no conditions to the full effectiveness of this Guaranty.
13
<PAGE>
3.11 Further Assurances. At any time or from time to time, upon
------------------
the request of Guarantied Party, Guarantors shall execute and deliver such
further documents and do such other acts and things as Guarantied Party may
reasonably request in order to effect fully the purposes of this Guaranty.
3.12 Additional Guarantors. The initial Guarantors hereunder
---------------------
shall be such of the Restricted Subsidiaries of Company as are signatories
hereto on the date hereof. From time to time subsequent to the date
hereof, additional Restricted Subsidiaries of Company may become parties
hereto, as additional Guarantors (each an "Additional Guarantor"), by
executing a counterpart of this Guaranty. Upon delivery of any such
counterpart to Administrative Agent, notice of which is hereby waived by
Guarantors, each such Additional Guarantor shall be a Guarantor and shall
be as fully a party hereto as if such Additional Guarantor were an original
signatory hereof. Each Guarantor expressly agrees that its obligations
arising hereunder shall not be affected or diminished by the addition or
release of any other Guarantor hereunder, nor by any election of
Administrative Agent not to cause any Subsidiary of Company to become an
Additional Guarantor hereunder. This Guaranty shall be fully effective as
to any Guarantor that is or becomes a party hereto regardless of whether
any other Person becomes or fails to become or ceases to be a Guarantor
hereunder.
3.13 Counterparts; Effectiveness. This Guaranty may be executed
---------------------------
in any number of counterparts and by the different parties hereto in
separate counterparts, each of which when so executed and delivered shall
be deemed to be an original for all purposes; but all such counterparts
together shall constitute but one and the same instrument. This Guaranty
shall become effective as to each Guarantor upon the execution of a
counterpart hereof by such Guarantor (whether or not a counterpart hereof
shall have been executed by any other Guarantor) and receipt by Guarantied
Party of written or telephonic notification of such execution and
authorization of delivery thereof.
3.14 Guarantied Party as Administrative Agent.
----------------------------------------
(a) Guarantied Party has been appointed to act as Guarantied
Party hereunder by Lenders and, by their acceptance of the benefits hereof,
Interest Rate Exchangers. Guarantied Party shall be obligated, and shall
have the right hereunder, to make demands, to give notices, to exercise or
refrain from exercising any rights, and to take or refrain from taking any
action, solely in accordance with this Guaranty and the Credit Agreement;
provided that Guarantied Party shall exercise, or refrain from exercising,
--------
any remedies hereunder in accordance with the instructions of (i) Requisite
Lenders or (ii) after payment in full of all Obligations under the Credit
Agreement and the other Loan Documents, the holders of a majority of the
aggregate notional amount (or, with respect to any Lender Interest Rate
Agreement that has been terminated in accordance with its terms, the amount
then due and payable (exclusive of expenses and similar payments but
including any early termination payments then due) under such Lender
Interest Rate Agreement) under all Lender Interest Rate Agreements
(Requisite Lenders or, if applicable, such holders being referred to herein
as "Requisite Obligees"). In furtherance of the foregoing provisions of
this subsection 3.14, each Interest Rate
14
<PAGE>
Exchanger, by its acceptance of the benefits hereof, agrees that it shall
have no right individually to enforce this Guaranty, it being understood
and agreed by such Interest Rate Exchanger that all rights and remedies
hereunder may be exercised solely by Guarantied Party for the benefit of
Beneficiaries in accordance with the terms of this subsection 3.14.
(b) Guarantied Party shall at all times be the same Person that
is Administrative Agent under the Credit Agreement. Written notice of
resignation by Administrative Agent pursuant to subsection 9.5 of the
Credit Agreement shall also constitute notice of resignation as Guarantied
Party under this Guaranty; removal of Administrative Agent pursuant to
subsection 9.5 of the Credit Agreement shall also constitute removal as
Guarantied Party under this Guaranty; and appointment of a successor
Administrative Agent pursuant to subsection 9.5 of the Credit Agreement
shall also constitute appointment of a successor Guarantied Party under
this Guaranty. Upon the acceptance of any appointment as Administrative
Agent under subsection 9.5 of the Credit Agreement by a successor
Administrative Agent, that successor Administrative Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and
duties of the retiring or removed Guarantied Party under this Guaranty, and
the retiring or removed Guarantied Party under this Guaranty shall promptly
(i) transfer to such successor Guarantied Party all sums held hereunder,
together with all records and other documents necessary or appropriate in
connection with the performance of the duties of the successor Guarantied
Party under this Guaranty, and (ii) take such other actions as may be
necessary or appropriate in connection with the assignment to such
successor Guarantied Party of the rights created hereunder, whereupon such
retiring or removed Guarantied Party shall be discharged from its duties
and obligations under this Guaranty. After any retiring or removed
Guarantied Party's resignation or removal hereunder as Guarantied Party,
the provisions of this Guaranty shall inure to its benefit as to any
actions taken or omitted to be taken by it under this Guaranty while it was
Guarantied Party hereunder.
[Remainder of page intentionally left blank]
15
<PAGE>
IN WITNESS WHEREOF, each of the undersigned Guarantors has caused this
Guaranty to be duly executed and delivered by its officer thereunto duly
authorized as of the date first written above.
[LIST ALL RESTRICTED SUBSIDIARIES]
By
___________________________
Title
________________________
Address:
_____________________
_____________________
_____________________
16
<PAGE>
IN WITNESS WHEREOF, the undersigned Additional Guarantor has caused
this Guaranty to be duly executed and delivered by its officer thereunto duly
authorized as of ______________, 199_.
________________________________________
(Name of Additional Guarantor)
By ____________________________
Title _________________________
Address: ______________________
______________________
______________________
17
<PAGE>
EXHIBIT 10.22
SUBSIDIARY SECURITY AGREEMENT
This SUBSIDIARY SECURITY AGREEMENT (this "Agreement") is dated as
of __________ and entered into by and between [INSERT NAME OF GRANTOR IN
CAPS], a _____________________ corporation ("Grantor"), and FIRST UNION
NATIONAL BANK, as administrative agent for and representative of (in such
capacity herein called "Secured Party") the financial institutions
("Lenders") party to the Credit Agreement referred to below and any
Interest Rate Exchangers (as hereinafter defined).
PRELIMINARY STATEMENTS
A. Secured Party, Syndication Agent and Lenders have entered
into a Credit Agreement dated as of October 23, 1997, which Credit
Agreement has been amended and restated by an Amended and Restated Credit
Agreement dated as of January 28, 1999 (said Credit Agreement, as it may
hereafter be further amended, supplemented or otherwise modified from time
to time, being the "Credit Agreement", the terms defined therein and not
otherwise defined herein being used herein as therein defined) with The
Pantry, Inc., Delaware corporation ("Company"), pursuant to which Lenders
have made certain commitments, subject to the terms and conditions set
forth in the Credit Agreement, to extend certain credit facilities to
Company.
B. Company may from time to time enter, or may from time to time
have entered, into one or more Interest Rate Agreements (collectively, the
"Lender Interest Rate Agreements") with one or more Lenders (in such
capacity, collectively, "Interest Rate Exchangers").
C. Grantor has executed and delivered that certain Subsidiary
Guaranty dated as of October 23, 1997 (said Subsidiary Guaranty, as it may
hereafter be amended, supplemented or otherwise modified from time to time,
being the "Guaranty") in favor of Secured Party for the benefit of Lenders
and any Interest Rate Exchangers, pursuant to which Grantor has guarantied
the prompt payment and performance when due of all obligations of Company
under the Credit Agreement and the other Loan Documents and all obligations
of Company under the Lender Interest Rate Agreements, including the
obligation of Company to make payments thereunder in the event of early
termination thereof.
D. It is a condition precedent to the extensions of credit by
Lenders under the Credit Agreement that Grantor shall have granted the
security interests and undertaken the obligations contemplated by this
Agreement.
NOW, THEREFORE, in consideration of the premises and in order to
induce Lenders to make Loans and other extensions of credit under the
Credit Agreement and to induce Interest Rate Exchangers to enter into the
Lender Interest Rate Agreements,
1
<PAGE>
and for other good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, Grantor hereby agrees with Secured Party as
follows:
SECTION 1. Grant of Security. Grantor hereby grants to Secured
-----------------
Party a security interest in, all of Grantor's right, title and interest in
and to the following, in each case whether now or hereafter existing or in
which Grantor now has or hereafter acquires an interest and wherever the
same may be located (the "Collateral"):
(a) all equipment in all of its forms, all parts thereof and all
accessions thereto (any and all such equipment, parts and accessions being
the "Equipment");
(b) all inventory in all of its forms (including (i) all goods
held by Grantor for sale or lease or to be furnished under contracts of
service or so leased or furnished, (ii) all raw materials, work in process,
finished goods, and materials used or consumed in the manufacture, packing,
shipping, advertising, selling, leasing, furnishing or production of such
inventory or otherwise used or consumed in Grantor's business, (iii) all
goods in which Grantor has an interest in mass or a joint or other interest
or right of any kind, (iv) all goods which are returned to or repossessed
by Grantor, and (v) all accessions thereto and products thereof (all such
inventory, accessions and products being the "Inventory") and all
negotiable documents of title (including warehouse receipts, dock receipts
and bills of lading) issued by any Person covering any Inventory (any such
negotiable document of title being a "Negotiable Document of Title");
(c) all accounts, contract rights, chattel paper, documents,
instruments, general intangibles and other rights and obligations of any
kind and all rights in, to and under all security agreements, leases and
other contracts securing or otherwise relating to any such accounts,
contract rights, chattel paper, documents, instruments, general intangibles
or other obligations (any and all such accounts, contract rights, chattel
paper, documents, instruments, general intangibles and other obligations
being the "Accounts", and any and all such security agreements, leases and
other contracts being the "Related Contracts");
(d) the agreements listed in Part A of Schedule II annexed
-----------
hereto, as each such agreement may be amended, supplemented or otherwise
modified from time to time (said agreements, as so amended, supplemented or
otherwise modified, being referred to herein individually as an "Assigned
Agreement" and collectively as the "Assigned Agreements"), including (i)
all rights of Grantor to receive moneys due or to become due under or
pursuant to the Assigned Agreements, (ii) all rights of Grantor to receive
proceeds of any insurance, indemnity, warranty or guaranty with respect to
the Assigned Agreements, (iii) all claims of Grantor for damages arising
out of any breach of or default under the Assigned Agreements, and (iv) all
rights of Grantor to terminate, amend, supplement, modify or exercise
rights or options under the Assigned Agreements, to perform thereunder and
to compel performance and otherwise exercise all remedies thereunder;
2
<PAGE>
(e) all deposit accounts, including the deposit accounts listed
in Part B of Schedule II annexed hereto and all other deposit accounts
-----------
maintained with Secured Party;
(f) all trademarks, tradenames, tradesecrets, business names,
patents, patent applications, licenses, copyrights, registrations and
franchise rights, and all goodwill associated with any of the foregoing;
(g) to the extent not included in any other paragraph of this
Section 1, all other general intangibles (including tax refunds, rights to
payment or performance, choses in action and judgments taken on any rights
or claims included in the Collateral);
(h) all plant fixtures, business fixtures and other fixtures and
storage and office facilities, and all accessions thereto and products
thereof;
(i) all books, records, ledger cards, files, correspondence,
computer programs, tapes, disks and related data processing software that
at any time evidence or contain information relating to any of the
Collateral or are otherwise necessary or helpful in the collection thereof
or realization thereupon; and
(j) all proceeds, products, rents and profits of or from any and
all of the foregoing Collateral and, to the extent not otherwise included,
all payments under insurance (whether or not Secured Party is the loss
payee thereof), or any indemnity, warranty or guaranty, payable by reason
of loss or damage to or otherwise with respect to any of the foregoing
Collateral. For purposes of this Agreement, the term "proceeds" includes
whatever is receivable or received when Collateral or proceeds are sold,
exchanged, collected or otherwise disposed of, whether such disposition is
voluntary or involuntary.
Notwithstanding the foregoing, nothing in this Section 1 or
otherwise in this Agreement shall constitute a grant by Grantor of a
security interest in any contract, document, instrument, general
intangible, lease, license, right or other right of any kind to the extent
such a grant of a security interest would, after giving effect to the
provisions of subsection 9-318 of the Uniform Commercial Code for the
relevant jurisdiction, constitute a breach or violation of any term
thereof.
SECTION 2. Security for Obligations. This Agreement secures,
------------------------
and the Collateral is collateral security for, the prompt payment or
performance in full when due, whether at stated maturity, by required
prepayment, declaration, acceleration, demand or otherwise (including the
payment of amounts that would become due but for the operation of the
automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C.
(S)362(a)), of all obligations and liabilities of every nature of Grantor
now or hereafter existing under or arising out of or in connection with the
Guaranty and all extensions or renewals thereof, whether for principal,
interest (including interest that, but for the filing of a petition in
bankruptcy with respect to Company, would accrue on such obligations,
whether or not a claim is allowed against Company for such interest in the
3
<PAGE>
related bankruptcy proceeding), reimbursement of amounts drawn under
Letters of Credit, payments for early termination of Lender Interest Rate
Agreements, fees, expenses, indemnities or otherwise, whether voluntary or
involuntary, direct or indirect, absolute or contingent, liquidated or
unliquidated, whether or not jointly owed with others, and whether or not
from time to time decreased or extinguished and later increased, created or
incurred, and all or any portion of such obligations or liabilities that
are paid, to the extent all or any part of such payment is avoided or
recovered directly or indirectly from Secured Party, Syndication Agent,
Documentation Agent or any Lender or Interest Rate Exchanger as a
preference, fraudulent transfer or otherwise and all obligations of every
nature of Grantor now or hereafter existing under this Agreement (all such
obligations of Grantor being the "Secured Obligations").
SECTION 3. Grantor Remains Liable. Anything contained herein to
----------------------
the contrary notwithstanding, (a) Grantor shall remain liable under any
contracts and agreements included in the Collateral, to the extent set
forth therein, to perform all of its duties and obligations thereunder to
the same extent as if this Agreement had not been executed, (b) the
exercise by Secured Party of any of its rights hereunder shall not release
Grantor from any of its duties or obligations under the contracts and
agreements included in the Collateral, and (c) Secured Party shall not have
any obligation or liability under any contracts and agreements included in
the Collateral by reason of this Agreement, nor shall Secured Party be
obligated to perform any of the obligations or duties of Grantor thereunder
or to take any action to collect or enforce any claim for payment assigned
hereunder.
SECTION 4. Representations and Warranties. Grantor represents
------------------------------
and warrants as follows:
(a) Ownership of Collateral. Except for the security interest
-----------------------
created by this Agreement or any other Collateral Documents, Grantor owns
the Collateral free and clear of any Lien except for Permitted Encumbrances
and Liens permitted under subsection 7.2A(iv) and (v) of the Credit
Agreement (with regard to the Liens permitted under sections 7.2A(iv) and
(v) of the Credit Agreement, only to the extent such Liens relate to the
specific property subject to such Liens).
(b) Location of Equipment and Inventory. All of the Equipment
-----------------------------------
and Inventory is, as of the date hereof, located in one of the states (and
counties thereof) specified in Schedule I annexed hereto.
----------
(c) Negotiable Documents of Title. No Negotiable Documents of
-----------------------------
Title are outstanding with respect to any of the Inventory (other than in
respect of (i) Inventory with an aggregate value not in excess of $500,000
or (ii) Inventory which, in the ordinary course of business, is in transit
either (A) from a supplier to Grantor, (B) between Grantor's retail
locations, or (C) to customers of Grantor).
(d) Office Locations; Other Names. The chief place of business,
-----------------------------
the chief executive office and the office where Grantor keeps its records
regarding the
4
<PAGE>
Accounts and all originals of all chattel paper that evidence
Accounts is, and has been for the four month period preceding the date
hereof, located at the location(s) specified in Schedule I. Grantor has not
----------
in the past five years done, and does not now do, business under any other
name (including any trade-name or fictitious business name), except as
described in Schedule I.
----------
(e) Delivery of Certain Collateral. All notes and other
------------------------------
instruments (excluding checks) comprising any and all items of Collateral
have been delivered to Secured Party duly endorsed and accompanied by duly
executed instruments of transfer or assignment in blank.
SECTION 5. Further Assurances.
------------------
(a) Grantor agrees that from time to time, at the expense of
Grantor, Grantor will promptly execute and deliver all further instruments
and documents, and take all further action, that may be necessary or
desirable, or that Secured Party may request, in order to perfect and
protect any security interest granted or purported to be granted hereby or
to enable Secured Party to exercise and enforce its rights and remedies
hereunder with respect to any Collateral. Without limiting the generality
of the foregoing, Grantor will: (i) mark conspicuously each item of
chattel paper included in the Accounts, each Related Contract and, at the
request of Secured Party, each of its records pertaining to the Collateral,
with a legend, in form and substance satisfactory to Secured Party,
indicating that such Collateral is subject to the security interest granted
hereby, (ii) at the request of Secured Party, deliver and pledge to Secured
Party hereunder all promissory notes and other instruments (including
checks) and all original counterparts of chattel paper constituting
Collateral, duly endorsed and accompanied by duly executed instruments of
transfer or assignment, all in form and substance satisfactory to Secured
Party, (iii) execute and file such financing or continuation statements, or
amendments thereto, and such other instruments or notices, as may be
necessary or desirable, or as Secured Party may request, in order to
perfect and preserve the security interests granted or purported to be
granted hereby, (iv) upon the request of Secured Party, promptly after the
acquisition by Grantor of any item of Equipment which is covered by a
certificate of title under a statute of any jurisdiction under the law of
which indication of a security interest on such certificate is required as
a condition of perfection thereof, execute and file with the registrar of
motor vehicles or other appropriate authority in such jurisdiction an
application or other document requesting the notation or other indication
of the security interest created hereunder on such certificate of title,
(v) upon the request of Secured Party within 30 days after the end of each
calendar quarter, deliver to Administrative Agent copies of all such
applications or other documents filed during such calendar quarter and
copies of all such certificates of title issued during such calendar
quarter indicating the security interest created hereunder in the items of
Equipment covered thereby, (vi) at any reasonable time, upon request by
Secured Party, exhibit the Collateral to and allow inspection of the
Collateral by Secured Party, or persons designated by Secured Party, and
(vii) at Secured Party's request, appear in and defend any action or
proceeding that may affect Grantor's title to or Secured Party's security
interest in all or any part of the Collateral.
5
<PAGE>
(b) Grantor hereby authorizes Secured Party to file one or more
financing or continuation statements, and amendments thereto, relative to
all or any part of the Collateral without the signature of Grantor.
Grantor agrees that a carbon, photographic or other reproduction of this
Agreement or of a financing statement signed by Grantor shall be sufficient
as a financing statement and may be filed as a financing statement in any
and all jurisdictions.
(c) Grantor will furnish to Secured Party from time to time
statements and schedules further identifying and describing the Collateral
and such other reports in connection with the Collateral as Secured Party
may reasonably request, all in reasonable detail.
SECTION 6. Certain Covenants of Grantor. Grantor shall:
----------------------------
(a) not use or permit any Collateral to be used unlawfully or in
violation of any provision of this Agreement or any applicable statute,
regulation or ordinance or any policy of insurance covering the Collateral;
(b) notify Secured Party of any change in Grantor's name,
identity or corporate structure within 15 days of such change;
(c) give Secured Party 30 days' prior written notice of any
change in Grantor's chief place of business, chief executive office or
residence or the office where Grantor keeps its records regarding the
Accounts and all originals of all chattel paper that evidence Accounts;
(d) if Secured Party gives value to enable Grantor to acquire
rights in or the use of any Collateral, use such value for such purposes;
and
(e) pay promptly when due all property and other taxes,
assessments and governmental charges or levies imposed upon, and all claims
(including claims for labor, materials and supplies) against, the
Collateral, except to the extent the validity thereof is being contested in
good faith; provided that Grantor shall in any event pay such taxes,
--------
assessments, charges, levies or claims not later than five days prior to
the date of any proposed sale under any judgement, writ or warrant of
attachment entered or filed against Grantor or any of the Collateral as a
result of the failure to make such payment.
SECTION 7. Special Covenants With Respect to Equipment and
-----------------------------------------------
Inventory. Grantor shall:
---------
(a) keep the Equipment and Inventory in the jurisdictions
specified on Schedule I annexed hereto or, upon 30 days' prior written
----------
notice to Secured Party, at such other places in jurisdictions where all
action that may be necessary in order to perfect and protect any security
interest granted or purported to be granted hereby, or to enable Secured
Party to exercise and enforce its rights and remedies hereunder, with
respect to such Equipment and Inventory shall have been taken;
6
<PAGE>
(b) cause the Equipment to be maintained and preserved in the
same condition, repair and working order as when new, ordinary wear and
tear excepted, and in accordance with Grantor's past practices. Grantor
shall promptly furnish to Secured Party a statement respecting any material
loss or damage to any of the Equipment;
(c) keep correct and accurate records of the Inventory, itemizing
and describing the kind, type and quantity of Inventory, Grantor's cost
therefor and (where applicable) the current list prices for the Inventory;
(d) if any Inventory is in possession or control of any of
Grantor's agents or processors, if the aggregate book value of all such
Inventory exceeds $500,000, and in any event upon the occurrence of an
Event of Default (as defined in the Credit Agreement), instruct such agent
or processor to hold all such Inventory for the account of Secured Party
and subject to the instructions of Secured Party; and
(e) promptly upon the issuance and delivery to Grantor of any
Negotiable Document of Title (other than any one or more Negotiable
Documents of Title covering (i) Inventory with an aggregate value not in
excess of $500,000 or (ii) Inventory which, in the ordinary course of
business, is in transit either (A) from a supplier to Grantor, (B) between
Grantor's retail locations, or (C) to customers of Grantor), deliver such
Negotiable Document of Title to Secured Party.
SECTION 8. Insurance. Grantor shall, at its own expense,
---------
maintain insurance with respect to the Equipment and Inventory in
accordance with the terms of the Credit Agreement.
SECTION 9. Special Covenants with respect to Accounts and
----------------------------------------------
Related Contracts.
-----------------
(a) Grantor shall keep its chief place of business and chief
executive office and the office where it keeps its records concerning the
Accounts and Related Contracts, and all originals of all chattel paper that
evidence Accounts, at the location therefor specified in Section 4 or, upon
30 days' prior written notice to Secured Party, at such other location in a
jurisdiction where all action that may be necessary or desirable, or that
Secured Party may request, in order to perfect and protect any security
interest granted or purported to be granted hereby, or to enable Secured
Party to exercise and enforce its rights and remedies hereunder, with
respect to such Accounts and Related Contracts shall have been taken.
Grantor will hold and preserve such records and chattel paper and will
permit representatives of Secured Party at any time during normal business
hours to inspect and make abstracts from such records and chattel paper,
and Grantor agrees to render to Secured Party, at Grantor's cost and
expense, such clerical and other assistance as may be reasonably requested
with regard thereto. Promptly upon the request of Secured Party, Grantor
shall deliver to Secured Party complete and correct copies of each Related
Contract.
7
<PAGE>
(b) Grantor shall, for not less than 5 years from the date on
which such Account arose, maintain (i) complete records of each Account,
including records of all payments received, credits granted and merchandise
returned, and (ii) all documentation relating thereto.
(c) Except as otherwise provided in this subsection (c), Grantor
shall continue to collect, at its own expense, all amounts due or to become
due to Grantor under the Accounts and Related Contracts. In connection
with such collections, Grantor may take (and, at Secured Party's direction,
shall take) such action as Grantor or Secured Party may deem necessary or
advisable to enforce collection of amounts due or to become due under the
Accounts; provided, however, that Secured Party shall have the right at any
-------- -------
time, upon the occurrence and during the continuation of an Event of
Default and upon written notice to Grantor of its intention to do so, to
notify the account debtors or obligors under any Accounts of the assignment
of such Accounts to Secured Party and to direct such account debtors or
obligors to make payment of all amounts due or to become due to Grantor
thereunder directly to Secured Party, to notify each Person maintaining a
lockbox or similar arrangement to which account debtors or obligors under
any Accounts have been directed to make payment to remit all amounts
representing collections on checks and other payment items from time to
time sent to or deposited in such lockbox or other arrangement directly to
Secured Party and, upon such notification and at the expense of Grantor, to
enforce collection of any such Accounts and to adjust, settle or compromise
the amount or payment thereof, in the same manner and to the same extent as
Grantor might have done. After receipt by Grantor of the notice from
Secured Party referred to in the proviso to the preceding sentence, (i) all
-------
amounts and proceeds (including checks and other instruments) received by
Grantor in respect of the Accounts and the Related Contracts shall be
received in trust for the benefit of Secured Party hereunder, shall be
segregated from other funds of Grantor and shall be forthwith paid over or
delivered to Secured Party in the same form as so received (with any
necessary endorsement) to be held as cash Collateral and applied as
provided by Section 18, and (ii) Grantor shall not adjust, settle or
compromise the amount or payment of any Account, or release wholly or
partly any account debtor or obligor thereof, or allow any credit or
discount thereon.
SECTION 10. Special Provisions With Respect to the Assigned
-----------------------------------------------
Agreements.
----------
(a) Grantor shall at its expense:
(i) perform and observe all terms and provisions of the
Assigned Agreements to be performed or observed by it, maintain the
Assigned Agreements in full force and effect, enforce the Assigned
Agreements in accordance with their terms, and take all such action to such
end as may be from time to time requested by Secured Party; and
(ii) furnish to Secured Party, promptly upon receipt
thereof, copies of all notices, requests and other documents received by
Grantor under or pursuant
8
<PAGE>
to the Assigned Agreements, and from time to time (A) furnish to Secured
Party such information and reports regarding the Assigned Agreements as
Secured Party may reasonably request and (B) upon request of Secured Party
make such demands and requests for information and reports or for action as
Grantor is entitled to make under the Assigned Agreements.
(b) Grantor shall not:
(i) cancel or terminate any of the Assigned Agreements or
consent to or accept any cancellation or termination thereof;
(ii) amend or otherwise modify the Assigned Agreements or
give any consent, waiver or approval thereunder;
(iii) waive any default under or breach of the Assigned
Agreements;
(iv) consent to or permit or accept any prepayment of
amounts to become due under or in connection with the Assigned Agreements,
except as expressly provided therein; or
(v) take any other action in connection with the Assigned
Agreements that would impair the value of the interest or rights of Grantor
thereunder or that would impair the interest or rights of Secured Party.
SECTION 11. Deposit Accounts. Upon the occurrence and during
----------------
the continuation of an Event of Default, Secured Party may exercise
dominion and control over, and refuse to permit further withdrawals
(whether of money, securities, instruments or other property) from any
deposit accounts maintained with Secured Party constituting part of the
Collateral.
SECTION 12. License of Patents, Trademarks, Copyrights, etc.
-----------------------------------------------
Grantor hereby assigns, transfers and conveys to Secured Party, effective
upon the occurrence of any Event of Default, the nonexclusive right and
license to use all trademarks, tradenames, copyrights, patents or technical
processes owned or used by Grantor that relate to the Collateral and any
other collateral granted by Grantor as security for the Secured
Obligations, together with any goodwill associated therewith, all to the
extent necessary to enable Secured Party to use, possess and realize on the
Collateral and to enable any successor or assign to enjoy the benefits of
the Collateral. This right and license shall inure to the benefit of all
successors, assigns and transferees of Secured Party and its successors,
assigns and transferees, whether by voluntary conveyance, operation of law,
assignment, transfer, foreclosure, deed in lieu of foreclosure or
otherwise. Such right and license is granted free of charge, without
requirement that any monetary payment whatsoever be made to Grantor.
9
<PAGE>
SECTION 13. Transfers and Other Liens. Grantor shall not:
-------------------------
(a) sell, assign (by operation of law or otherwise) or
otherwise dispose of any of the Collateral, except as permitted by the
Credit Agreement; provided that in the event Grantor makes an Asset Sale or
sale and lease-back transaction permitted by the Credit Agreement and the
assets subject to such Asset Sale or sale and lease-back transaction
constitute Collateral, Secured Party shall release the Collateral that is
the subject of such Asset Sale to Grantor free and clear of any Lien and
security interest under this Agreement or any other Collateral Document
concurrently with the consummation of such Asset Sale or sale and lease-
back transaction; provided, further that, as a condition precedent to such
-------- -------
satisfactory to it that arrangements satisfactory to it have been made for
delivery to Secured Party of that amount of Net Asset Sale Proceeds
required to be delivered to Secured Party under the Credit Agreement; or
(b) except for the security interest created by this Agreement,
create or suffer to exist any Lien upon or with respect to any of the
Collateral to secure the indebtedness or other obligations of any Person,
except as otherwise permitted under subsections 7.2A(iv) and (v) of the
Credit Agreement (with regard to the Liens permitted under subsections
7.2A(iv) and (v) of the Credit Agreement, only to the extent such Liens
relate to the specific property subject to such Liens). If Grantor
proposes to obtain financing permitted under Section 7.1(iii) of the Credit
Agreement with respect to any asset acquired after the Closing Date
("Permitted CapEx Financing"), Secured Party will either (a) with respect
to such asset, subordinate the Lien and security interest created hereunder
to the Lien securing such Permitted CapEx Financing by a subordination
agreement reasonably acceptable to Secured Party and the provider thereof
or (b) if Grantor has not been able, after reasonable effort, to get the
provider of such Permitted CapEx Financing to agree to subordination,
Secured Party will release the Lien and security interest granted hereunder
in such asset.
SECTION 14. Secured Party Appointed Attorney-in-Fact. Grantor
----------------------------------------
hereby irrevocably appoints Secured Party as Grantor's attorney-in-fact,
with full authority in the place and stead of Grantor and in the name of
Grantor, Secured Party or otherwise, from time to time in Secured Party's
discretion, upon the occurrence and during the continuation of an Event of
Default or Potential Event of Default, to take any action and to execute
any instrument that Secured Party may deem necessary or advisable to
accomplish the purposes of this Agreement, including:
(a) to obtain and adjust insurance required to be maintained by
Grantor or paid to Secured Party pursuant to Section 8;
(b) to ask for, demand, collect, sue for, recover, compound,
receive and give acquittance and receipts for moneys due and to become due
under or in respect of any of the Collateral;
10
<PAGE>
(c) to receive, endorse and collect any drafts or other
instruments, documents and chattel paper in connection with clauses (a) and
(b) above;
(d) to file any claims or take any action or institute any
proceedings that Secured Party may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights of
Secured Party with respect to any of the Collateral;
(e) to pay or discharge taxes or Liens (other than Liens
permitted under this Agreement or the Credit Agreement) levied or placed
upon or threatened against the Collateral, the legality or validity thereof
and the amounts necessary to discharge the same to be determined by Secured
Party in its sole discretion, any such payments made by Secured Party to
become obligations of Grantor to Secured Party, due and payable immediately
without demand;
(f) to sign and endorse any invoices, freight or express bills,
bills of lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications and notices in connection with Accounts and
other documents relating to the Collateral; and
(g) upon the occurrence and during the continuation of an Event
of Default, generally to sell, transfer, pledge, make any agreement with
respect to or otherwise deal with any of the Collateral as fully and
completely as though Secured Party were the absolute owner thereof for all
purposes, and to do, at Secured Party's option and Grantor's expense, at
any time or from time to time, all acts and things that Secured Party deems
necessary to protect, preserve or realize upon the Collateral and Secured
Party's security interest therein in order to effect the intent of this
Agreement, all as fully and effectively as Grantor might do.
SECTION 15. Secured Party May Perform. If Grantor fails to
-------------------------
perform any agreement contained herein within the period provided herein,
upon reasonable notice, Secured Party may itself perform, or cause
performance of, such agreement, and the expenses of Secured Party incurred
in connection therewith shall be payable by Grantor under Section 19.
SECTION 16. Standard of Care. The powers conferred on Secured
----------------
Party hereunder are solely to protect its interest in the Collateral and
shall not impose any duty upon it to exercise any such powers. Except for
the exercise of reasonable care in the custody of any Collateral in its
possession and the accounting for moneys actually received by it hereunder,
Secured Party shall have no duty as to any Collateral or as to the taking
of any necessary steps to preserve rights against prior parties or any
other rights pertaining to any Collateral. Secured Party shall be deemed
to have exercised reasonable care in the custody and preservation of
Collateral in its possession if such Collateral is accorded treatment
substantially equal to that which Secured Party accords its own property.
11
<PAGE>
SECTION 17. Remedies. If any Event of Default shall have
--------
occurred and be continuing, Secured Party may exercise in respect of the
Collateral, in addition to all other rights and remedies provided for
herein or otherwise available to it, all the rights and remedies of a
secured party on default under the Uniform Commercial Code as in effect in
any relevant jurisdiction (the "Code") (whether or not the Code applies to
the affected Collateral), and also may (a) require Grantor to, and Grantor
hereby agrees that it will at its expense and upon request of Secured Party
forthwith, assemble all or part of the Collateral as directed by Secured
Party and make it available to Secured Party at a place to be designated by
Secured Party that is reasonably convenient to both parties, (b) enter onto
the property where any Collateral is located and take possession thereof
with or without judicial process, (c) prior to the disposition of the
Collateral, store, process, repair or recondition the Collateral or
otherwise prepare the Collateral for disposition in any manner to the
extent Secured Party deems appropriate, (d) take possession of Grantor's
premises or place custodians in exclusive control thereof, remain on such
premises and use the same and any of Grantor's equipment for the purpose of
completing any work in process, taking any actions described in the
preceding clause (c) and collecting any Secured Obligation, and (e) without
notice except as specified below, sell the Collateral or any part thereof
in one or more parcels at public or private sale, at any of Secured Party's
offices or elsewhere, for cash, on credit or for future delivery, at such
time or times and at such price or prices and upon such other terms as
Secured Party may deem commercially reasonable. Secured Party or any
Lender or Interest Rate Exchanger may be the purchaser of any or all of the
Collateral at any such public sale and, to the extent permitted by law,
private sale, and Secured Party, as agent for and representative of Lenders
and Interest Rate Exchangers (but not any Lender or Lenders or Interest
Rate Exchanger or Interest Rate Exchangers in its or their respective
individual capacities unless Requisite Obligees (as defined in Section
21(a)) shall otherwise agree in writing), shall be entitled, for the
purpose of bidding and making settlement or payment of the purchase price
for all or any portion of the Collateral sold at any such public sale, to
use and apply any of the Secured Obligations as a credit on account of the
purchase price for any Collateral payable by Secured Party at such sale.
Each purchaser at any such sale shall hold the property sold absolutely
free from any claim or right on the part of Grantor, and Grantor hereby
waives (to the extent permitted by applicable law) all rights of
redemption, stay and/or appraisal which it now has or may at any time in
the future have under any rule of law or statute now existing or hereafter
enacted. Grantor agrees that, to the extent notice of sale shall be
required by law, at least ten days' notice to Grantor of the time and place
of any public sale or the time after which any private sale is to be made
shall constitute reasonable notification. Secured Party shall not be
obligated to make any sale of Collateral regardless of notice of sale
having been given. Secured Party may adjourn any public or private sale
from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place to
which it was so adjourned. Grantor hereby waives any claims against
Secured Party arising by reason of the fact that the price at which any
Collateral may have been sold at such a private sale was less than the
price which might have been obtained at a public sale, even if Secured
Party accepts the first offer received and does not offer such Collateral
to more than one offeree. If the proceeds of any sale or other
12
<PAGE>
disposition of the Collateral are insufficient to pay all the Secured
Obligations, Grantor shall be liable for the deficiency and the fees of any
attorneys employed by Secured Party to collect such deficiency.
SECTION 18. Application of Proceeds. Except as expressly
-----------------------
provided elsewhere in this Agreement, all proceeds received by Secured
Party in respect of any sale of, collection from, or other realization upon
all or any part of the Collateral shall be applied as provided in
subsection 2.4D of the Credit Agreement.
SECTION 19. Indemnity and Expenses.
----------------------
(a) Grantor agrees to indemnify Secured Party, Syndication Agent,
Documentation Agent, each Lender and each Interest Rate Exchanger from and
against any and all claims, losses and liabilities in any way relating to,
growing out of or resulting from this Agreement and the transactions
contemplated hereby (including enforcement of this Agreement), except to
the extent such claims, losses or liabilities result solely from Secured
Party's, Syndication Agent's, Documentation Agent's or such Lender's or
Interest Rate Exchanger's gross negligence or willful misconduct as finally
determined by a court of competent jurisdiction.
(b) Grantor shall pay to Secured Party upon demand the amount of
any and all costs and expenses, including the reasonable fees and expenses
of its counsel and of any experts and agents, that Secured Party may incur
in connection with (i) the administration of this Agreement, (ii) the
custody, preservation, use or operation of, or the sale of, collection
from, or other realization upon, any of the Collateral, (iii) the exercise
or enforcement of any of the rights of Secured Party hereunder, or (iv) the
failure by Grantor to perform or observe any of the provisions hereof.
SECTION 20. Continuing Security Interest; Transfer of Loans.
-----------------------------------------------
This Agreement shall create a continuing security interest in the
Collateral and shall (a) remain in full force and effect until the payment
in full of the Secured Obligations, the cancellation or termination of the
Commitments and the cancellation or expiration of all outstanding Letters
of Credit, (b) be binding upon Grantor, its successors and assigns, and (c)
inure, together with the rights and remedies of Secured Party hereunder, to
the benefit of Secured Party and its successors, transferees and assigns.
Without limiting the generality of the foregoing clause (c), but subject to
the provisions of subsection 10.1 of the Credit Agreement, any Lender may
assign or otherwise transfer any Loans held by it to any other Person, and
such other Person shall thereupon become vested with all the benefits in
respect thereof granted to Lenders herein or otherwise. Upon the payment
in full of all Secured Obligations, the cancellation or termination of the
Commitments and the cancellation or expiration of all outstanding Letters
of Credit, the security interest granted hereby shall terminate and all
rights to the Collateral shall revert to Grantor. Upon any such
termination Secured Party will, at Grantor's expense, execute and deliver
to Grantor such documents as Grantor shall reasonably request to evidence
such termination.
13
<PAGE>
SECTION 21. Secured Party as Administrative Agent.
-------------------------------------
(a) Secured Party has been appointed to act as Secured Party
hereunder by Lenders and, by their acceptance of the benefits hereof,
Interest Rate Exchangers. Secured Party shall be obligated, and shall have
the right hereunder, to make demands, to give notices, to exercise or
refrain from exercising any rights, and to take or refrain from taking any
action (including the release or substitution of Collateral), solely in
accordance with this Agreement and the Credit Agreement; provided that
--------
Secured Party shall exercise, or refrain from exercising, any remedies
provided for in Section 17 in accordance with the instructions of (i)
Requisite Lenders or (ii) after payment in full of all Obligations under
the Credit Agreement and the other Loan Documents, the holders of a
majority of the aggregate notional amount (or, with respect to any Lender
Interest Rate Agreement that has been terminated in accordance with its
terms, the amount then due and payable (exclusive of expenses and similar
payments but including any early termination payments then due) under such
Lender Interest Rate Agreement) under all Lender Interest Rate Agreements
(Requisite Lenders or, if applicable, such holders being referred to herein
as "Requisite Obligees"). In furtherance of the foregoing provisions of
this Section 21(a), each Interest Rate Exchanger, by its acceptance of the
benefits hereof, agrees that it shall have no right individually to realize
upon any of the Collateral hereunder, it being understood and agreed by
such Interest Rate Exchanger that all rights and remedies hereunder may be
exercised solely by Secured Party for the benefit of Lenders and Interest
Rate Exchangers in accordance with the terms of this Section 21(a).
(b) Secured Party shall at all times be the same Person that is
Administrative Agent under the Credit Agreement. Written notice of
resignation by Administrative Agent pursuant to subsection 9.5 of the
Credit Agreement shall also constitute notice of resignation as Secured
Party under this Agreement; removal of Administrative Agent pursuant to
subsection 9.5 of the Credit Agreement shall also constitute removal as
Secured Party under this Agreement; and appointment of a successor
Administrative Agent pursuant to subsection 9.5 of the Credit Agreement
shall also constitute appointment of a successor Secured Party under this
Agreement. Upon the acceptance of any appointment as Administrative Agent
under subsection 9.5 of the Credit Agreement by a successor Administrative
Agent, that successor Administrative Agent shall thereupon succeed to and
become vested with all the rights, powers, privileges and duties of the
retiring or removed Secured Party under this Agreement, and the retiring or
removed Secured Party under this Agreement shall promptly (i) transfer to
such successor Secured Party all sums, securities and other items of
Collateral held hereunder, together with all records and other documents
necessary or appropriate in connection with the performance of the duties
of the successor Secured Party under this Agreement, and (ii) execute and
deliver to such successor Secured Party such amendments to financing
statements, and take such other actions, as may be necessary or appropriate
in connection with the assignment to such successor Secured Party of the
security interests created hereunder, whereupon such retiring or removed
Secured Party shall be discharged from its duties and obligations under
this Agreement. After any
14
<PAGE>
retiring or removed Administrative Agent's resignation or removal hereunder
as Secured Party, the provisions of this Agreement shall inure to its
benefit as to any actions taken or omitted to be taken by it under this
Agreement while it was Secured Party hereunder.
SECTION 22. Amendments; Etc. No amendment, modification,
---------------
termination or waiver of any provision of this Agreement, and no consent to
any departure by Grantor therefrom, shall in any event be effective unless
the same shall be in writing and signed by Secured Party and, in the case
of any such amendment or modification, by Grantor. Any such waiver or
consent shall be effective only in the specific instance and for the
specific purpose for which it was given.
SECTION 23. Notices. Any notice or other communication herein
-------
required or permitted to be given shall be in writing and may be personally
served, telexed or sent by telefacsimile or United States mail or courier
service and shall be deemed to have been given when delivered in person or
by courier service, upon receipt of telefacsimile or telex, or three
Business Days after depositing it in the United States mail with postage
prepaid and properly addressed. For the purposes hereof, the address of
each party hereto shall be as set forth under such party's name on the
signature pages hereof or, as to either party, such other address as shall
be designated by such party in a written notice delivered to the other
party hereto.
SECTION 24. Failure or Indulgence Not Waiver; Remedies
------------------------------------------
Cumulative. No failure or delay on the part of Secured Party in the
----------
exercise of any power, right or privilege hereunder shall impair such
power, right or privilege or be construed to be a waiver of any default or
acquiescence therein, nor shall any single or partial exercise of any such
power, right or privilege preclude any other or further exercise thereof or
of any other power, right or privilege. All rights and remedies existing
under this Agreement are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
SECTION 25. Severability. In case any provision in or
------------
obligation under this Agreement shall be invalid, illegal or unenforceable
in any jurisdiction, the validity, legality and enforceability of the
remaining provisions or obligations, or of such provision or obligation in
any other jurisdiction, shall not in any way be affected or impaired
thereby.
SECTION 26. Headings. Section and subsection headings in this
--------
Agreement are included herein for convenience of reference only and shall
not constitute a part of this Agreement for any other purpose or be given
any substantive effect.
SECTION 27. Governing Law; Terms; Rules of Construction. THIS
-------------------------------------------
AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE
GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE
GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO
CONFLICTS OF
15
<PAGE>
LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE
PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN
RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A
JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined
herein or in the Credit Agreement, terms used in Articles 8 and 9 of the
Uniform Commercial Code in the State of New York are used herein as therein
defined. The rules of construction set forth in subsection 1.3 of the
Credit Agreement shall be applicable to this Agreement mutatis mutandis.
SECTION 28. Consent to Jurisdiction and Service of Process. ALL
----------------------------------------------
JUDICIAL PROCEEDINGS BROUGHT AGAINST GRANTOR ARISING OUT OF OR RELATING TO
THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE
OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF
NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, GRANTOR, FOR ITSELF
AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY
(I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE
JURISDICTION AND VENUE OF SUCH COURTS;
(II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS;
(III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN
ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN
RECEIPT REQUESTED, TO GRANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE
WITH SECTION 23;
(IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS
SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER GRANTOR IN ANY SUCH
PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND
BINDING SERVICE IN EVERY RESPECT;
(V) AGREES THAT SECURED PARTY RETAINS THE RIGHT TO SERVE PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST
GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND
(VI) AGREES THAT THE PROVISIONS OF THIS SECTION 28 RELATING TO
JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST
EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-
1402 OR OTHERWISE.
16
<PAGE>
SECTION 29. Waiver of Jury Trial. GRANTOR AND SECURED PARTY
--------------------
HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM
OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope
of this waiver is intended to be all-encompassing of any and all disputes
that may be filed in any court and that relate to the subject matter of
this transaction, including contract claims, tort claims, breach of duty
claims, and all other common law and statutory claims. Grantor and Secured
Party each acknowledge that this waiver is a material inducement for
Grantor and Secured Party to enter into a business relationship, that
Grantor and Secured Party have already relied on this waiver in entering
into this Agreement and that each will continue to rely on this waiver in
their related future dealings. Grantor and Secured Party further warrant
and represent that each has reviewed this waiver with its legal counsel,
and that each knowingly and voluntarily waives its jury trial rights
following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE,
MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN
BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 29 AND
EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS
AGREEMENT. In the event of litigation, this Agreement may be filed as a
written consent to a trial by the court.
SECTION 30. Counterparts. This Agreement may be executed in one
------------
or more counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed
an original, but all such counterparts together shall constitute but one
and the same instrument; signature pages may be detached from multiple
separate counterparts and attached to a single counterpart so that all
signature pages are physically attached to the same document.
[Remainder of page intentionally left blank]
17
<PAGE>
IN WITNESS WHEREOF, Grantor and Secured Party have caused this
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
[NAME OF GRANTOR], as Grantor
By: ____________________
Title:
Notice Address: _____________________
_____________________
_____________________
FIRST UNION NATIONAL BANK,
as Secured Party
By: ____________________
Title:
Notice Address: _____________________
_____________________
_____________________
18
<PAGE>
Exhibit 10.23
SUBSIDIARY PLEDGE AGREEMENT
This SUBSIDIARY PLEDGE AGREEMENT (this "Agreement") is dated as
of __________ and entered into by and between [INSERT NAME OF GRANTOR IN
CAPS], a _____________ corporation ("Pledgor"), and FIRST UNION NATIONAL
BANK, as administrative agent for and representative of (in such capacity
herein called "Secured Party") the financial institutions ("Lenders") party
to the Credit Agreement referred to below and any Interest Rate Exchangers
(as hereinafter defined).
PRELIMINARY STATEMENTS
A. Pledgor is the legal and beneficial owner of (i) the shares
of stock (the "Pledged Shares") described in Part A of Schedule I annexed
----------
hereto and issued by the corporations named therein and (ii) the
indebtedness (the "Pledged Debt") described in Part B of said Schedule I
----------
and issued by the obligors named therein.
B. Secured Party, Syndication Agent and Lenders have entered
into a Credit Agreement dated as of October 23, 1997, which Credit
Agreement has been amended and restated by an Amended and Restated Credit
Agreement dated as of January 28, 1999 (said Credit Agreement, as it may
hereafter be further amended, supplemented or otherwise modified from time
to time, being the "Credit Agreement", the terms defined therein and not
otherwise defined herein being used herein as therein defined) with The
Pantry, Inc., a Delaware corporation ("Company"), pursuant to which Lenders
have made certain commitments, subject to the terms and conditions set
forth in the Credit Agreement, to extend certain credit facilities to
Company.
C. Company may from time to time enter, or may from time to time
have entered, into one or more Interest Rate Agreements (collectively, the
"Lender Interest Rate Agreements") with one or more Lenders (in such
capacity, collectively, "Interest Rate Exchangers").
D. Pledgor has executed and delivered that certain Subsidiary
Guaranty dated as of October 23, 1997 (said Subsidiary Guaranty, as it may
hereafter be amended, supplemented or otherwise modified from time to time,
being the "Guaranty") in favor of Secured Party for the benefit of Lenders
and any Interest Rate Exchangers, pursuant to which Pledgor has guarantied
the prompt payment and performance when due of all obligations of Company
under the Credit Agreement and all obligations of Company under the Lender
Interest Rate Agreements, including the obligation of Company to make
payments thereunder in the event of early termination thereof.
1
<PAGE>
E. It is a condition precedent to the extensions of credit by
Lenders under the Credit Agreement that Pledgor shall have granted the
security interests and undertaken the obligations contemplated by this
Agreement.
NOW, THEREFORE, in consideration of the premises and in order to
induce Lenders to make Loans and other extensions of credit under the
Credit Agreement and to induce Interest Rate Exchangers to enter into
Lender Interest Rate Agreements, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged,
Pledgor hereby agrees with Secured Party as follows:
SECTION 1. Pledge of Security. Pledgor hereby pledges and
------------------
assigns to Secured Party, and hereby grants to Secured Party a security
interest in, all of Pledgor's right, title and interest in and to the
following (the "Pledged Collateral"):
(a) the Pledged Shares and the certificates representing the
Pledged Shares and any interest of Pledgor in the entries on the books of
any financial intermediary pertaining to the Pledged Shares, and all
dividends, cash, warrants, rights, instruments and other property or
proceeds from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of the Pledged Shares;
(b) the Pledged Debt and the instruments evidencing the Pledged
Debt, and all interest, cash, instruments and other property or proceeds
from time to time received, receivable or otherwise distributed in respect
of or in exchange for any or all of the Pledged Debt;
(c) all additional shares of, and all securities convertible into
and warrants, options and other rights to purchase or otherwise acquire,
stock of any issuer of the Pledged Shares from time to time acquired by
Pledgor in any manner (which shares shall be deemed to be part of the
Pledged Shares), the certificates or other instruments representing such
additional shares, securities, warrants, options or other rights and any
interest of Pledgor in the entries on the books of any financial
intermediary pertaining to such additional shares, and all dividends, cash,
warrants, rights, instruments and other property or proceeds from time to
time received, receivable or otherwise distributed in respect of or in
exchange for any or all of such additional shares, securities, warrants,
options or other rights;
(d) all additional indebtedness from time to time owed to Pledgor
by any obligor on the Pledged Debt and the instruments evidencing such
indebtedness, and all interest, cash, instruments and other property or
proceeds from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of such indebtedness;
(e) all shares of, and all securities convertible into and
warrants, options and other rights to purchase or otherwise acquire, stock
of any Person that, after the date of this Agreement, becomes, as a result
of any occurrence, a direct Restricted Subsidiary of Pledgor (which shares
shall be deemed to be part of the Pledged Shares),
2
<PAGE>
the certificates or other instruments representing such shares, securities,
warrants, options or other rights and any interest of Pledgor in the
entries on the books of any financial intermediary pertaining to such
shares, and all dividends, cash, warrants, rights, instruments and other
property or proceeds from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of such shares,
securities, warrants, options or other rights;
(f) all indebtedness from time to time owed to Pledgor by any
Person that, after the date of this Agreement, becomes, as a result of any
occurrence, a direct or indirect Restricted Subsidiary of Pledgor, and all
interest, cash, instruments and other property or proceeds from time to
time received, receivable or otherwise distributed in respect of or in
exchange for any or all of such indebtedness; and
(g) to the extent not covered by clauses (a) through (f) above,
all proceeds of any or all of the foregoing Pledged Collateral. For
purposes of this Agreement, the term "proceeds" includes whatever is
receivable or received when Pledged Collateral or proceeds are sold,
exchanged, collected or otherwise disposed of, whether such disposition is
voluntary or involuntary, and includes proceeds of any indemnity or
guaranty payable to Pledgor or Secured Party from time to time with respect
to any of the Pledged Collateral.
SECTION 2. Security for Obligations. This Agreement secures,
------------------------
and the Pledged Collateral is collateral security for, the prompt payment
or performance in full when due, whether at stated maturity, by required
prepayment, declaration, acceleration, demand or otherwise (including the
payment of amounts that would become due but for the operation of the
automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C.
(S)362(a)), of all obligations and liabilities of every nature of Pledgor
now or hereafter existing under or arising out of or in connection with the
Guaranty and all extensions or renewals thereof, whether for principal,
interest (including interest that, but for the filing of a petition in
bankruptcy with respect to Company, would accrue on such obligations,
whether or not a claim is allowed against Company for such interest in the
related bankruptcy proceeding), reimbursement of amounts drawn under
Letters of Credit, payments for early termination of Lender Interest Rate
Agreements, fees, expenses, indemnities or otherwise, whether voluntary or
involuntary, direct or indirect, absolute or contingent, liquidated or
unliquidated, whether or not jointly owed with others, and whether or not
from time to time decreased or extinguished and later increased, created or
incurred, and all or any portion of such obligations or liabilities that
are paid, to the extent all or any part of such payment is avoided or
recovered directly or indirectly from Secured Party, Syndication Agent,
Documentation Agent or any Lender or Interest Rate Exchanger as a
preference, fraudulent transfer or otherwise, and all obligations of every
nature of Pledgor now or hereafter existing under this Agreement (all such
obligations of Pledgor being the "Secured Obligations").
SECTION 3. Delivery of Pledged Collateral. All certificates or
------------------------------
instruments representing or evidencing the Pledged Collateral shall be
delivered to and held by or on behalf of Secured Party pursuant hereto and
shall be in suitable form for
3
<PAGE>
transfer by delivery or, as applicable, shall be accompanied by Pledgor's
endorsement, where necessary, or duly executed instruments of transfer or
assignment in blank, all in form and substance satisfactory to Secured
Party. Upon the occurrence and during the continuation of an Event of
Default (as defined in the Credit Agreement), Secured Party shall have the
right, without notice to Pledgor, to transfer to or to register in the name
of Secured Party or any of its nominees any or all of the Pledged
Collateral, subject only to the revocable rights specified in Section 7(a).
In addition, Secured Party shall have the right at any time to exchange
certificates or instruments representing or evidencing Pledged Collateral
for certificates or instruments of smaller or larger denominations.
SECTION 4. Representations and Warranties. Pledgor represents
------------------------------
and warrants as follows:
(a) Due Authorization, etc. of Pledged Collateral. All of the
---------------------------------------------
Pledged Shares have been duly authorized and validly issued and are fully
paid and non-assessable. All of the Pledged Debt has been duly authorized,
authenticated or issued, and delivered and is the legal, valid and binding
obligation of the issuers thereof and is not in default.
(b) Description of Pledged Collateral. The Pledged Shares
---------------------------------
constitute all of the issued and outstanding shares of stock of each issuer
thereof, and there are no outstanding warrants, options or other rights to
purchase, or other agreements outstanding with respect to, or property that
is now or hereafter convertible into, or that requires the issuance or sale
of, any Pledged Shares. The Pledged Debt constitutes all of the issued and
outstanding intercompany indebtedness evidenced by a promissory note of the
respective issuers thereof owing to Pledgor.
(c) Ownership of Pledged Collateral. Pledgor is the legal,
-------------------------------
record and beneficial owner of the Pledged Collateral free and clear of any
Lien except for the security interest created by this Agreement or any
other Collateral Document or Permitted Encumbrances.
SECTION 5. Transfers and Other Liens; Additional Pledged
---------------------------------------------
Collateral; etc. Pledgor shall:
----------------
(a) not, except as expressly permitted by the Credit Agreement,
(i) sell, assign (by operation of law or otherwise) or otherwise dispose
of, or grant any option with respect to, any of the Pledged Collateral,
(ii) create or suffer to exist any Lien upon or with respect to any of the
Pledged Collateral, except for the security interest under this Agreement,
or (iii) permit any issuer of Pledged Shares to merge or consolidate unless
all the outstanding capital stock of the surviving or resulting corporation
is, upon such merger or consolidation, pledged hereunder and no cash,
securities or other property is distributed in respect of the outstanding
shares of any other constituent corporation; provided that in the event
--------
Pledgor makes an Asset Sale permitted by the Credit Agreement and the
assets subject to such Asset Sale are Pledged Collateral, Secured Party
shall release the Pledged Collateral that is the subject of such Asset Sale
to
4
<PAGE>
Pledgor free and clear of any Lien and security interest under this
Agreement or any other Collateral Document concurrently with the
consummation of such Asset Sale; provided, further that, as a condition
-------- -------
precedent to such release, Secured Party shall have received evidence
satisfactory to it that arrangements satisfactory to it have been made for
delivery to Secured Party of the Net Asset Sale Proceeds of such Asset Sale
to the extent required under the Credit Agreement;
(b) (i) cause each issuer of Pledged Shares not to issue any
stock or other securities in addition to or in substitution for the Pledged
Shares issued by such issuer, except to Pledgor, (ii) pledge hereunder,
immediately upon its acquisition (directly or indirectly) thereof, any and
all additional shares of stock or other securities of each issuer of
Pledged Shares, and (iii) pledge hereunder, immediately upon its
acquisition (directly or indirectly) thereof, any and all shares of stock
of any Person that, after the date of this Agreement, becomes, as a result
of any occurrence, a direct Restricted Subsidiary of Pledgor;
(c) (i) pledge hereunder, immediately upon their issuance, any
and all instruments or other evidences of additional indebtedness from time
to time owed to Pledgor by any obligor on the Pledged Debt, and (ii) pledge
hereunder, immediately upon their issuance, any and all instruments or
other evidences of indebtedness from time to time owed to Pledgor by any
Person that after the date of this Agreement becomes, as a result of any
occurrence, a direct or indirect Restricted Subsidiary of Pledgor;
(d) promptly notify Secured Party of any event of which Pledgor
becomes aware causing loss of the Pledged Collateral;
(e) promptly deliver to Secured Party all written notices
received by it with respect to the Pledged Collateral; and
(f) pay promptly when due all taxes, assessments and governmental
charges or levies imposed upon, and all claims against, the Pledged
Collateral, except to the extent the validity thereof is being contested in
good faith; provided that Pledgor shall in any event pay such taxes,
--------
assessments, charges, levies or claims not later than five days prior to
the date of any proposed sale under any judgement, writ or warrant of
attachment entered or filed against Pledgor or any of the Pledged
Collateral as a result of the failure to make such payment.
SECTION 6. Further Assurances; Pledge Amendments.
-------------------------------------
(a) Pledgor agrees that from time to time, at the expense of
Pledgor, Pledgor will promptly execute and deliver all further instruments
and documents, and take all further action, that may be necessary or
desirable, or that Secured Party may request, in order to perfect and
protect any security interest granted or purported to be granted hereby or
to enable Secured Party to exercise and enforce its rights and remedies
hereunder with respect to any Pledged Collateral. Without limiting the
generality of the foregoing, Pledgor will: (i) execute and file such
financing or continuation statements, or
5
<PAGE>
amendments thereto, and such other instruments or notices, as may be
necessary or desirable, or as Secured Party may request, in order to
perfect and preserve the security interests granted or purported to be
granted hereby and (ii) at Secured Party's request, appear in and defend
any action or proceeding that may affect Pledgor's title to or Secured
Party's security interest in all or any part of the Pledged Collateral.
(b) Pledgor further agrees that it will, upon obtaining any
additional shares of stock or other securities required to be pledged
hereunder as provided in Section 5(b) or (c), promptly (and in any event
within five Business Days) deliver to Secured Party a Pledge Amendment,
duly executed by Pledgor, in substantially the form of Schedule II annexed
-----------
hereto (a "Pledge Amendment"), in respect of the additional Pledged Shares
or Pledged Debt to be pledged pursuant to this Agreement. Pledgor hereby
authorizes Secured Party to attach each Pledge Amendment to this Agreement
and agrees that all Pledged Shares or Pledged Debt listed on any Pledge
Amendment delivered to Secured Party shall for all purposes hereunder be
considered Pledged Collateral; provided that the failure of Pledgor to
--------
execute a Pledge Amendment with respect to any additional Pledged Shares or
Pledged Debt pledged pursuant to this Agreement shall not impair the
security interest of Secured Party therein or otherwise adversely affect
the rights and remedies of Secured Party hereunder with respect thereto.
SECTION 7. Voting Rights; Dividends; Etc.
------------------------------
(a) So long as no Event of Default shall have occurred and be
continuing:
(i) Pledgor shall be entitled to exercise any and all voting
and other consensual rights pertaining to the Pledged Collateral or any
part thereof for any purpose not inconsistent with the terms of this
Agreement or the Credit Agreement; provided, however, that Pledgor shall
-------- -------
not exercise or refrain from exercising any such right if Secured Party
shall have notified Pledgor that, in Secured Party's judgment, such action
would have a material adverse effect on the value of the Pledged Collateral
or any part thereof; and provided, further, that Pledgor shall give Secured
-------- -------
Party at least five Business Days' prior written notice of the manner in
which it intends to exercise, or the reasons for refraining from
exercising, any such right. It is understood, however, that neither (A) the
voting by Pledgor of any Pledged Shares for or Pledgor's consent to the
election of directors at a regularly scheduled annual or other meeting of
stockholders or with respect to incidental matters at any such meeting nor
(B) Pledgor's consent to or approval of any action otherwise permitted
under this Agreement and the Credit Agreement shall be deemed inconsistent
with the terms of this Agreement or the Credit Agreement within the meaning
of this Section 7(a)(i), and no notice of any such voting or consent need
be given to Secured Party;
(ii) Pledgor shall be entitled to receive and retain, and to
utilize free and clear of the lien of this Agreement, any and all dividends
and interest paid in respect of the Pledged Collateral; provided, however,
-------- -------
that any and all
6
<PAGE>
(A) dividends and interest paid or payable other than in
cash in respect of, and instruments and other property received, receivable
or otherwise distributed in respect of, or in exchange for, any Pledged
Collateral,
(B) dividends and other distributions paid or payable in
cash in respect of any Pledged Collateral in connection with a partial or
total liquidation or dissolution or in connection with a reduction of
capital, capital surplus or paid-in-surplus, and
(C) cash paid, payable or otherwise distributed in
respect of principal or in redemption of or in exchange for any Pledged
Collateral, shall be, and shall forthwith be delivered to Secured Party to
hold as, Pledged Collateral and shall, if received by Pledgor, be received
in trust for the benefit of Secured Party, be segregated from the other
property or funds of Pledgor and be forthwith delivered to Secured Party as
Pledged Collateral in the same form as so received (with all necessary
indorsements); and
(iii) Secured Party shall promptly execute and deliver (or
cause to be executed and delivered) to Pledgor all such proxies, dividend
payment orders and other instruments as Pledgor may from time to time
reasonably request for the purpose of enabling Pledgor to exercise the
voting and other consensual rights which it is entitled to exercise
pursuant to paragraph (i) above and to receive the dividends, principal or
interest payments which it is authorized to receive and retain pursuant to
paragraph (ii) above.
(b) Upon the occurrence and during the continuation of an Event
of Default:
(i) upon written notice from Secured Party to Pledgor, all
rights of Pledgor to exercise the voting and other consensual rights which
it would otherwise be entitled to exercise pursuant to Section 7(a)(i)
shall cease, and all such rights shall thereupon become vested in Secured
Party who shall thereupon have the sole right to exercise such voting and
other consensual rights;
(ii) all rights of Pledgor to receive the dividends and
interest payments which it would otherwise be authorized to receive and
retain pursuant to Section 7(a)(ii) shall cease, and all such rights shall
thereupon become vested in Secured Party who shall thereupon have the sole
right to receive and hold as Pledged Collateral such dividends and interest
payments; and
(iii) all dividends, principal and interest payments which
are received by Pledgor contrary to the provisions of paragraph (ii) of
this Section 7(b) shall be received in trust for the benefit of Secured
Party, shall be segregated from other funds of Pledgor and shall forthwith
be paid over to Secured Party as Pledged Collateral in the same form as so
received (with any necessary indorsements).
7
<PAGE>
(c) In order to permit Secured Party to exercise the voting and
other consensual rights which it may be entitled to exercise pursuant to
Section 7(b)(i) and to receive all dividends and other distributions which
it may be entitled to receive under Section 7(a)(ii) or Section 7(b)(ii),
(i) Pledgor shall promptly execute and deliver (or cause to be executed and
delivered) to Secured Party all such proxies, dividend payment orders and
other instruments as Secured Party may from time to time reasonably request
and (ii) without limiting the effect of the immediately preceding clause
(i), Pledgor hereby grants to Secured Party an irrevocable proxy to vote
the Pledged Shares and to exercise all other rights, powers, privileges and
remedies to which a holder of the Pledged Shares would be entitled
(including giving or withholding written consents of shareholders, calling
special meetings of shareholders and voting at such meetings), which proxy
shall be effective, automatically and without the necessity of any action
(including any transfer of any Pledged Shares on the record books of the
issuer thereof) by any other Person (including the issuer of the Pledged
Shares or any officer or agent thereof), upon the occurrence of an Event of
Default and which proxy shall only terminate upon the payment in full of
the Secured Obligations.
SECTION 8. Secured Party Appointed Attorney-in-Fact. Pledgor
----------------------------------------
hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact,
with full authority in the place and stead of Pledgor and in the name of
Pledgor, Secured Party or otherwise, from time to time in Secured Party's
discretion to take any action and to execute any instrument that Secured
Party may deem necessary or advisable to accomplish the purposes of this
Agreement, including:
(a) to file one or more financing or continuation statements, or
amendments thereto, relative to all or any part of the Pledged Collateral
without the signature of Pledgor; and
(b) upon the occurrence and during the continuation of an Event
of Default:
(i) to ask, demand, collect, sue for, recover, compound,
receive and give acquittance and receipts for moneys due and to become due
under or in respect of any of the Pledged Collateral;
(ii) to receive, endorse and collect any instruments made
payable to Pledgor representing any dividend, principal or interest payment
or other distribution in respect of the Pledged Collateral or any part
thereof and to give full discharge for the same; and
(iii) to file any claims or take any action or institute any
proceedings that Secured Party may deem necessary or desirable for the
collection of any of the Pledged Collateral or otherwise to enforce the
rights of Secured Party with respect to any of the Pledged Collateral.
8
<PAGE>
SECTION 9. Secured Party May Perform. If Pledgor fails to
-------------------------
perform any agreement contained herein after the period in which such
performance is required, and after reasonable notice, Secured Party may
itself perform, or cause performance of, such agreement, and the expenses
of Secured Party incurred in connection therewith shall be payable by
Pledgor under Section 14(b).
SECTION 10. Standard of Care. The powers conferred on Secured
----------------
Party hereunder are solely to protect its interest in the Pledged
Collateral and shall not impose any duty upon it to exercise any such
powers. Except for the exercise of reasonable care in the custody of any
Pledged Collateral in its possession and the accounting for moneys actually
received by it hereunder, Secured Party shall have no duty as to any
Pledged Collateral, it being understood that Secured Party shall have no
responsibility for (a) ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relating to
any Pledged Collateral, whether or not Secured Party has or is deemed to
have knowledge of such matters, (b) taking any necessary steps (other than
steps taken in accordance with the standard of care set forth above to
maintain possession of the Pledged Collateral) to preserve rights against
any parties with respect to any Pledged Collateral, (c) taking any
necessary steps to collect or realize upon the Secured Obligations or any
guarantee therefor, or any part thereof, or any of the Pledged Collateral,
or (d) initiating any action to protect the Pledged Collateral against the
possibility of a decline in market value. Secured Party shall be deemed to
have exercised reasonable care in the custody and preservation of Pledged
Collateral in its possession if such Pledged Collateral is accorded
treatment substantially equal to that which Secured Party accords its own
property consisting of negotiable securities.
SECTION 11. Remedies.
--------
(a) If any Event of Default shall have occurred and be
continuing, Secured Party may exercise in respect of the Pledged
Collateral, in addition to all other rights and remedies provided for
herein or otherwise available to it, all the rights and remedies of a
secured party on default under the Uniform Commercial Code as in effect in
any relevant jurisdiction (the "Code") (whether or not the Code applies to
the affected Pledged Collateral), and Secured Party may also in its sole
discretion, without notice except as specified below, sell the Pledged
Collateral or any part thereof in one or more parcels at public or private
sale, at any exchange or broker's board or at any of Secured Party's
offices or elsewhere, for cash, on credit or for future delivery, at such
time or times and at such price or prices and upon such other terms as
Secured Party may deem commercially reasonable, irrespective of the impact
of any such sales on the market price of the Pledged Collateral. Secured
Party or any Lender or Interest Rate Exchanger may be the purchaser of any
or all of the Pledged Collateral at any such public sale and, to the extent
permitted by law, private sale, and Secured Party, as agent for and
representative of Lenders and Interest Rate Exchangers (but not any Lender
or Lenders or Interest Rate Exchanger or Interest Rate Exchangers in its or
their respective individual capacities unless Requisite Obligees (as
defined in Section 16(a)) shall otherwise agree in writing), shall be
entitled, for the purpose of bidding and making settlement or payment of
the
9
<PAGE>
purchase price for all or any portion of the Pledged Collateral sold at any
such public sale, to use and apply any of the Secured Obligations as a
credit on account of the purchase price for any Pledged Collateral payable
by Secured Party at such sale. Each purchaser at any such sale shall hold
the property sold absolutely free from any claim or right on the part of
Pledgor, and Pledgor hereby waives (to the extent permitted by applicable
law) all rights of redemption, stay and/or appraisal which it now has or
may at any time in the future have under any rule of law or statute now
existing or hereafter enacted. Pledgor agrees that, to the extent notice of
sale shall be required by law, at least ten days' notice to Pledgor of the
time and place of any public sale or the time after which any private sale
is to be made shall constitute reasonable notification. Secured Party shall
not be obligated to make any sale of Pledged Collateral regardless of
notice of sale having been given. Secured Party may adjourn any public or
private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time
and place to which it was so adjourned. Pledgor hereby waives any claims
against Secured Party arising by reason of the fact that the price at which
any Pledged Collateral may have been sold at such a private sale was less
than the price which might have been obtained at a public sale, even if
Secured Party accepts the first offer received and does not offer such
Pledged Collateral to more than one offeree. If the proceeds of any sale or
other disposition of the Pledged Collateral are insufficient to pay all the
Secured Obligations, Pledgor shall be liable for the deficiency and the
fees of any attorneys employed by Secured Party to collect such deficiency.
(b) Pledgor recognizes that, by reason of certain prohibitions
contained in the Securities Act and applicable state securities laws,
Secured Party may be compelled, with respect to any sale of all or any part
of the Pledged Collateral conducted without prior registration or
qualification of such Pledged Collateral under the Securities Act and/or
such state securities laws, to limit purchasers to those who will agree,
among other things, to acquire the Pledged Collateral for their own
account, for investment and not with a view to the distribution or resale
thereof. Pledgor acknowledges that any such private sales may be at prices
and on terms less favorable than those obtainable through a public sale
without such restrictions (including a public offering made pursuant to a
registration statement under the Securities Act) and, notwithstanding such
circumstances and the registration rights granted to Secured Party by
Pledgor pursuant to Section 12, Pledgor agrees that the effect of the
foregoing in respect of any such private sale shall not be deemed per se to
--- --
cause such private sale to have not been made in a commercially reasonable
manner and that Secured Party shall have no obligation to engage in public
sales and no obligation to delay the sale of any Pledged Collateral for the
period of time necessary to permit the issuer thereof to register it for a
form of public sale requiring registration under the Securities Act or
under applicable state securities laws, even if such issuer would, or
should, agree to so register it.
(c) If Secured Party determines to exercise its right to sell any
or all of the Pledged Collateral, upon written request, Pledgor shall and
shall cause each issuer of any Pledged Shares to be sold hereunder from
time to time to furnish to Secured Party all such information as Secured
Party may request in order to determine the number of
10
<PAGE>
shares and other instruments included in the Pledged Collateral which may
be sold by Secured Party in exempt transactions under the Securities Act
and the rules and regulations of the Securities and Exchange Commission
thereunder, as the same are from time to time in effect.
SECTION 12. Registration Rights. If Secured Party shall
-------------------
determine to exercise its right to sell all or any of the Pledged
Collateral pursuant to Section 11, Pledgor agrees that, upon request of
Secured Party (which request may be made by Secured Party in its sole
discretion), Pledgor will, at its own expense:
(a) execute and deliver, and use its best efforts to cause each
issuer of the Pledged Collateral contemplated to be sold and the directors
and officers thereof to execute and deliver, all such instruments and
documents, and do or cause to be done all such other acts and things, as
may be necessary or, in the opinion of Secured Party, advisable to file a
registration statement covering such Pledged Collateral under the
provisions of the Securities Act and to use its best efforts to cause the
registration statement relating thereto to become effective and to remain
effective for such period as prospectuses are required by law to be
furnished, and to make all amendments and supplements thereto and to the
related prospectus which, in the opinion of Secured Party, are necessary or
advisable, all in conformity with the requirements of the Securities Act
and the rules and regulations of the Securities and Exchange Commission
applicable thereto;
(b) use its best efforts to qualify the Pledged Collateral under
all applicable state securities or "Blue Sky" laws and to obtain all
necessary governmental approvals for the sale of the Pledged Collateral, as
requested by Secured Party;
(c) cause each such issuer to make available to its security
holders, as soon as practicable, an earnings statement which will satisfy
the provisions of Section 11(a) of the Securities Act;
(d) to use its best efforts to do or cause to be done all such
other acts and things as may be necessary to make such sale of the Pledged
Collateral or any part thereof valid and binding and in compliance with
applicable law; and
(e) bear all costs and expenses, including reasonable attorneys'
fees, of carrying out its obligations under this Section 12.
Pledgor further agrees that a breach of any of the covenants
contained in this Section 12 will cause irreparable injury to Secured
Party, that Secured Party has no adequate remedy at law in respect of such
breach and, as a consequence, that each and every covenant contained in
this Section 12 shall be specifically enforceable against Pledgor, and
Pledgor hereby waives and agrees not to assert any defenses against an
action for specific performance of such covenants except for a defense that
no default has occurred giving rise to the Secured Obligations becoming due
and payable prior to their
11
<PAGE>
stated maturities. Nothing in this Section 12 shall in any way alter the
rights of Secured Party under Section 11.
SECTION 13. Application of Proceeds. All proceeds received by
-----------------------
Secured Party in respect of any sale of, collection from, or other
realization upon all or any part of the Pledged Collateral shall be applied
as provided in subsection 2.4D of the Credit Agreement.
SECTION 14. Indemnity and Expenses.
----------------------
(a) Pledgor agrees to indemnify Secured Party, Syndication Agent,
Documentation Agent, each Lender and each Interest Rate Exchanger from and
against any and all claims, losses and liabilities in any way relating to,
growing out of or resulting from this Agreement and the transactions
contemplated hereby (including enforcement of this Agreement), except to
the extent such claims, losses or liabilities result solely from Secured
Party's, Syndication Agent's, Documentation Agent's or such Lender's or
Interest Rate Exchanger's gross negligence or willful misconduct as finally
determined by a court of competent jurisdiction.
(b) Pledgor shall pay to Secured Party upon demand the amount of
any and all costs and expenses, including the reasonable fees and expenses
of its counsel and of any experts and agents, that Secured Party may incur
in connection with (i) the administration of this Agreement, (ii) the
custody or preservation of, or the sale of, collection from, or other
realization upon, any of the Pledged Collateral, (iii) the exercise or
enforcement of any of the rights of Secured Party hereunder, or (iv) the
failure by Pledgor to perform or observe any of the provisions hereof.
(c) In the event of any public sale described in Section 12,
Pledgor agrees to indemnify and hold harmless Secured Party, Syndication
Agent, Documentation Agent, each Lender and each Interest Rate Exchanger
and each of their respective directors, officers, employees and agents from
and against any loss, fee, cost, expense, damage, liability or claim, joint
or several, to which any such Persons may become subject or for which any
of them may be liable, under the Securities Act or otherwise, insofar as
such losses, fees, costs, expenses, damages, liabilities or claims (or any
litigation commenced or threatened in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus, registration statement,
prospectus or other such document published or filed in connection with
such public sale, or any amendment or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse Secured Party and
such other Persons for any legal or other expenses reasonably incurred by
Secured Party and such other Persons in connection with any litigation, of
any nature whatsoever, commenced or threatened in respect thereof
(including any and all fees, costs and expenses whatsoever reasonably
incurred by Secured Party and such other Persons and counsel for Secured
Party and such other Persons in investigating, preparing for, defending
against or providing evidence,
12
<PAGE>
producing documents or taking any other action in respect of, any such
commenced or threatened litigation or any claims asserted). This indemnity
shall be in addition to any liability which Pledgor may otherwise have and
shall extend upon the same terms and conditions to each Person, if any,
that controls Secured Party or such Persons within the meaning of the
Securities Act.
SECTION 15. Continuing Security Interest; Transfer of Loans.
-----------------------------------------------
This Agreement shall create a continuing security interest in the Pledged
Collateral and shall (a) remain in full force and effect until the payment
in full of all Secured Obligations, the cancellation or termination of the
Commitments and the cancellation or expiration of all outstanding Letters
of Credit, (b) be binding upon Pledgor, its successors and assigns, and (c)
inure, together with the rights and remedies of Secured Party hereunder, to
the benefit of Secured Party and its successors, transferees and assigns.
Without limiting the generality of the foregoing clause (c), but subject to
the provisions of subsection 10.1 of the Credit Agreement, any Lender may
assign or otherwise transfer any Loans held by it to any other Person, and
such other Person shall thereupon become vested with all the benefits in
respect thereof granted to Lenders herein or otherwise. Upon the payment
in full of all Secured Obligations, the cancellation or termination of the
Commitments and the cancellation or expiration of all outstanding Letters
of Credit, the security interest granted hereby shall terminate and all
rights to the Pledged Collateral shall revert to Pledgor. Upon any such
termination Secured Party will, at Pledgor's expense, execute and deliver
to Pledgor such documents as Pledgor shall reasonably request to evidence
such termination and Pledgor shall be entitled to the return, upon its
request and at its expense, against receipt and without recourse to Secured
Party, of such of the Pledged Collateral as shall not have been sold or
otherwise applied pursuant to the terms hereof.
SECTION 16. Secured Party as Administrative Agent.
-------------------------------------
(a) Secured Party has been appointed to act as Secured Party
hereunder by Lenders and, by their acceptance of the benefits hereof,
Interest Rate Exchangers. Secured Party shall be obligated, and shall have
the right hereunder, to make demands, to give notices, to exercise or
refrain from exercising any rights, and to take or refrain from taking any
action (including the release or substitution of Pledged Collateral),
solely in accordance with this Agreement and the Credit Agreement; provided
--------
that Secured Party shall exercise, or refrain from exercising, any remedies
provided for in Section 11 in accordance with the instructions of (i)
Requisite Lenders or (ii) after payment in full of all Obligations under
the Credit Agreement and the other Loan Documents, the holders of a
majority of the aggregate notional amount (or, with respect to any Lender
Interest Rate Agreement that has been terminated in accordance with its
terms, the amount then due and payable (exclusive of expenses and similar
payments but including any early termination payments then due) under such
Lender Interest Rate Agreement) under all Lender Interest Rate Agreements
(Requisite Lenders or, if applicable, such holders being referred to herein
as "Requisite Obligees"). In furtherance of the foregoing provisions of
this Section 16(a), each Interest Rate Exchanger, by its acceptance of the
benefits hereof, agrees that it shall have no right individually to realize
upon any of the Pledged Collateral hereunder, it being understood
13
<PAGE>
and agreed by such Interest Rate Exchanger that all rights and remedies
hereunder may be exercised solely by Secured Party for the benefit of
Lenders and Interest Rate Exchangers in accordance with the terms of this
Section 16(a).
(b) Secured Party shall at all times be the same Person that is
Administrative Agent under the Credit Agreement. Written notice of
resignation by Administrative Agent pursuant to subsection 9.5 of the
Credit Agreement shall also constitute notice of resignation as Secured
Party under this Agreement; removal of Administrative Agent pursuant to
subsection 9.5 of the Credit Agreement shall also constitute removal as
Secured Party under this Agreement; and appointment of a successor
Administrative Agent pursuant to subsection 9.5 of the Credit Agreement
shall also constitute appointment of a successor Secured Party under this
Agreement. Upon the acceptance of any appointment as Administrative Agent
under subsection 9.5 of the Credit Agreement by a successor Administrative
Agent, that successor Administrative Agent shall thereupon succeed to and
become vested with all the rights, powers, privileges and duties of the
retiring or removed Secured Party under this Agreement, and the retiring or
removed Secured Party under this Agreement shall promptly (i) transfer to
such successor Secured Party all sums, securities and other items of
Collateral held hereunder, together with all records and other documents
necessary or appropriate in connection with the performance of the duties
of the successor Secured Party under this Agreement, and (ii) execute and
deliver to such successor Secured Party such amendments to financing
statements, and take such other actions, as may be necessary or appropriate
in connection with the assignment to such successor Secured Party of the
security interests created hereunder, whereupon such retiring or removed
Secured Party shall be discharged from its duties and obligations under
this Agreement. After any retiring or removed Administrative Agent's
resignation or removal hereunder as Secured Party, the provisions of this
Agreement shall inure to its benefit as to any actions taken or omitted to
be taken by it under this Agreement while it was Secured Party hereunder.
SECTION 17. Amendments; Etc. No amendment, modification,
---------------
termination or waiver of any provision of this Agreement, and no consent to
any departure by Pledgor therefrom, shall in any event be effective unless
the same shall be in writing and signed by Secured Party and, in the case
of any such amendment or modification, by Pledgor. Any such waiver or
consent shall be effective only in the specific instance and for the
specific purpose for which it was given.
SECTION 18. Notices. Any notice or other communication herein
-------
required or permitted to be given shall be in writing and may be personally
served, telexed or sent by telefacsimile or United States mail or courier
service and shall be deemed to have been given when delivered in person or
by courier service, upon receipt of telefacsimile or telex, or three
Business Days after depositing it in the United States mail with postage
prepaid and properly addressed. For the purposes hereof, the address of
each party hereto shall be as set forth under such party's name on the
signature pages hereof or, as to either party, such other address as shall
be designated by such party in a written notice delivered to the other
party hereto.
14
<PAGE>
SECTION 19. Failure or Indulgence Not Waiver; Remedies
------------------------------------------
Cumulative. No failure or delay on the part of Secured Party in the
----------
exercise of any power, right or privilege hereunder shall impair such
power, right or privilege or be construed to be a waiver of any default or
acquiescence therein, nor shall any single or partial exercise of any such
power, right or privilege preclude any other or further exercise thereof or
of any other power, right or privilege. All rights and remedies existing
under this Agreement are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
SECTION 20. Severability. In case any provision in or
------------
obligation under this Agreement shall be invalid, illegal or unenforceable
in any jurisdiction, the validity, legality and enforceability of the
remaining provisions or obligations, or of such provision or obligation in
any other jurisdiction, shall not in any way be affected or impaired
thereby.
SECTION 21. Headings. Section and subsection headings in this
--------
Agreement are included herein for convenience of reference only and shall
not constitute a part of this Agreement for any other purpose or be given
any substantive effect.
SECTION 22. Governing Law; Terms; Rules of Construction. THIS
-------------------------------------------
AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE
GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE
GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO
CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES
THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES
HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY
THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless
otherwise defined herein or in the Credit Agreement, terms used in Articles
8 and 9 of the Uniform Commercial Code in the State of New York are used
herein as therein defined. The rules of construction set forth in
subsection 1.3 of the Credit Agreement shall be applicable to this
Agreement mutatis mutandis.
SECTION 23. Consent to Jurisdiction and Service of Process. ALL
----------------------------------------------
JUDICIAL PROCEEDINGS BROUGHT AGAINST PLEDGOR ARISING OUT OF OR RELATING TO
THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE
OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF
NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, PLEDGOR, FOR ITSELF
AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY
(I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE
JURISDICTION AND VENUE OF SUCH COURTS;
15
<PAGE>
(II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS;
(III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN
ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN
RECEIPT REQUESTED, TO PLEDGOR AT ITS ADDRESS PROVIDED IN ACCORDANCE
WITH SECTION 18;
(IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS
SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER PLEDGOR IN ANY SUCH
PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND
BINDING SERVICE IN EVERY RESPECT;
(V) AGREES THAT SECURED PARTY RETAINS THE RIGHT TO SERVE PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST
PLEDGOR IN THE COURTS OF ANY OTHER JURISDICTION; AND
(VI) AGREES THAT THE PROVISIONS OF THIS SECTION 23 RELATING TO
JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST
EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-
1402 OR OTHERWISE.
SECTION 24. Waiver of Jury Trial. PLEDGOR AND SECURED PARTY
--------------------
HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM
OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope
of this waiver is intended to be all-encompassing of any and all disputes
that may be filed in any court and that relate to the subject matter of
this transaction, including contract claims, tort claims, breach of duty
claims, and all other common law and statutory claims. Pledgor and Secured
Party each acknowledge that this waiver is a material inducement for
Pledgor and Secured Party to enter into a business relationship, that
Pledgor and Secured Party have already relied on this waiver in entering
into this Agreement and that each will continue to rely on this waiver in
their related future dealings. Pledgor and Secured Party further warrant
and represent that each has reviewed this waiver with its legal counsel,
and that each knowingly and voluntarily waives its jury trial rights
following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE,
MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN
BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 24 AND
EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS
AGREEMENT. In the event of litigation, this Agreement may be filed as a
written consent to a trial by the court.
16
<PAGE>
SECTION 25. Counterparts. This Agreement may be executed in one
------------
or more counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed
an original, but all such counterparts together shall constitute but one
and the same instrument; signature pages may be detached from multiple
separate counterparts and attached to a single counterpart so that all
signature pages are physically attached to the same document.
[remainder of page intentionally left blank]
17
<PAGE>
IN WITNESS WHEREOF, Pledgor and Secured Party have caused this
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
[NAME OF PLEDGOR], as Pledgor
By:
---------------------------
Title:
Notice Address:
-------------------------
-------------------------
-------------------------
FIRST UNION NATIONAL BANK,
as Secured Party
By:
---------------------------
Title:
Notice Address:
------------------------
------------------------
------------------------
18
<PAGE>
Exhibit 10.24
SUBSIDIARY TRADEMARK SECURITY AGREEMENT
This SUBSIDIARY TRADEMARK SECURITY AGREEMENT (this "Agreement")
is dated as of ________ and entered into by and among [INSERT NAME OF
GRANTOR IN CAPS], a ________________ corporation ("Grantor"), and FIRST
UNION NATIONAL BANK, as administrative agent for and representative of (in
such capacity herein called "Secured Party") the financial institutions
("Lenders") party to the Credit Agreement referred to below and any
Interest Rate Exchangers (as hereinafter defined).
PRELIMINARY STATEMENTS
A. Secured Party, Syndication Agent and Lenders have entered
into a Credit Agreement dated as of October 23, 1997, which Credit
Agreement has been amended and restated by an Amended and Restated Credit
Agreement dated as of January 28, 1999 (said Credit Agreement, as it may
hereafter be further amended, supplemented or otherwise modified from time
to time, being the "Credit Agreement", the terms defined therein and not
otherwise defined herein being used herein as therein defined) with The
Pantry, Inc. (the "Borrower") pursuant to which Lenders have made certain
commitments, subject to the terms and conditions set forth in the Credit
Agreement, to extend certain credit facilities to the Borrower.
B. Borrower may from time to time enter into one or more
Interest Rate Agreements (collectively, the "Lender Interest Rate
Agreements") with one or more Lenders (in such capacity, collectively,
"Interest Rate Exchangers") in accordance with the terms of the Credit
Agreement.
C. Grantor owns and uses in its business, and will in the future
adopt and so use, various intangible assets, including trademarks, service
marks, designs, logos, indicia, tradenames, corporate names, company names,
business names, fictitious business names, trade styles and/or other source
and/or business identifiers and applications pertaining thereto
(collectively, the "Trademarks").
D. Secured Party desires to become a secured creditor with
respect to all of the existing and future Trademarks, all registrations
that have been or may hereafter be issued or applied for thereon in the
United States and any state thereof (the "Registrations"), all common law
and other rights in and to the Trademarks in the United States and any
state thereof (the "Trademark Rights"), all goodwill of Grantor's business
symbolized by the Trademarks and associated therewith, including without
limitation the documents and things described in Section 1(b) (the
"Associated Goodwill"), and all proceeds of the Trademarks, the
Registrations, the Trademark Rights and the Associated Goodwill, and
Grantor agrees to create a secured and protected interest in the
Trademarks, the Registrations, the Trademark Rights, the Associated
Goodwill and all the proceeds thereof as provided herein.
1
<PAGE>
E. Grantor has executed and delivered the Subsidiary Security
Agreement dated as of even date herewith (the "Subsidiary Security
Agreement") between Grantor and Secured Party for the benefit of Lenders,
pursuant to which Grantor has granted Secured Party a security interest in
all of its personal property, including, without limitation, the Collateral
(as defined below), which Subsidiary Security Agreement is to be
supplemented by this Agreement, and it is desired that all obligations of
Grantor under the Guaranty be secured hereunder.
F. Pursuant to the Subsidiary Security Agreement, Grantor has
granted to Secured Party a lien on and security interest in, among other
assets, the equipment and inventory relating to the products and services
sold or delivered under or in connection with the Trademarks such that,
upon the occurrence and during the continuation of an Event of Default,
Secured Party would be able to exercise its remedies consistent with the
Subsidiary Security Agreement, this Agreement and applicable law to
foreclose upon Grantor's business and use the Trademarks, the Registrations
and the Trademark Rights in conjunction with the continued operation of
such business, maintaining substantially the same product and service
specifications and quality as maintained by Grantor, and benefit from the
Associated Goodwill.
G. Upon the occurrence and during the continuation of an Event
of Default, and to permit Secured Party to operate Grantor's business
without interruption and to use the Trademarks, Registrations, Trademark
Rights and Associated Goodwill in conjunction therewith, Grantor is willing
to appoint Secured Party as Grantor's attorney-in-law and attorney-in-fact
to execute documents and take actions consistent therewith.
I. It is a requirement under the Credit Agreement that Grantor
shall have granted the security interests and undertaken the obligations
contemplated by this Agreement.
NOW, THEREFORE, in consideration of the premises and in order to
induce Lenders to make Loans and other extensions of credit under the
Credit Agreement as well as to induce Interest Rate Exchangers to enter
into the Lender Interest Rate Agreements to enter into the Lender Interest
Rate Agreements and for other good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, Grantor hereby agrees with
Secured Party as follows:
SECTION 1. Grant of Security. Grantor hereby grants to Secured
-----------------
Party a security interest in, all of Grantor's right, title and interest in
and to the following, in each case whether now or hereafter existing or in
which Grantor now has or hereafter acquires an interest and wherever the
same may be located (the "Collateral"):
(a) each of the Trademarks and rights and interests in Trademarks
which are presently, or in the future may be, owned, held (whether pursuant
to a license or otherwise) or used by Grantor, in whole or in part
(including, without limitation, the Trademarks specifically identified in
Schedule A annexed hereto, as the same may be amended pursuant hereto from
----------
time to time), and including all Trademark Rights with
2
<PAGE>
respect thereto and all federal and state Registrations therefor heretofore
or hereafter granted or applied for, the right (but not the obligation) to
register claims under any state or federal trademark law and to apply for,
renew and extend the Trademarks, Registrations and Trademark Rights, the
right (but not the obligation) to sue or bring opposition or cancellation
proceedings in the name of Grantor or in the name of Secured Party or
otherwise for past, present and future infringements of the Trademarks,
Registrations or Trademark Rights and all rights (but not obligations)
corresponding thereto in the United States and the Associated Goodwill; it
being understood that the rights and interests included herein shall
include, without limitation, all rights and interests pursuant to licensing
or other contracts in favor of Grantor pertaining to the Trademarks,
Registrations or Trademark Rights presently or in the future owned or used
by third parties but, in the case of third parties which are not Affiliates
of Grantor, only to the extent permitted by such licensing or other
contracts and, if not so permitted, only with the consent of such third
parties;
(b) the following documents and things in Grantor's possession,
or subject to Grantor's right to possession, related to (Y) the production,
sale and delivery by Grantor, or by any Affiliate, licensee or
subcontractor of Grantor, of products or services sold or delivered by or
under the authority of Grantor in connection with the Trademarks,
Registrations or Trademark Rights (which products and services shall, for
purposes of this Agreement, be deemed to include, without limitation,
products and services sold or delivered pursuant to merchandising
operations utilizing any Trademarks, Registrations or Trademark Rights); or
(Z) any retail or other merchandising operations conducted under the name
of or in connection with the Trademarks, Registrations or Trademark Rights
by Grantor or any Affiliate, licensee or subcontractor of Grantor:
(i) all lists and ancillary documents that identify and
describe any of Grantor's customers, or those of its Affiliates,
licensees or subcontractors, for products sold and services delivered
under or in connection with the Trademarks or Trademark Rights,
including without limitation any lists and ancillary documents that
contain a customer's name and address, the name and address of any of
its warehouses, branches or other places of business, the identity of
the Person or Persons having the principal responsibility on a
customer's behalf for ordering products or services of the kind
supplied by Grantor, or the credit, payment, discount, delivery or
other sale terms applicable to such customer, together with
information setting forth the total purchases, by brand, product,
service, style, size or other criteria, and the patterns of such
purchases;
(ii) all product and service specification documents and
production and quality control manuals used in the manufacture or
delivery of products and services sold or delivered under or in
connection with the Trademarks or Trademark Rights;
(iii) all documents which reveal the name and address of any
source of supply, and any terms of purchase and delivery, for any and
all materials, components and services used in the production of
products and
3
<PAGE>
services sold or delivered under or in connection with the Trademarks
or Trademark Rights; and
(iv) all documents constituting or concerning the then
current or proposed advertising and promotion by Grantor or its
Affiliates, licensees or subcontractors of products and services sold
or delivered under or in connection with the Trademarks or Trademark
Rights including, without limitation, all documents which reveal the
media used or to be used and the cost for all such advertising
conducted within the described period or planned for such products and
services;
(c) all general intangibles relating to the Collateral;
(d) all books, records, ledger cards, files, correspondence,
computer programs, tapes, disks and related data processing software
that at any time evidence or contain information relating to any of
the Collateral or are otherwise necessary or helpful in the collection
thereof or realization thereupon; and
(e) all proceeds, products, rents and profits (including
without limitation license royalties and proceeds of infringement
suits) of or from any and all of the foregoing Collateral and, to the
extent not otherwise included, all payments under insurance (whether
or not Secured Party is the loss payee thereof), or any indemnity,
warranty or guaranty, payable by reason of loss or damage to or
otherwise with respect to any of the foregoing Collateral. For
purposes of this Agreement, the term "proceeds" includes whatever is
receivable or received when Collateral or proceeds are sold,
exchanged, collected or otherwise disposed of, whether such
disposition is voluntary or involuntary.
SECTION 2. Security for Obligations. This Agreement secures,
------------------------
and the Collateral is collateral security for, the prompt payment or
performance in full when due, whether at stated maturity, by required
prepayment, declaration, acceleration, demand or otherwise (including
the payment of amounts that would become due but for the operation of
the automatic stay under Section 362(a) of the Bankruptcy Code, 11
U.S.C. (S)362(a)), of all obligations and liabilities of every nature
of Grantor now or hereafter existing under or arising out of or in
connection with the Guaranty and all extensions or renewals thereof,
whether for principal, interest (including without limitation interest
that, but for the filing of a petition in bankruptcy with respect to
Company and/or Grantor, would accrue on such obligations, whether or
not a claim is allowed against Company and/or Grantor for such
interest in the related bankruptcy proceeding), reimbursement of
amounts drawn under Letters of Credit, payments for early termination
of Lender Interest Rate Agreements, fees, expenses, indemnities or
otherwise, whether voluntary or involuntary, direct or indirect,
absolute or contingent, liquidated or unliquidated, whether or not
jointly owed with others, and whether or not from time to time
decreased or extinguished and later increased, created or incurred,
and all or any portion of such obligations or liabilities that are
paid, to the extent all or any part of such payment is avoided or
recovered directly or indirectly from Secured Party, Syndication
Agent, Documentation Agent, any Lender or Interest Rate Exchanger as a
4
<PAGE>
preference, fraudulent transfer or otherwise (all such obligations and
liabilities being the "Underlying Debt"), and all obligations of every
nature of Grantor now or hereafter existing under this Agreement (all
such obligations of Grantor, together with the Underlying Debt, being
the "Secured Obligations").
SECTION 3. Grantor Remains Liable. Anything contained herein to
----------------------
the contrary notwithstanding, (a) Grantor shall remain liable under
any contracts and agreements included in the Collateral, to the extent
set forth therein, to perform all of its duties and obligations
thereunder to the same extent as if this Agreement had not been
executed, (b) the exercise by Secured Party of any of its rights
hereunder shall not release Grantor from any of its duties or
obligations under the contracts and agreements included in the
Collateral, and (c) Secured Party shall not have any obligation or
liability under any contracts and agreements included in the
Collateral by reason of this Agreement, nor shall Secured Party be
obligated to perform any of the obligations or duties of Grantor
thereunder or to take any action to collect or enforce any claim for
payment assigned hereunder.
SECTION 4. Representations and Warranties. Grantor represents
------------------------------
and warrants as follows:
(a) Description of Collateral. A true and complete list of all
-------------------------
Trademarks, Registrations and Trademark Rights owned, held (whether
pursuant to a license or otherwise) or used by Grantor, in whole or in
part, as of the date of this Agreement and which are material to the
operation of the business of Grantor is set forth in Schedule A
----------
annexed hereto.
(b) Validity and Enforceability of Collateral. Each of the
-----------------------------------------
Trademarks, Registrations and Trademark Rights that is owned by
Grantor and is material to the financial condition or business of
Grantor is valid, subsisting and enforceable. Grantor is not aware of
any pending or threatened claim by any third party that any such
Trademarks, Registrations or Trademark Rights is invalid or
unenforceable or that the use of any of the Trademarks, Registrations
or Trademark Rights violates the rights of any third person or of any
basis for any such claim.
(c) Ownership of Collateral. Except for the security interest
-----------------------
created by this Agreement or any other Collateral Document, Grantor
owns the Collateral free and clear of any Lien (other than Permitted
Encumbrances). Except such as may have been filed in favor of Secured
Party relating to this Agreement, (i) no effective financing statement
or other instrument similar in effect covering all or any part of the
Collateral is on file in any filing or recording office and (ii) no
effective filing covering all or any part of the Collateral is on file
in the United States Patent and Trademark Office.
(d) Office Locations; Other Names. The chief place of business,
-----------------------------
the chief executive office and the office where Grantor keeps its
records regarding the Collateral is, and has been for the four month
period preceding the date hereof, located at the location identified
in Schedule B attached hereto. Grantor has not in the past five
----------
5
<PAGE>
years done, and does not now do, business under any other name
(including any trade-name or fictitious business name), except as set
forth in Schedule B attached hereto.
----------
(e) Governmental Authorizations. Except as contemplated by
---------------------------
Sections 1(a) and 4(f) hereof, no authorization, approval or other
action by, and no notice to or filing with, any governmental authority
or regulatory body is required for either (i) the grant by Grantor of
the security interest hereby, (ii) the execution, delivery or
performance of this Agreement by Grantor, or (iii) the perfection of
or the exercise by Secured Party of its rights and remedies hereunder
in the United States (except as may have been taken by or at the
direction of Grantor).
(f) Perfection. This Agreement, together with the filing of
----------
financing statements describing the Collateral with the Secretary of
State of the State of [Delaware] [Florida], and the recording of this
Agreement with the United States Patent and Trademark Office, which
have been made or will be made promptly following the Closing Date,
creates a valid, perfected and, except for Permitted Encumbrances,
First Priority security interest in the Collateral, securing the
payment of the Secured Obligations; provided that additional actions
--------
may be required with respect to the perfection of proceeds of the
Collateral.
(g) Other Information. All information heretofore, herein or
-----------------
hereafter supplied to Secured Party by or on behalf of Grantor with
respect to the Collateral is accurate and complete in all material
respects.
SECTION 5. Further Assurances; New Trademarks, Registrations and
-----------------------------------------------------
Trademark Rights.
----------------
(a) Grantor agrees that from time to time, at the expense of
Grantor, Grantor will promptly execute and deliver all further
instruments and documents, and take all further action, that may be
necessary in order to perfect and protect any security interest or
conditional assignment granted or purported to be granted hereby or to
enable Secured Party to exercise and enforce its rights and remedies
hereunder with respect to any Collateral. Without limiting the
generality of the foregoing, Grantor will: (i) at the request of
Secured Party, mark conspicuously each of its records pertaining to
the Collateral with a legend, in form and substance satisfactory to
Secured Party, indicating that such Collateral is subject to the
security interest granted hereby, (ii) execute and file such financing
or continuation statements, or amendments thereto, and such other
instruments or notices, as may be necessary in order to perfect and
preserve the security interests granted or purported to be granted
hereby, (iii) at the revocable request of Secured Party, use its best
efforts to obtain any necessary consents of third parties to the grant
and perfection of a security interest and assignment to Secured Party
with respect to any Collateral, (iv) at any reasonable time, upon
request by Secured Party, exhibit the Collateral to and allow
inspection of the Collateral by Secured Party, or persons designated
by Secured Party, and (v) at Secured Party's request, appear in and
defend any action or proceeding that may affect Grantor's title to or
Secured Party's security interest in all or any part of the
Collateral.
6
<PAGE>
(b) Grantor hereby authorizes Secured Party to file one or more
financing or continuation statements, and amendments thereto, relative to
all or any part of the Collateral without the signature of Grantor.
Grantor agrees that a carbon, photographic or other reproduction of this
Agreement or of a financing statement signed by Grantor shall be sufficient
as a financing statement and may be filed as a financing statement in any
and all jurisdictions.
(c) Grantor hereby authorizes Secured Party to modify this
Agreement without obtaining Grantor's approval of or signature to such
modification by amending Schedule A annexed hereto to include reference to
----------
any right, title or interest in any existing Trademark, Registration or
Trademark Right or any Trademark, Registration or Trademark Right acquired
or developed by Grantor after the execution hereof or to delete any
reference to any right, title or interest in any Trademark, Registration or
Trademark Right in which Grantor no longer has or claims any right, title
or interest.
(d) Grantor will furnish to Secured Party from time to time
statements and schedules further identifying and describing the Collateral
and such other reports in connection with the Collateral as Secured Party
may reasonably request, all in reasonable detail.
(e) If Grantor shall obtain rights to any new Trademarks,
Registrations or Trademark Rights, the provisions of this Agreement shall
automatically apply thereto. Grantor shall promptly notify Secured Party
in writing of any rights to any new Trademarks or Trademark Rights acquired
by Grantor after the date hereof and of any Registrations issued or
applications for Registration made after the date hereof. Concurrently with
the filing of an application for Registration for any Trademark, Grantor
shall execute, deliver and record in all places where this Agreement is
recorded an appropriate Trademark Collateral Security Agreement,
substantially in the form hereof, with appropriate insertions, or an
amendment to this Agreement, in form and substance satisfactory to Secured
Party, pursuant to which Grantor shall grant a security interest to the
extent of its interest in such Registration as provided herein to Secured
Party unless so doing would, in the reasonable judgment of Grantor, after
due inquiry, result in the grant of a Registration in the name of Secured
Party, in which event Grantor shall give written notice to Secured Party as
soon as reasonably practicable and the filing shall instead be undertaken
as soon as practicable but in no case later than immediately following the
grant of the Registration.
SECTION 6. Certain Covenants of Grantor. Grantor shall:
----------------------------
(a) not use or permit any Collateral to be used unlawfully or in
violation of any provision of this Agreement or any applicable statute,
regulation or ordinance or any policy of insurance covering the Collateral;
(b) notify Secured Party of any change in Grantor's name,
identity or corporate structure within 15 days of such change;
7
<PAGE>
(c) give Secured Party 30 days' prior written notice of any
change in Grantor's chief place of business or chief executive office or
the office where Grantor keeps its records regarding the Collateral;
(d) pay promptly when due all property and other taxes,
assessments and governmental charges or levies imposed upon, and all claims
(including claims for labor, materials and supplies) against, the
Collateral, except to the extent the validity thereof is being contested in
good faith; provided that Grantor shall in any event pay such taxes,
--------
assessments, charges, levies or claims not later than five days prior to
the date of any proposed sale under any judgement, writ or warrant of
attachment entered or filed against Grantor or any of the Collateral as a
result of the failure to make such payment;
(e) not sell, assign (by operation of law or otherwise) or
otherwise dispose of any of the Collateral, except as permitted herein or
by the Credit Agreement; provided that in the event Grantor makes an Asset
--------
Sale permitted by the Credit Agreement and the assets subject to such Asset
Sale constitute Collateral, Secured Party shall release the Collateral that
is the subject of such Asset Sale to Grantor free and clear of any Lien and
security interest under this Agreement or any other Collateral Documents
concurrently with the consummation of such Asset Sale; provided, further
-------- -------
that, as a condition precedent to such release, Secured Party shall have
received evidence satisfactory to it that arrangements satisfactory to it
have been made for delivery to Secured Party of that amount of Net Asset
Sale Proceeds required to be delivered to Secured Party under the Credit
Agreement;
(f) except for the security interest created by this Agreement or
any other Loan Document, not create or suffer to exist any Lien upon or
with respect to any of the Collateral to secure the indebtedness or other
obligations of any Person except for Permitted Encumbrances;
(g) keep reasonable records respecting the Collateral and at all
times keep at least one complete set of its records concerning
substantially all of the Trademarks, Registrations and Trademark Rights at
its chief executive office or principal place of business;
(h) not permit the inclusion in any contract to which it becomes
a party of any provision that could impair in any material respect or
prevent the creation of a security interest in, or the assignment of,
Grantor's rights and interests in any property included within the
definitions of any Trademarks, Registrations, Trademark Rights and
Associated Goodwill acquired under such contracts;
(i) take all reasonable steps necessary to protect the secrecy of
all trade secrets relating to the products and services sold or delivered
under or in connection with the Trademarks and Trademark Rights, including
without limitation entering into confidentiality agreements with employees
and labeling and restricting access to secret information and documents;
8
<PAGE>
(j) use proper statutory notice in connection with its use of
each of the Trademarks, Registrations and Trademark Rights;
(k) use consistent standards of high quality (which may be
consistent with Grantor's past practices) in the manufacture, sale and
delivery of products and services sold or delivered under or in connection
with the Trademarks, Registrations and Trademark Rights, including, to the
extent applicable, in the operation and maintenance of its retail stores
and other merchandising operations; and
(l) upon any officer of Grantor obtaining knowledge thereof,
promptly notify Secured Party in writing of any event that may materially
and adversely affect the value of the Collateral or any material portion
thereof, the ability of Grantor or Secured Party to dispose of the
Collateral or any material portion thereof, or the rights and remedies of
Secured Party in relation thereto, including without limitation the levy of
any legal process against the Collateral or any material portion thereof.
SECTION 7. Certain Inspection Rights. Grantor hereby grants to
-------------------------
Secured Party and its employees, representatives and agents the right to
visit Grantor's and any of its Affiliate's or subcontractor's plants,
facilities and other places of business that are utilized in connection
with the manufacture, production, inspection, storage or sale of products
and services sold or delivered under any of the Trademarks, Registrations
or Trademark Rights (or which were so utilized during the prior six month
period), and to inspect the quality control and all other records relating
thereto upon reasonable notice to Grantor and as often as may be reasonably
requested.
SECTION 8. Amounts Payable in Respect of the Collateral. Except
--------------------------------------------
as otherwise provided in this Section 8, Grantor shall continue to collect,
at its own expense, all amounts due or to become due to Grantor in respect
of the Collateral or any portion thereof. In connection with such
collections, Grantor may take (and, at Secured Party's direction, shall
take) such action as Grantor or Secured Party may deem necessary or
advisable to enforce collection of such amounts; provided, however, that
-------- -------
Secured Party shall have the right at any time, upon the occurrence and
during the continuation of an Event of Default and upon written notice to
Grantor of its intention to do so, to notify the obligors with respect to
any such amounts of the existence of the security interest created and to
direct such obligors to make payment of all such amounts directly to
Secured Party, and, upon such notification and at the expense of Grantor,
to enforce collection of any such amounts and to adjust, settle or
compromise the amount or payment thereof, in the same manner and to the
same extent as Grantor might have done. After receipt by Grantor of the
notice from Secured Party referred to in the proviso to the preceding
-------
sentence, (i) all amounts and proceeds (including checks and other
instruments) received by Grantor in respect of amounts due to Grantor in
respect of the Collateral or any portion thereof shall be received in trust
for the benefit of Secured Party hereunder, shall be segregated from other
funds of Grantor and shall be forthwith paid over or delivered to Secured
Party in the same form as so received (with any necessary endorsement) to
be held as cash Collateral and applied as provided by Section 16, and (ii)
Grantor shall not adjust, settle or compromise the amount or payment of any
such amount or release wholly or partly any obligor with respect thereto or
allow any credit or discount thereon.
9
<PAGE>
SECTION 9. Trademark Applications and Litigation.
-------------------------------------
(a) Grantor shall have the duty diligently, through counsel
reasonably acceptable to Secured Party, to prosecute any trademark
application relating to any of the Trademarks specifically identified in
Schedule A annexed hereto that is pending as of the date of this Agreement,
----------
to make federal application on any existing or future registerable but
unregistered Trademarks, and to file and prosecute opposition and
cancellation proceedings, renew Registrations and do any and all acts which
are necessary or desirable to preserve and maintain all rights in all
Trademarks, Registrations and Trademark Rights. Any expenses incurred in
connection therewith shall be borne solely by Grantor. Grantor shall not
abandon any Trademark, Registration or Trademark Right that is material in
value or to the conduct of Grantor's business without prior written notice
to, and express consent of, Secured Party.
(b) Except as provided in Section 9(d), Grantor shall have the
right to commence and prosecute in its own name, as real party in interest,
for its own benefit and at its own expense, such suits, proceedings or
other actions for infringement, unfair competition, dilution or other
damage as are in its reasonable business judgment necessary to protect the
Collateral. Secured Party shall provide, at Grantor's expense, all
reasonable and necessary cooperation in connection with any such suit,
proceeding or action including, without limitation, joining as a necessary
party.
(c) Grantor shall promptly, following its becoming aware thereof,
notify Secured Party of the institution of, or of any adverse determination
in, any proceeding (whether in the United States Patent and Trademark
Office or any federal, state, local or foreign court) described in Section
9(a) or 9(b) or regarding Grantor's claim of ownership in or right to use
any of the Trademarks, Registrations or Trademark Rights, its right to
register the same, or its right to keep and maintain such Registration.
Grantor shall provide to Secured Party any information with respect thereto
requested by Secured Party.
(d) Anything contained herein to the contrary notwithstanding,
upon the occurrence and during the continuation of an Event of Default,
Secured Party shall have the right (but not the obligation) to bring suit,
in the name of Grantor, Secured Party or otherwise, to enforce any
Trademark, Registration, Trademark Right, Associated Goodwill and any
license thereunder, in which event Grantor shall, at the request of Secured
Party, do any and all lawful acts and execute any and all documents
required by Secured Party in aid of such enforcement and Grantor shall
promptly, upon demand, reimburse and indemnify Secured Party as provided in
Section 17 in connection with the exercise of its rights under this Section
9. To the extent that Secured Party shall elect not to bring suit to
enforce any Trademark, Registration, Trademark Right, Associated Goodwill
or any license thereunder as provided in this Section 9(d), Grantor agrees
to use all reasonable measures, whether by action, suit, proceeding or
otherwise, to prevent the infringement of any of the Trademarks,
Registrations, Trademark Rights or Associated Goodwill by others and for
that purpose agrees to diligently maintain any action, suit or proceeding
against any Person so infringing necessary to prevent such infringement.
10
<PAGE>
SECTION 10. Non-Disturbance Agreements, etc. If and to the
--------------------------------
extent that Grantor is permitted to license the Collateral, Secured Party
shall enter into a non-disturbance agreement or other similar arrangement,
at Grantor's request and expense, with Grantor and any licensee of any
Collateral permitted hereunder in form and substance satisfactory to
Secured Party pursuant to which (a) Secured Party shall agree not to
disturb or interfere with such licensee's rights under its license
agreement with Grantor so long as such licensee is not in default
thereunder and (b) such licensee shall acknowledge and agree that the
Collateral licensed to it is subject to the security interest created in
favor of Secured Party and the other terms of this Agreement.
SECTION 11. Reassignment of Collateral. If (a) an Event of
--------------------------
Default shall have occurred and, by reason of cure, waiver, modification,
amendment or otherwise, no longer be continuing, (b) no other Event of
Default shall have occurred and be continuing, (c) an assignment to Secured
Party of any rights, title and interests in and to the Collateral shall
have been previously made and shall have become absolute and effective
pursuant to Section 12(f) or Section 15(b), and (d) the Secured Obligations
shall not have become immediately due and payable, upon the written request
of Grantor and the written consent of Secured Party, Secured Party shall
promptly execute and deliver to Grantor such assignments as may be
necessary to reassign to Grantor any such rights, title and interests as
may have been assigned to Secured Party as aforesaid, subject to any
disposition thereof that may have been properly made by Secured Party
pursuant hereto; provided that, after giving effect to such reassignment,
--------
Secured Party's security interest granted pursuant to Section 1, as well as
all other rights and remedies of Secured Party granted hereunder, shall
continue to be in full force and effect; and provided, further that the
-------- -------
rights, title and interests so reassigned shall be free and clear of all
Liens other than Liens (if any) encumbering such rights, title and interest
at the time of their assignment to Secured Party and Permitted
Encumbrances.
SECTION 12. Secured Party Appointed Attorney-in-Fact. Grantor
----------------------------------------
hereby irrevocably appoints Secured Party as Grantor's attorney-in-fact,
with full authority in the place and stead of Grantor and in the name of
Grantor, Secured Party or otherwise, from time to time in Secured Party's
discretion, upon the occurrence and during the continuation of an Event of
Default or Potential Event of Default, to take any action and to execute
any instrument that Secured Party may deem necessary or advisable to
accomplish the purposes of this Agreement, including without limitation:
(a) to endorse Grantor's name on all applications, documents,
papers and instruments necessary for Secured Party in the use or
maintenance of the Collateral;
(b) to ask for, demand, collect, sue for, recover, compound,
receive and give acquittance and receipts for moneys due and to become due
under or in respect of any of the Collateral;
(c) to receive, endorse and collect any drafts or other
instruments, documents and chattel paper in connection with clause (b)
above;
11
<PAGE>
(d) to file any claims or take any action or institute any
proceedings that Secured Party may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights of
Secured Party with respect to any of the Collateral;
(e) to pay or discharge taxes or Liens (other than Liens
permitted under this Agreement or the Credit Agreement) levied or placed
upon or threatened against the Collateral, the legality or validity thereof
and the amounts necessary to discharge the same to be determined by Secured
Party in its sole discretion, any such payments made by Secured Party to
become obligations of Grantor to Secured Party, due and payable immediately
without demand; and
(f) (i) to execute and deliver any of the assignments or
documents requested by Secured Party pursuant to Section 15(b), (ii) to
grant or issue an exclusive or non-exclusive license to the Collateral or
any portion thereof to any Person, and (iii) otherwise generally to sell,
transfer, pledge, make any agreement with respect to or otherwise deal with
any of the Collateral as fully and completely as though Secured Party were
the absolute owner thereof for all purposes, and to do, at Secured Party's
option and Grantor's expense, at any time or from time to time, all acts
and things that are reasonably necessary to protect, preserve or realize
upon the Collateral and Secured Party's security interest therein in order
to effect the intent of this Agreement, all as fully and effectively as
Grantor might do.
SECTION 13. Secured Party May Perform. If Grantor fails to
-------------------------
perform any agreement contained herein, Secured Party may itself perform,
or cause performance of, such agreement, and the expenses of Secured Party
incurred in connection therewith shall be payable by Grantor under Section
17.
SECTION 14. Standard of Care. The powers conferred on Secured
----------------
Party hereunder are solely to protect its interest in the Collateral and
shall not impose any duty upon it to exercise any such powers. Except for
the exercise of reasonable care in the custody of any Collateral in its
possession and the accounting for moneys actually received by it hereunder,
Secured Party shall have no duty as to any Collateral or as to the taking
of any necessary steps to preserve rights against prior parties or any
other rights pertaining to any Collateral. Secured Party shall be deemed
to have exercised reasonable care in the custody and preservation of
Collateral in its possession if such Collateral is accorded treatment
substantially equal to that which Secured Party accords its own property.
SECTION 15. Remedies. If any Event of Default shall have
--------
occurred and be continuing:
(a) Secured Party may exercise in respect of the Collateral, in
addition to all other rights and remedies provided for herein or otherwise
available to it, all the rights and remedies of a secured party on default
under the Uniform Commercial Code as in effect in any relevant jurisdiction
(the "Code") (whether or not the Code applies to the affected Collateral),
and also may (i) require Grantor to, and Grantor hereby agrees that it
12
<PAGE>
will at its expense and upon request of Secured Party forthwith, assemble
all or part of the Collateral as directed by Secured Party and make it
available to Secured Party at a place to be designated by Secured Party
that is reasonably convenient to both parties, (ii) enter onto the property
where any Collateral is located and take possession thereof with or without
judicial process, (iii) prior to the disposition of the Collateral, store
the Collateral or otherwise prepare the Collateral for disposition in any
manner to the extent Secured Party deems appropriate, (iv) take possession
of Grantor's premises or place custodians in exclusive control thereof,
remain on such premises and use the same for the purpose of taking any
actions described in the preceding clause (iii) and collecting any Secured
Obligation, (v) exercise any and all rights and remedies of Grantor under
or in connection with the contracts related to the Collateral or otherwise
in respect of the Collateral, including without limitation any and all
rights of Grantor to demand or otherwise require payment of any amount
under, or performance of any provision of, such contracts, and (vi) without
notice except as specified below, sell the Collateral or any part thereof
in one or more parcels at public or private sale, at any of Secured Party's
offices or elsewhere, for cash, on credit or for future delivery, at such
time or times and at such price or prices and upon such other terms as
Secured Party may deem commercially reasonable. Secured Party, any Lender
or Interest Rate Exchanger may be the purchaser of any or all of the
Collateral at any such public sale, and to the extent permitted by law,
private sale, and Secured Party, as agent for and representative of Lenders
and Interest Rate Exchangers (but not any Lender or Lenders, Interest Rate
Exchanger or Interest Rate Exchangers in its or their respective individual
capacities unless Requisite Lenders and Requisite Obligees (as defined in
Section 19(a)) shall otherwise agree in writing), shall be entitled, for
the purpose of bidding and making settlement or payment of the purchase
price for all or any portion of the Collateral sold at any such public
sale, to use and apply any of the Secured Obligations as a credit on
account of the purchase price for any Collateral payable by Secured Party
at such sale. Each purchaser at any such sale shall hold the property sold
absolutely free from any claim or right on the part of Grantor, and Grantor
hereby waives (to the extent permitted by applicable law) all rights of
redemption, stay and/or appraisal which it now has or may at any time in
the future have under any rule of law or statute now existing or hereafter
enacted. Grantor agrees that, to the extent notice of sale shall be
required by law, at least ten days' notice to Grantor of the time and place
of any public sale or the time after which any private sale is to be made
shall constitute reasonable notification. Secured Party shall not be
obligated to make any sale of Collateral regardless of notice of sale
having been given. Secured Party may adjourn any public or private sale
from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place to
which it was so adjourned. Grantor hereby waives any claims against Secured
Party arising by reason of the fact that the price at which any Collateral
may have been sold at such a private sale was less than the price which
might have been obtained at a public sale, even if Secured Party accepts
the first offer received and does not offer such Collateral to more than
one offeree. If the proceeds of any sale or other disposition of the
Collateral are insufficient to pay all the Secured Obligations, Grantor
shall be liable for the deficiency and the fees of any attorneys employed
by Secured Party to collect such deficiency.
13
<PAGE>
(b) Upon written demand from Secured Party, Grantor shall execute
and deliver to Secured Party an assignment or assignments of the
Trademarks, Registrations, Trademark Rights and the Associated Goodwill and
such other documents as are necessary or appropriate to carry out the
intent and purposes of this Agreement.
SECTION 16. Application of Proceeds. Except as expressly
-----------------------
provided elsewhere in this Agreement, all proceeds received by Secured
Party in respect of any sale of, collection from, or other realization upon
all or any part of the Collateral shall be applied as provided in
subsection 2.4D of the Credit Agreement.
SECTION 17. Indemnity and Expenses.
----------------------
(a) Grantor agrees to indemnify Secured Party, Syndication Agent,
Documentation Agent, each Lender, each Interest Rate Exchanger from and
against any and all claims, losses and liabilities in any way relating to,
growing out of or resulting from this Agreement and the transactions
contemplated hereby (including, without limitation, enforcement of this
Agreement), except to the extent such claims, losses or liabilities result
solely from Secured Party's, Syndication Agent's, Documentation Agent's,
such Lender's, such Interest Rate Exchanger's gross negligence or willful
misconduct as finally determined by a court of competent jurisdiction.
(b) Grantor shall pay to Secured Party upon demand the amount of
any and all costs and expenses, including the reasonable fees and expenses
of its counsel and of any experts and agents, that Secured Party may incur
in connection with (i) the administration of this Agreement, (ii) the
custody, preservation, use or operation of, or the sale of, collection
from, or other realization upon, any of the Collateral, (iii) the exercise
or enforcement of any of the rights of Secured Party hereunder, or (iv) the
failure by Grantor to perform or observe any of the provisions hereof.
SECTION 18. Continuing Security Interest; Transfer of Loans.
-----------------------------------------------
This Agreement shall create a continuing security interest in the
Collateral and shall (a) remain in full force and effect until the payment
in full of the Secured Obligations, the cancellation or termination of the
Commitments and the cancellation or expiration of all outstanding Letters
of Credit, (b) be binding upon Grantor, its successors and assigns, and (c)
inure, together with the rights and remedies of Secured Party hereunder, to
the benefit of Secured Party and its successors, transferees and assigns.
Without limiting the generality of the foregoing clause (c), but subject to
the provisions of subsection 10.1 of the Credit Agreement, any Lender may
assign or otherwise transfer any Loans held by it to any other Person, and
such other Person shall thereupon become vested with all the benefits in
respect thereof granted to Lenders herein or otherwise. Upon the payment
in full of all Secured Obligations, the cancellation or termination of the
Commitments and the cancellation or expiration of all outstanding Letters
of Credit, the security interest granted hereby shall terminate and all
rights to the Collateral shall revert to Grantor. Upon any such
termination Secured Party will, at Grantor's expense, execute and deliver
to Grantor such documents as Grantor shall reasonably request to evidence
such termination.
14
<PAGE>
SECTION 19. Secured Party as Administrative Agent.
-------------------------------------
(a) Secured Party has been appointed to act as Secured Party
hereunder by Lenders. Secured Party shall be obligated, and shall have the
right hereunder, to make demands, to give notices, to exercise or refrain
from exercising any rights, and to take or refrain from taking any action
(including, without limitation, the release or substitution of Collateral),
solely in accordance with this Agreement and the Credit Agreement; provided
--------
that Secured Party shall exercise, or refrain from exercising, any remedies
provided for in Section 15 in accordance with the instructions of (i)
Requisite Lenders or (ii) after payment in full of all Obligations under
the Credit Agreement and the other Loan Documents, the holders of a
majority of the aggregate notional amount (or, with respect to any Lender
Interest Rate Agreement that has been terminated in accordance with its
terms, the amount then due and payable (exclusive of expenses and similar
payments but including any early termination payments then due) under such
Lender Interest Rate Agreement) under all Lender Interest Rate Agreements
(Requisite Lenders or, if applicable, such holders being referred to herein
as "Requisite Obligees"). In furtherance of the foregoing provisions of
this Section 19(a), each Interest Rate Exchanger, by its acceptance of the
benefits hereof, agrees that it shall have no right individually to realize
upon any of the Collateral hereunder, it being understood and agreed by
such Interest Rate Exchanger that all rights and remedies hereunder may be
exercised solely by Secured Party for the benefit of Lenders and Interest
Rate Exchangers in accordance with the terms of this Section 19(a).
(b) Written notice of resignation by Administrative Agent
pursuant to subsection 9.5 of the Credit Agreement shall also constitute
notice of resignation as Secured Party under this Agreement; removal of
Administrative Agent pursuant to subsection 9.5 of the Credit Agreement
shall also constitute removal as Secured Party under this Agreement; and
appointment of a successor Administrative Agent pursuant to subsection 9.5
of the Credit Agreement shall also constitute appointment of a successor
Secured Party under this Agreement. Upon the acceptance of any appointment
as Administrative Agent under subsection 9.5 of the Credit Agreement by a
successor Administrative Agent, that successor Administrative Agent shall
thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring or removed Secured Party under this
Agreement, and the retiring or removed Secured Party under this Agreement
shall promptly (i) transfer to such successor Secured Party all sums,
securities and other items of Collateral held hereunder, together with all
records and other documents necessary or appropriate in connection with the
performance of the duties of the successor Secured Party under this
Agreement, and (ii) execute and deliver to such successor Secured Party
such amendments to financing statements, and take such other actions, as
may be necessary or appropriate in connection with the assignment to such
successor Secured Party of the security interests created hereunder,
whereupon such retiring or removed Secured Party shall be discharged from
its duties and obligations under this Agreement. After any retiring or
removed Administrative Agent's resignation or removal hereunder as Secured
Party, the provisions of this Agreement shall inure to its benefit as to
any actions taken or omitted to be taken by it under this Agreement while
it was Secured Party hereunder.
15
<PAGE>
SECTION 20. Amendments; Etc. No amendment, modification,
---------------
termination or waiver of any provision of this Agreement, and no consent to
any departure by Grantor therefrom, shall in any event be effective unless
the same shall be in writing and signed by Secured Party and, in the case
of any such amendment or modification, by Grantor. Any such waiver or
consent shall be effective only in the specific instance and for the
specific purpose for which it was given.
SECTION 21. Notices. Any notice or other communication herein
-------
required or permitted to be given shall be in writing and may be personally
served, telexed or sent by telefacsimile or mail or courier service and
shall be deemed to have been given when delivered in person or by courier
service, upon receipt of telefacsimile or telex, or three Business Days
after depositing it in the mail with postage prepaid and properly
addressed. For the purposes hereof, the address of each party hereto shall
be as set forth under such party's name on the signature pages hereof or,
as to either party, such other address as shall be designated by such party
in a written notice delivered to the other party hereto.
SECTION 22. Failure or Indulgence Not Waiver; Remedies
------------------------------------------
Cumulative. No failure or delay on the part of Secured Party in the
----------
exercise of any power, right or privilege hereunder shall impair such
power, right or privilege or be construed to be a waiver of any default or
acquiescence therein, nor shall any single or partial exercise of any such
power, right or privilege preclude any other or further exercise thereof or
of any other power, right or privilege. All rights and remedies existing
under this Agreement are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
SECTION 23. Severability. In case any provision in or
------------
obligation under this Agreement shall be invalid, illegal or unenforceable
in any jurisdiction, the validity, legality and enforceability of the
remaining provisions or obligations, or of such provision or obligation in
any other jurisdiction, shall not in any way be affected or impaired
thereby.
SECTION 24. Headings. Section and subsection headings in this
--------
Agreement are included herein for convenience of reference only and shall
not constitute a part of this Agreement for any other purpose or be given
any substantive effect.
SECTION 25. Governing Law; Terms. THIS AGREEMENT AND THE RIGHTS
--------------------
AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE
OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL
OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF
LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE
VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES
HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS
OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise
16
<PAGE>
defined herein or in the Credit Agreement, terms used in Articles 8 and 9
of the Uniform Commercial Code in the State of New York are used herein as
therein defined.
SECTION 26. Consent to Jurisdiction and Service of Process. ALL
----------------------------------------------
JUDICIAL PROCEEDINGS BROUGHT AGAINST GRANTOR ARISING OUT OF OR RELATING TO
THIS AGREEMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE STATE OF NEW YORK, AND BY EXECUTION AND DELIVERY OF
THIS AGREEMENT GRANTOR ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF
THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS AND
IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN
CONNECTION WITH THIS AGREEMENT. Grantor hereby agrees that service of all
process in any such proceeding in any such court may be made by registered
or certified mail, return receipt requested, to Grantor at its address
provided in Section 21, such service being hereby acknowledged by Grantor
to be sufficient for personal jurisdiction in any action against Grantor in
any such court and to be otherwise effective and binding service in every
respect. Nothing herein shall affect the right to serve process in any
other manner permitted by law or shall limit the right of Secured Party to
bring proceedings against Grantor in the courts of any other jurisdiction.
SECTION 27. Waiver of Jury Trial. GRANTOR AND SECURED PARTY
--------------------
HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM
OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope
of this waiver is intended to be all-encompassing of any and all disputes
that may be filed in any court and that relate to the subject matter of
this transaction, including without limitation contract claims, tort
claims, breach of duty claims, and all other common law and statutory
claims. Grantor and Secured Party each acknowledge that this waiver is a
material inducement for Grantor and Secured Party to enter into a business
relationship, that Grantor and Secured Party have already relied on this
waiver in entering into this Agreement and that each will continue to rely
on this waiver in their related future dealings. Grantor and Secured Party
further warrant and represent that each has reviewed this waiver with its
legal counsel, and that each knowingly and voluntarily waives its jury
trial rights following consultation with legal counsel. THIS WAIVER IS
IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN
WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of
litigation, this Agreement may be filed as a written consent to a trial by
the court.
SECTION 28. Counterparts. This Agreement may be executed in one
------------
or more counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed
an original, but all such counterparts together shall constitute but one
and the same instrument; signature pages may be detached from multiple
separate counterparts and attached to a single counterpart so that all
signature pages are physically attached to the same document.
17
<PAGE>
IN WITNESS WHEREOF, Grantor and Secured Party have caused this
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
[NAME OF GRANTOR], as Grantor
By: ____________________
Title: ___________________
Notice Address: _____________________
_____________________
_____________________
FIRST UNION NATIONAL BANK,
as Secured Party
By: ____________________
Title: ___________________
Notice Address: _____________________
_____________________
_____________________
18
<PAGE>
Exhibit 10.26
THE PANTRY, INC.
STOCK SUBSCRIPTION AGREEMENT
THIS STOCK SUBSCRIPTION AGREEMENT (this "Agreement") is made and entered
into as of [______________], 1998, by and between The Pantry, Inc., a Delaware
corporation (the "Company"), and [__________] ("Purchaser").
R E C I T A L S:
---------------
A. The Company has adopted The Pantry, Inc. 1998 Stock Subscription Plan
(the "Plan").
B. The Company desires, pursuant to the Plan, to sell to Purchaser, who
is an employee of the Company and/or any directly or indirectly majority or
wholly-owned entities of the Company (individually, a "Subsidiary" and
collectively, the "Subsidiaries"), and Purchaser desires to purchase from the
Company, Shares (as hereinafter defined) of the Company, subject to the terms
and conditions set forth in this Agreement. The date on which such sale and
purchase occur shall be referred to herein as the "Closing Date."
C. In order to induce the Company to sell the Shares to the Purchaser,
Purchaser agrees to hold such shares subject to the restrictions and interests
created by this Agreement.
A G R E E M E N T:
-----------------
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants and conditions contained herein, the parties agree as follows:
1. Sales and Purchase of Shares. The Company hereby agrees to sell to
----------------------------
Purchaser, subject to the conditions and restrictions contained in this
Agreement, and Purchaser hereby agrees to purchase from the Company, [_________]
shares of common stock $0.01 par value per share (individually, a "Share," and
collectively, the "Shares") of the Company, at a price of $[____] per Share, for
an aggregate purchase price of [_________] (the "Purchase Price"). The Purchase
Price shall be payable by delivery of (a) cash or Purchaser's check in the
amount of [_______________], and (b) a secured promissory note of Purchaser
issued to the Company (in the form attached hereto as Exhibit C) for
---------
[_______________] (the "Note"). Payment of all amounts owed under the Note and
compliance by Purchaser with the terms and conditions
<PAGE>
of this Agreement and the Pledge Agreement (as hereinafter defined) shall be
secured by a pledge of the Shares, in conjunction with which Purchaser shall
execute a Stock Pledge Agreement in the form attached hereto as Exhibit D (the
---------
"Pledge Agreement"). Purchaser shall deliver the cash or check, the Note and the
Pledge Agreement to the Company prior to the Closing Date, each dated as of the
Closing Date. In connection with the purchase of Shares hereunder, Purchaser
acknowledges that he or she has reviewed the Informational Memorandum dated
August, 1998 relating to the Plan, including the discussion of Section 83(b) of
the Internal Revenue Code of 1986, as amended.
2. Restriction on Transfer of the Shares.
-------------------------------------
(a) Except as otherwise provided herein, Purchaser may not sell,
transfer, assign, pledge, hypothecate or otherwise dispose of (collectively,
"Transfer") any of the Shares, or any right, title or interest therein prior to
the first anniversary of the Closing Date and, thereafter, any Transfer must be
in compliance with Section 4 and Section 8 hereof. All Transfers also must
--------- ---------
comply with Section 6 of the Pledge Agreement. Any purported Transfer
(including an involuntary Transfer initiated by operation of legal process) of
any of the Shares or any right, title or interest therein, except in strict
compliance with the terms and conditions of this Agreement, shall be null and
void.
(b) For purposes of this Agreement, "Initial Public Offering" shall
mean an underwritten public offering of Common Stock by the Company registered
under the Securities Act of 1933 (the "Act") (other than an offering registered
on Form S-4 or Form S-8 or any substitute for such forms) resulting in gross
proceeds to the Company in excess of $25 million.
3. Repurchase Option Upon Termination.
----------------------------------
(a) In the event that Purchaser's employment or other relationship
with the Company and all of its Subsidiaries terminates for any reason
(including, without limitation, by reason of Purchaser's death, disability,
retirement, voluntary resignation or dismissal by the Company or any of its
Subsidiaries, with or without cause), the Company shall have the option (the
"Repurchase Option") to purchase from Purchaser all or any portion of the Shares
acquired by Purchaser under this Agreement for a period of six (6) months after
the effective date of such termination (the effective date of termination is
hereinafter referred to as the "Termination Date").
(b) The purchase price (the "Repurchase Price") for each Share to be
purchased pursuant to the Repurchase Option shall equal (a) the greater of
Purchase Price and Book Value (as defined herein) if the Termination Date occurs
within the two (2) year period commencing on the date hereof and (b) the greater
of the Purchase Price and the Fair Market Value (as defined herein) thereof
(subject to adjustment as set forth herein) thereafter. The "Book Value" of a
Share shall equal [______] per Share (subject to adjustment as set forth in
Section 3(c)) plus the net income or minus the net loss per share to the end of
- -------------
the fiscal quarter
2
<PAGE>
immediately preceding the Termination Date, as determined by the Board of
Directors of the Company, acting in good faith and based upon the books and
records of the Company prepared in accordance with generally accepted accounting
principles consistently applied, which determination shall be final and binding.
The "Fair Market Value" of a Share shall be the fair market value of a Share as
of the Termination Date as determined by the Board of Directors of the Company,
which determination shall be final and binding.
(c) 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.
(d) The Repurchase Option shall be exercised by the Company by
delivery to Purchaser, within the six-month period specified above, of a written
notice specifying (a) the number of Shares to be purchased and (b) a day, which
shall not be more than 30 days after the date such notice is delivered, on or
before which Purchaser shall surrender the certificate or certificates
representing the Shares to be purchased pursuant to the Repurchase Option (duly
endorsed in blank for Transfer) at the principal office of the Company in
exchange for a check, payable to Purchaser in the amount equal to the Repurchase
Price, calculated as provided in this Section 3, multiplied by the number of the
---------
Shares to be purchased. If Purchaser fails to so surrender such certificate or
certificates on or before such date, from and after such date the Shares which
the Company elected to repurchase shall be deemed to be no longer outstanding,
and Purchaser shall cease to be a stockholder with respect to such Shares and
shall have no rights with respect thereto except only the right to receive
payment of the Repurchase Price, without interest, upon surrender of the
certificate or certificates therefor (duly endorsed in blank for transfer).
Notwithstanding the foregoing in this Section 3(d), in the event any principal,
------------
interest, fees, expenses or other amounts due on or in connection with the Note
(the "Outstanding Amount") are owed to the Company by Purchaser, the Repurchase
Price for the number of the Shares to be repurchased hereunder shall be reduced
(to an amount not less than zero) by such Outstanding Amount, which reduction
shall be specified in reasonable detail in the Company's written notice of
election to exercise the Repurchase Option. If the Outstanding Amount exceeds
the Repurchase Price for the number of the Shares to be repurchased, Purchaser
shall remain obligated and liable to the Company for the unpaid balance thereof.
(e) The Repurchase Option shall terminate upon the last to occur of
(i) the first anniversary of the Closing Date and (ii) the Initial Public
Offering.
3
<PAGE>
4. Right of First Refusal.
----------------------
(a) Sales; Notice. At any time on or after the first anniversary of
-------------
the Closing Date, Purchaser may Transfer 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 4 and Section 8 hereof, and subject to Section 6 of
--------- ---------
the Pledge Agreement. Prior to any such proposed Transfer, Purchaser shall
first give at least thirty (30) days' advance written notice (the "Notice") to
the Company specifying (i) Purchaser's bona fide intention to sell such Shares;
(ii) the name(s) and address(es) of the proposed transferee(s); (iii) the number
of Shares Purchaser proposes to Transfer (individually, an "Offered Share," and
collectively, the "Offered Shares"); (iv) the price for which Purchaser proposes
to Transfer each Offered Share (the "Proposed Purchase Price"); (v) such
evidence as the Company may reasonably request to demonstrate the ability of the
proposed transferee(s) to pay the Proposed Purchase Price; and (vi) all other
material terms and conditions of the proposed transfer.
(b) Election by the Company. Within twenty (20) days after receipt of
-----------------------
the Notice, the Company may elect to purchase (or assign its right to purchase
to a designee or designees) any or 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 Purchaser, specifying a day, which shall not be more than
twenty (20) days after such notice is delivered, on or before which Purchaser
shall surrender (if Purchaser has not already done so) the certificate or
certificates representing the Offered Shares (duly endorsed in blank for
transfer) at the administrative office of the Company. Within twenty (20) days
after delivery of such notice to Purchaser, the Company (or its designee) shall
deliver to Purchaser a check, payable to Purchaser, in the amount equal to the
product of the Proposed Purchase Price multiplied by the number of Offered
Shares (the "First Refusal Price") in exchange for the Offered Shares. If
Purchaser fails to so surrender such certificate or certificates on or before
such date, from and after such date the Offered Shares shall be deemed to be no
longer outstanding, and Purchaser shall cease to be a Shareholder with respect
to such Shares and shall have no rights with respect thereto except only the
right to receive payment of the First Refusal Price, without interest, upon
surrender of the certificate or certificates therefor (duly endorsed in blank
for Transfer). Notwithstanding the foregoing, if any Outstanding Amount is owed
to the Company by Purchaser, the First Refusal Price shall be reduced (to an
amount not less than zero) by such Outstanding Amount, which reduction shall be
specified in reasonable detail in the Company's written notice of election to
purchase the Offered Shares. If the Company does not elect to purchase (or
assign its rights to a designee) all of the Offered Shares, Purchaser shall be
entitled to Transfer the Offered Shares, subject to Section 8 hereof and Section
---------
6 of the Pledge Agreement, to the transferee(s) named in the Notice at the
Proposed Purchase Price, or at a higher price, and on the terms and conditions
set forth in the Notice; provided, however, that such Transfer must be
consummated within ninety (90) days after the date of the Notice and any
proposed Transfer after such ninety (90) day period may be made only by again
complying with the procedures set forth in this Section 4.
---------
4
<PAGE>
(c) The right of first refusal contained in this Section 4 shall
---------
terminate upon the closing of an Initial Public Offering.
5. Permitted Transfers. Notwithstanding any other provision hereof,
-------------------
subject to and upon full compliance with Section 6 of the Pledge Agreement,
Purchaser may, at any time or times, transfer any or all of the Shares: (a)
inter vivos to Purchaser's spouse or issue, a trust for their benefit, or
pursuant to any will or testamentary trust; or (b) upon Purchaser's death, to
any person in accordance with the laws of descent and/or testamentary
distribution (such persons described in clauses (a) and (b) hereof are
collectively referred to herein as "Permitted Transferees"). Shares shall not
be Transferred pursuant to this Section 5 until the Permitted Transferee
---------
executes a valid undertaking, in form and substance reasonably satisfactory to
the Company, to the effect that the Permitted Transferee and the Shares so
Transferred shall thereafter remain subject to all of the provisions of this
Agreement (including the Repurchase Option) and the Pledge Agreement, as though
the Permitted Transferee were a party to this Agreement and the Pledge
Agreement, bound in every respect in the same way as Purchaser. Transfers made
in accordance with this Section 5 shall not be subject to the provisions of
---------
Section 4 hereof.
- ---------
6. Security for Performance. The Company and Purchaser hereby
------------------------
acknowledge that Purchaser has agreed to pledge the Shares under the Pledge
Agreement to secure the payment of all obligations existing under the Note
whether for principal, interest, fees, expenses or otherwise and/or to ensure
Purchaser's compliance with the terms and conditions of this Agreement and the
Pledge Agreement. Subject to the terms and conditions of this Agreement and of
the Pledge Agreement, and to the exceptions specified therein, Purchaser shall
be entitled to exercise all rights and privileges of the registered holder of
the Shares held by the Company pursuant to the Pledge Agreement and shall be
entitled to receive any dividend or other distribution thereon.
7. Partial Termination. This Agreement shall terminate with respect to
-------------------
those Shares which are (a) acquired by the Company pursuant to Section 3(b)
---------
hereof upon such acquisition; or (b) acquired by the Company pursuant to Section
-------
4 hereof, upon such acquisition.
- -
8. Obligation to Sell Securities.
-----------------------------
(a) If the investment funds affiliated with Freeman Spogli & Co., LLC
(collectively "FSEP") find a third-party buyer for all shares of common stock of
the Company held by them (whether such sale is by way of purchase, exchange,
merger or other form of transaction), upon the request of FSEP the Purchaser
shall sell all of Purchaser's Shares for the same per share consideration (which
may be less than the Purchase Price per share paid by Purchaser), and otherwise
pursuant to the terms and conditions applicable to FSEP for the sale of the
shares of the common stock of the Company held by them.
5
<PAGE>
(b) Purchaser hereby consents to any sale, transfer, reorganization,
exchange, merger, combination or other form of transaction described in Section
-------
8(a) and agrees 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. Purchaser further agrees to timely take such other
actions as FSEP 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 Purchaser may
have in connection therewith.
(c) The obligations of Purchaser pursuant to this Section 3 shall be
---------
binding on any transferee (other than a transferee in a Public Market Sale, as
defined below) of any of the Shares and Purchaser and any of his transferees
shall obtain and deliver to the Company a written commitment to be bound by such
provisions from a subsequent transferee prior to any Transfer (other than
Transfers constituting a Public Market Sale). The Purchaser's obligations
pursuant to this Section 8, and the obligations of any such transferee, shall
---------
survive the partial termination of this Agreement pursuant to Section 7 hereof.
---------
Any transfer effected in violation of this provision shall be void. The term
"Public Market Sale" means any sale of Common Stock after the Initial Public
Offering which is made pursuant to Rule 144 promulgated under the Act or which
is made pursuant to a registration statement declared effective by the
Securities and Exchange Commission.
9. Tag Along Rights. If FSEP finds a third-party buyer (other than a
----------------
buyer that is an investment fund or partnership affiliated with FSEP or a
general or limited partner of FSEP (each, a "FS Permitted Transferee"), or is a
transferee in a Public Market Sale), for all or part of the shares of Common
Stock held by FSEP (whether such sale is by way of purchase, exchange, merger or
other form of transaction), the Purchaser shall have the right to sell, on the
terms set forth in a written notice (the "Offering Notice") delivered by FSEP to
the Purchaser describing the terms of the proposed sale (including the minimum
sale price for the shares of Common stock that FSEP plans to sell), that amount
of the Shares he then owns which constitute the same percentage of his Shares as
the percentage of Common Stock sold by FSEP. Each such right shall be
exercisable by delivering written notice to FSEP within 15 days after receipt of
the Offering Notice. Failure to exercise such right within such 15-day period
shall be regarded as a waiver of such rights. The obligations of FSEP under
this Section 9 shall terminate upon an Initial Public Offering.
---------
10. Agreement Subject to Plan. This Agreement entered into under, and is
-------------------------
subject to, the Plan and, in the event of any conflict, the provisions of the
Plan shall prevail.
11. Miscellaneous.
-------------
6
<PAGE>
(a) Further Assurances. Each party hereto agrees to perform any
------------------
further acts and execute and deliver any documents which may be reasonably
necessary to carry out the intent of this Agreement.
(b) Notices. Except as otherwise provided herein, all notices,
-------
requests, demands and other communications under this Agreement shall be in
writing, and if by telegram or telecopy, shall be deemed to have been validly
served, given or delivered when sent, or if by personal delivery or messenger or
courier service, or by registered or certified mail, shall be deemed to have
been validly served, given or delivered upon actual delivery, at the following
addresses, telephone and facsimile numbers (or such other address(es), telephone
and facsimile numbers a party may designate for itself by like notice):
If to the Company:
The Pantry, Inc.
1801 Douglas Drive
Post Office Box 1410
Sanford, NC 27330
Attention: Peter J. Sodini
Telephone: [_______]
Telecopy: [________]
With a copy to:
Freeman Spogli & Co. Incorporated
11100 Santa Monica Boulevard
Suite 1900
Los Angeles, CA 90025
Attention: [__________]
TEL: [___________]
FAX: [___________]
If to Purchaser:
At the address specified at the end of this Agreement.
(c) Amendments. This Agreement may be amended only by a written
----------
agreement executed by both of the parties hereto and by FSEP.
(d) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of Delaware.
7
<PAGE>
(e) Disputes. In the event of any dispute among the parties arising
--------
out of this Agreement, the prevailing party shall be entitled to recover from
the nonprevailing party the reasonable expenses of the prevailing party
including, without limitation, reasonable attorneys' fees.
(f) Entire Agreement. This Agreement constitutes the entire agreement
----------------
and understanding among the parties pertaining to the subject matter hereof and
supersedes any and all prior agreements, whether written or oral, relating
hereto.
(g) Recapitalizations or Exchanges Affecting the Company's Capital.
--------------------------------------------------------------
The provisions of this Agreement shall apply to any and all stock or other
securities of the Company or any successor or assign of the Company, which may
be issued in respect of, in exchange for or in substitution of, the Shares by
reason of any split, reverse split, recapitalization, reclassification,
combination, merger, consolidation or otherwise, and such Shares or other
securities shall be encompassed within the term "Shares" for purposes of this
Agreement and the Pledge Agreement.
(h) No Rights as an Employee. Nothing in this Agreement shall affect
------------------------
in any manner whatsoever the rights of the Company or any of its Subsidiaries to
terminate Purchaser's employment for any reason, with or without cause, subject
to the terms and conditions of any employment agreement to which Purchaser may
be a party.
(i) Disclosure. The Company shall have no duty or obligation to
----------
affirmatively disclose to Purchaser, and Purchaser shall have no right to be
advised of, any material information regarding the Company or any of its
Subsidiaries at any time prior to, upon or in connection with the Company's
repurchase of the Shares under this Agreement at the cessation or termination of
Purchaser's employment with the Company and/or any of its Subsidiaries.
(j) Successors and Assigns. The Company may assign with absolute
----------------------
discretion any or all of its rights and/or obligations and/or delegate any of
its duties under this Agreement to any of its affiliates, successors and/or
assigns and this Agreement shall inure to the benefit of, and be binding upon,
such respective affiliates, successors and/or assigns of the Company in the same
manner and to the same extent as if such affiliates, successors and/or assigns
were original parties hereto. Without limiting the foregoing, the Company may
assign the Repurchase Option and/or the right of first refusal provided for in
Section 3 and Section 4 hereof, respectively, to any of its affiliates,
- --------- ---------
successors and/or assigns. FSEP may assign its rights under Section 8 hereof to
any FS Permitted Transferee or to a purchaser of shares of Common Stock then
owned by FSEP. For purposes of this Agreement, the term "Shares" shall include
shares of capital stock or other securities of the Company or any successor or
assign of the Company, which are issued in respect of, in exchange for or in
substitution of the Shares by reason of any split, reverse split,
recapitalization, reclassification, combination, merger, exchange or
consolidation. Unless specifically provided herein to the contrary,
8
<PAGE>
Purchaser may not assign any or all of its rights and/or obligations and/or
delegate any or all its duties under this Agreement without the prior written
consent of the Company and FSEP. Upon an assignment of any or all of Purchaser's
rights and/or obligations and/or a delegation of any or all of its duties under
this Agreement in accordance with the terms of this Agreement, this Agreement
shall inure to the benefit of, and be binding upon, Purchaser's respective
affiliates, successors and/or assigns in the same manner and to the same extent
as if such affiliates, successors and/or assigns were original parties hereto.
(k) Heading. Introductory headings at the beginning of each section
-------
and subsection of this Agreement are solely for the convenience of the parties
and shall not be deemed to be a limitation upon or description of the contents
of any such section and subsection of this Agreement.
(l) Counterparts. This Agreement may be executed in two counterparts,
------------
each of which shall be deemed an original and both of which, when taken
together, shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
THE COMPANY:
THE PANTRY, INC.
a Delaware corporation
By:
-----------------------------------
Peter J. Sodini
President
PURCHASER:
---------------------------------------
[ ]
-------------
Address:
[ ]
-------------
<PAGE>
Exhibit 10.27
-----------------------------------
STOCK PURCHASE AGREEMENT
among
THE PANTRY, INC.,
FS EQUITY PARTNERS IV, L.P.,
and
CB CAPITAL INVESTORS, L.P.
-----------------------------------
Dated as of July 2, 1998
-----------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I THE TRANSACTIONS.................................... 1
1.1 Purchase and Sale................................... 1
1.2 Purchase Price...................................... 1
1.3 Closing Matters..................................... 1
1.4 Time and Place of Closing........................... 2
1.5 Fees and Expenses................................... 2
ARTICLE II REPRESENTATIONS AND WARRANTIES
OF THE PURCHASERS................................... 2
2.1 Organization........................................ 2
2.2 Authority........................................... 2
2.3 No Violation........................................ 3
2.4 Brokers............................................. 3
2.5 Securities Act Representation....................... 3
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY....... 4
3.1 Corporate Organization.............................. 4
3.2 Capital Stock....................................... 4
3.3 Newly Issued Shares................................. 5
3.4 Authority........................................... 5
3.5 No Violation........................................ 6
3.6 Litigation.......................................... 6
3.7 Financial Statements and SEC Reports................ 7
3.8 Absence of Certain Changes or Events................ 7
3.9 Brokers; Certain Expenses........................... 7
3.10 Small Business Matters.............................. 7
ARTICLE IV COVENANTS AND AGREEMENTS............................ 8
4.1 Delivery of Financial Statements and Other Documents 9
ARTICLE V MISCELLANEOUS....................................... 9
5.1 Notices............................................. 10
5.2 Headings; Agreement................................. 11
5.3 Publicity........................................... 11
5.4 Entire Agreement.................................... 11
5.5 Conveyance Taxes.................................... 11
5.6 Assignment.......................................... 11
5.7 Counterparts........................................ 11
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
5.8 Amendment........................................... 11
5.9 Governing Law....................................... 12
5.10 Third Party Beneficiaries........................... 12
5.11 Limitation of Liability............................. 12
</TABLE>
EXHIBITS
Exhibit A Amended and Restated Stockholders' Agreement
Exhibit B Amended and Restated Registration Rights Agreement
SCHEDULES
Schedule A Schedule of Purchasers
Schedule B Outstanding Shares of Common Stock and Equivalents
ii
<PAGE>
STOCK PURCHASE AGREEMENT
------------------------
STOCK PURCHASE AGREEMENT ("Agreement"), dated as of July 2, 1998,
among The Pantry, Inc., a Delaware corporation (the "Company"), FS Equity
Partners IV, L.P., a Delaware limited partnership ("FSEP IV"), and CB Capital
Investors, L.P., a Delaware limited partnership ("Chase"). FSEP IV and Chase
are sometimes collectively referred to herein as the "Purchasers" and
individually as a "Purchaser".
R E C I T A L S:
- - - - - - - -
A. The Purchasers have purchased from the Company an aggregate
amount of 43,478 shares of the Company's common stock, par value $.01 per share
(the "Common Stock"), for $575.00 per share of Common Stock in the amounts and
for the consideration set forth opposite each such Purchaser's name on Schedule
--------
A attached hereto; and
- -
B. The Board of Directors of the Company (the "Board") has ratified
this Agreement and the transactions contemplated hereby, upon the terms and
subject to the conditions set forth herein.
A G R E E M E N T:
- - - - - - - - -
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants, agreements and conditions contained
herein, the sufficiency of which is hereby acknowledged, and in order to set
forth the terms and conditions of the transactions described herein, the parties
hereby agree as follows:
ARTICLE I
THE TRANSACTIONS
1.1 Purchase and Sale. Upon the terms and subject to the conditions
-----------------
set forth in this Agreement, at the Closing, as defined below, the Purchasers
have purchased from the Company and the Company has sold to the Purchasers
43,478 shares of Common Stock.
1.2 Purchase Price. The purchase price paid by the Purchasers for
--------------
the shares of Common Stock they acquired was $575.00 per share of Common Stock.
1.3 Closing Matters. At the Closing (a) each Purchaser will have
---------------
wire transferred in same day funds to the Company the sums set forth opposite
such Purchaser's name on Schedule A in payment of the purchase price for the
----------
shares of Common Stock to be
<PAGE>
purchased by such Purchaser and (b) the Company shall deliver a certificate or
certificates to such Purchaser, representing the shares of Common Stock
purchased thereby.
1.4 Time and Place of Closing. The consummation of the transactions
-------------------------
contemplated by this Agreement (the "Closing") shall take place at 10:00 a.m.
New York time, at the offices of the Company at 1801 Douglas Drive, Sanford,
North Carolina 27330 on July 2, 1998 or at such other time, place or date as the
parties hereto shall agree upon in writing (the "Closing Date").
1.5 Fees and Expenses. The Company shall on the first business day
-----------------
after the Closing Date, pay to FS & Co. Incorporated a transaction fee of One
Million Dollars ($1,000,000), by wire transfer in same day funds.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE PURCHASERS
Each Purchaser, severally as to itself only and not as to any other
Purchaser, represents and warrants to the Company, to the extent applicable, as
follows:
2.1 Organization. Purchaser is a limited partnership duly organized,
------------
validly existing and in good standing under the laws of the State of Delaware.
2.2 Authority. Purchaser has full partnership power and authority to
---------
execute and deliver this Agreement, the Amended and Restated Stockholders'
Agreement (the "Stockholders' Agreement") the form of which agreement is
attached hereto as Exhibit A, the Amended and Restated Registration Rights
Agreement, the form of which agreement is attached as Exhibit B hereto (the
"Registration Rights Agreement," and, together with the Stockholders' Agreement
and the Registration Rights Agreement, the "Ancillary Agreements"), and to
consummate the transactions contemplated on its part hereby and thereby. The
execution, delivery and performance by Purchaser of this Agreement and each of
the Ancillary Agreements and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary action on the part
of Purchaser. No other action on the part of Purchaser or its partners is
necessary to authorize the execution and delivery of this Agreement or the
Ancillary Agreements by Purchaser or the performance by Purchaser of its
obligations hereunder or thereunder. Each of this Agreement and each of the
Ancillary Agreements has been duly executed and delivered by Purchaser and
constitutes a legal, valid and binding agreement of Purchaser, enforceable
against it in accordance with its terms, subject to applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws affecting creditors'
rights generally and subject to general equitable principles (regardless of
2
<PAGE>
whether such enforceability is considered in a proceeding in equity or at law).
Each other agreement to be executed by Purchaser in connection with this
Agreement will be duly executed and delivered by Purchaser and (assuming due
execution and delivery by the other party or parties thereto) will constitute a
legal, valid and binding obligation of Purchaser, enforceable against it in
accordance with its terms, subject to applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws affecting creditors' rights generally
and subject to general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law) and except to
the extent that indemnification with respect to securities laws violations may
be held void as against public policy.
2.3 No Violation. The execution and delivery of this Agreement and
------------
the Ancillary Agreements by Purchaser, the performance by Purchaser of its
obligations hereunder and thereunder and the consummation by it of the
transactions contemplated hereby and thereby, will not (a) violate any provision
of law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award applicable to Purchaser, (b) require the consent, waiver,
approval, license or authorization of or any filing by Purchaser with any person
or governmental authority (other than such consents, waivers, approvals,
licenses and authorizations and filings as shall have been or will be timely
made or obtained by or on behalf of Purchaser) or (c) violate, result (with or
without notice or the passage of time, or both) in a breach of or give rise to
the right to accelerate, terminate or cancel any obligation under or constitute
(with or without notice or the passage of time, or both) a default under, any of
the terms or provisions of any charter or bylaw, partnership agreement,
indenture, mortgage, agreement, contract, order, judgment, ordinance, regulation
or decree to which Purchaser is subject or by which Purchaser is bound and which
would have an adverse effect on the ability of Purchaser to perform its
obligations under this Agreement and the Ancillary Agreements.
2.4 Brokers. Purchaser has not paid or become obligated to pay any
-------
fee or commission to any broker, finder, investment banker or other intermediary
in connection with this Agreement, it being acknowledged and agreed that no
Purchaser shall be liable to FS & Co. Incorporated or any affiliate thereof with
respect to the fee payable by the Company pursuant to Section 1.5.
2.5 Securities Act Representation. Purchaser was not formed or
-----------------------------
organized for the purpose of purchasing the shares of Common Stock purchased
hereunder and is an "accredited investor" as defined in Rule 501 promulgated as
part of Regulation D under the Securities Act of 1933, as amended (the
"Securities Act"). Purchaser is not purchasing shares of Common Stock with a
view to a distribution or resale of any of such shares in violation of any
applicable securities laws. In making its decision to invest in shares of
Common Stock, Purchaser has relied upon independent investigations made by
Purchaser and, to the extent believed by it to be appropriate, has relied on
investigations made by Purchaser's representatives, including Purchaser's own
legal, accounting, investment, financial, tax and other professional advisors
and Purchaser has been afforded an opportunity to examine all
3
<PAGE>
documents and to ask questions of, and to receive answers from, the Company and
its representatives concerning the current financial and operational condition
of the Company, the Company's prospects, the terms of each of this Agreement and
the Ancillary Agreements and the transactions contemplated hereby and thereby
and such Purchaser's investment in such shares of Common Stock.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
The Company represents and warrants, except as disclosed on the
schedules (the "Disclosure Schedules") attached hereto, each of which
disclosures shall reference the applicable Section hereof to which it applies,
to each Purchaser as follows:
3.1 Corporate Organization. The Company is a corporation duly
----------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, with all requisite corporate power and authority to own, operate and
lease its properties and to carry on its business as it is now being conducted,
and is qualified or licensed to do business and is in good standing in each
jurisdiction in which the failure to be so qualified or licensed could
reasonably be expected, individually or in the aggregate, to have a material and
adverse effect upon the financial condition or results of operations of the
Company and its subsidiaries, considered as a whole (a "Material Adverse
Effect").
3.2 Capital Stock. (a) As of the date hereof, the authorized capital
-------------
stock of the Company consists in its entirety of (i) Three Hundred Thousand
(300,000) shares of Common Stock, of which (A) One Hundred Eighty-Six Thousand
Twenty-Nine (186,029) are issued and outstanding and are held of record by the
persons and in the amounts set forth on Schedule B hereto, (B) Forty-Six
----------
Thousand (46,000) are reserved for issuance upon exercise of two (2) Common
Stock Purchase Warrants (the "Warrants") and are held of record by the persons
and in the amounts set forth on Schedule B hereto and (C) Sixty-Seven Thousand
Nine Hundred Seventy-One (67,971) are authorized but unissued and none of which
are held by the Company as treasury shares, and (ii) One Hundred Fifty Thousand
(150,000) shares of Preferred Stock, of which (A) Fifty Thousand (50,000) shares
have been designated as the Series A Preferred Stock of the Company (the "Series
A Stock"), none of which shares of Series A Stock are issued and outstanding and
none of which are held by the Company as treasury shares and (B) Twenty-Five
Thousand (25,000) shares have been designated as the Series B Preferred Stock of
the Company (the "Series B Stock"), of which Seventeen Thousand Five Hundred
(17,500) shares of Series B Stock are issued and outstanding and none of which
are held by the Company as treasury shares.
4
<PAGE>
(b) Following the consummation of the transactions contemplated
by this Agreement and the Ancillary Agreements, there will be (i) Two Hundred
Twenty-Nine Thousand Five Hundred Seven (229,507) shares of Common Stock
outstanding and Forty-Six Thousand (46,000) Shares of Common Stock reserved for
issuance on exercise of the Warrants, (ii) no shares of Series A Stock
outstanding, (iii) Seventeen Thousand Five Hundred (17,500) shares of Series B
Stock outstanding, and (iv) except for the Warrants, no outstanding options,
warrants or other similar securities.
(c) All of the outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid and non-
assessable and free of preemptive rights with respect thereto and were issued in
compliance with all applicable federal and state securities laws and
regulations. Except with respect to the Stockholders' Agreement, there are no
voting trusts or other agreements, arrangements or understandings with respect
to the voting of the capital stock of the Company to which the Company is a
party or, to the best of the Company's knowledge, to which any other person is a
party. Except as contemplated hereby or as set forth in the Disclosure
Schedules, there are no preemptive rights, registration rights, subscriptions,
options, warrants, rights, convertible securities or other agreements or
commitments of any character relating to the issued or unissued capital stock or
other securities of the Company (collectively, "Preemptive Rights") and there
are no outstanding contractual obligations of the Company to repurchase, redeem
or otherwise acquire or sell, issue or otherwise transfer any shares of capital
stock.
3.3 Newly Issued Shares.
-------------------
(a) The shares of Common Stock sold and issued by the Company to
the Purchasers pursuant to the terms of this Agreement have been duly authorized
and, when issued as contemplated hereby at the Closing, will be validly issued,
fully paid and non-assessable and no person has Preemptive Rights with respect
to such shares. At the Closing, the Purchasers will acquire good and marketable
title to the shares of Common Stock, free and clear of any and all security
interests, liens, claims, pledges, encumbrances or other rights of any kind
(collectively, "Encumbrances"), except as may exist under the Stockholders'
Agreement, as amended by the Amendment.
(b) The shares of Common Stock sold and issued by the Company to
the Purchasers pursuant to the terms of this Agreement will be issued in
compliance with all applicable federal and state securities laws and
regulations.
3.4 Authority. The Company has full corporate power and authority to
---------
execute and deliver this Agreement and the Ancillary Agreements to carry out its
obligations hereunder and thereunder and to consummate the transactions
contemplated on its part hereby and thereby. The execution, delivery and
performance by the Company of this Agreement and each Ancillary Agreement and
the consummation of the transactions contemplated on its part
5
<PAGE>
hereby and thereby have been duly authorized by the Board, and no other
corporate proceedings on the part of the Company or its stockholders are
necessary to authorize the execution and delivery of this Agreement or the
Ancillary Agreements by the Company or to consummate the transactions
contemplated on its part hereby or thereby. Each of this Agreement and each of
the Ancillary Agreements has been duly executed and delivered by the Company and
constitutes a legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to applicable
bankruptcy, insolvency, moratorium, reorganization or similar laws affecting
creditors' rights generally and subject to general equitable principles
(regardless of whether such enforceability is considered in a proceeding in
equity or at law) and except to the extent that indemnification with respect to
securities laws violations may be held void as against public policy.
3.5 No Violation. The execution, delivery and performance of this
------------
Agreement and the Ancillary Agreements by the Company and the consummation by it
of the transactions contemplated hereby and thereby will not (a) violate any
provision of law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award applicable to the Company or any of its subsidiaries, (b)
require the consent, waiver, approval or authorization of or any filing by the
Company or any of its subsidiaries with any person or governmental authority,
(c) violate, result (with or without notice or the passage of time, or both) in
a breach of, or give rise to the right to terminate, accelerate or cancel any
obligation under, or require the payment of any fee, or constitute (with or
without notice or the passage of time, or both) a default under, any of the
terms or provisions of the charter documents of the Company or any of its
subsidiaries, or any indenture, mortgage, lien, order, judgment, ordinance,
regulation, decree or other agreement or instrument to which the Company or any
of its subsidiaries is subject or bound which could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect or interfere
in any way with the Company's ability to consummate the transactions
contemplated by this Agreement or the Ancillary Agreements, (d) result in the
creation of any Encumbrance upon any property of the Company or any of its
subsidiaries which could reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect or (e) result in a loss or adverse
modification of any license, permit, certificate, franchise or contract granted
to or otherwise held by the Company or any of its subsidiaries which could
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect.
3.6 Litigation. Except as disclosed in the SEC Filings, as defined
----------
below, there are no actions, proceedings, complaints, grievances, investigations
or unfair labor practice complaints or grievances or investigations pending or,
to the best of the Company's knowledge, threatened, against the Company or any
of its subsidiaries, assets or property before any court or governmental or
regulatory authority or body or arbitrator, which could reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect. There are
no such actions, proceedings or investigations pending or, to the best knowledge
of the Company, threatened against the Company or, to the best knowledge of the
Company,
6
<PAGE>
pending or threatened against any other party challenging the validity or
propriety of the transactions contemplated by this Agreement. Except as
disclosed in the SEC Filings, none of the Company or any of its subsidiaries,
assets or property is subject to any order, judgment, injunction or decree,
which could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect.
3.7 Financial Statements and SEC Reports. The Company has delivered
------------------------------------
to the Purchasers true and complete copies of the Company's Annual Report on
Form 10-K for the fiscal year ended September 24, 1997 (the "1997 10-K"), as
filed with the Securities and Exchange Commission (the "SEC") on December 23,
1997, and all filings made with the SEC since September 24, 1997, including,
without limitation, the Company's Quarterly Report on Form 10-Q for the quarter
ended December 25, 1996, as filed with the SEC on February 9, 1998, the
Company's Quarterly Report on Form 10-Q for the quarter ended March 26, 1998, as
filed with the SEC on May 11, 1998, and any financial statements or schedules
included or incorporated by reference therein (collectively, the "SEC Filings").
As of their respective dates, the SEC Filings did not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of the Company and its subsidiaries included in the SEC
Filings were prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis (except as may be indicated
therein or in the notes thereto and except that the quarterly financial
statements do not contain all of the footnote disclosures required by GAAP for
annual financial statements) and present fairly the consolidated financial
position, results of operations and cash flows of the Company and its
subsidiaries as of the dates and for the periods indicated.
3.8 Absence of Certain Changes or Events. Since March 26, 1998 the
------------------------------------
Company and its subsidiaries have conducted their respective businesses in the
ordinary course.
3.9 Brokers; Certain Expenses. Except as set forth in Section 1.5,
-------------------------
the Company has not paid or become obligated to pay any fee or commission to any
broker, finder, investment banker or other intermediary in connection with any
of the transactions contemplated by this Agreement.
3.10 Small Business Matters.
----------------------
(a) The Company, together with its "affiliates" (as that term is
defined in Title 13, Code of Federal Regulations, (S) 121.103), is a "small
business concern" within the meaning of the Small Business Investment Act of
1958, as amended ("SBIA"), and the regulations thereunder, including Title 13,
Code of Federal Regulations (S) 121.301(c). The information set forth in the
Small Business Administration Forms 480, 652 and Parts A and B
7
<PAGE>
of Form 1031 regarding the Company and its affiliates that have been executed
and delivered to Chase is accurate and complete.
(b) The proceeds from the sale of Common Stock will be used by
the Company for the purpose of future unspecified acquisitions by the Company of
other entities in a similar line of business as the Company. No portion of such
proceeds will be used (i) to provide capital to a corporation licensed under the
SBIA, (ii) to acquire farm land, (iii) to fund production of a single item or
defined limited number of items, generally over a defined production period,
where such production will constitute the majority of the activities of the
Company and its subsidiaries (examples include motion pictures and electric
generating plants), or (iv) for any purpose contrary to the public interest
(including, but not limited to, activities which are in violation of law) or
inconsistent with free competitive enterprise, in each case, within the meaning
of 13 C.F.R. (S) 107.720.
(c) Neither the Company's nor any of its subsidiaries' primary
business activity involves, directly or indirectly, providing funds to others,
the purchase or discounting of debt obligations, factoring or long-term leasing
of equipment with no provision for maintenance or repair, and neither the
Company nor any of its subsidiaries is classified under Major Group 65 (Real
Estate) of the SIC Manual. The assets of the business of the Company and its
subsidiaries (the "Business") will not be reduced or consumed, generally without
replacement, as the life of the Business progresses, and the nature of the
Business does not require that a stream of cash payments be made to the
Business's financing sources, on a basis associated with the continuing sale of
assets (examples of such businesses would include real estate development
projects and oil and gas wells). See 13 C.F.R. (S) 107.720.
(d) The proceeds from the sale of the Common Stock to Chase at
the Closing will not be used substantially for a foreign operation, and at
Closing or within one year thereafter, no more than 49 percent of the employees
or tangible assets of the Company and its subsidiaries will be located outside
the United States (unless the Company can show, to the SBA's satisfaction, that
the proceeds from the sale of Common Stock to Chase at the Closing will be used
for a specific domestic purpose). This subsection (d) does not prohibit such
proceeds from being used to acquire foreign materials and equipment or foreign
property rights for use or sale in the United States.
ARTICLE IV
COVENANTS AND AGREEMENTS
4.1 Delivery of Financial Statements and Other Documents. So long as
----------------------------------------------------
the Purchasers and/or their respective successors and assigns hold any shares of
Common Stock,
8
<PAGE>
the Company shall deliver the following financial statements and other documents
to such parties:
(a) The Company shall deliver to the Purchasers, as soon as
practicable, but in any event within ninety (90) days after the end of each
fiscal year of the Company, a statement of operations for such fiscal year, a
balance sheet of the Company as of the end of such year, and a statement of cash
flows for such year, such year-end financial reports to be in reasonable detail
and prepared in accordance with GAAP.
(b) The Company shall deliver to the Purchasers, as soon as
practicable, but in any event within forty-five (45) days after the end of each
of the first three (3) quarters of each fiscal year of the Company, an unaudited
statement of operations, balance sheet, and statement of cash flows of the
Company for such fiscal quarters as of the end of such fiscal quarters.
(c) The Company shall deliver to the Purchasers, as soon as
practicable, but in any event within thirty (30) days after the end of each
month, an unaudited statement of operations, balance sheet, and statement of
cash flows of the Company for such month and for the fiscal year-to-date.
(d) The Company shall deliver to the Purchasers prior to the
close of each fiscal year, an operating budget for the next fiscal year
forecasting the Company's revenues, expenses and cash position, prepared on a
monthly basis, including balance sheets and sources and applications of funds
statements for such months.
(e) The Company shall deliver to the Purchasers, as soon as
practicable, but in any event within ten (10) days of receipt by the Company,
copies of any management letters of the Company's accountants.
(f) The Company shall promptly deliver to the Purchasers: (1)
notice of any defaults under any material contracts or agreements; (2) notice of
any material litigation; and (3) copies of all filings with the SEC.
(g) The Company shall deliver to the Purchasers, as soon as
practicable, all other information reasonably requested by the Purchasers, where
such information is readily available and may be reduced to written form.
9
<PAGE>
ARTICLE V
MISCELLANEOUS
5.1 Notices. All notices and other communications given or made
-------
pursuant hereto shall be in writing and shall be deemed to have been given or
made if in writing and delivered personally, sent by commercial carrier or
registered or certified mail (postage prepaid, return receipt requested) or
transmitted by facsimile to the parties at the following addresses and numbers:
(a) If to FSEP IV, to:
c/o Freeman Spogli & Co.
11100 Santa Monica Boulevard
Suite 1900
Los Angeles, California 90025
Attention: Mr. William M. Wardlaw
Facsimile No.: (310) 444-1870
with a copy to:
Freeman Spogli & Co. Incorporated
599 Lexington Avenue
18th Floor
New York, New York 10022
Attention: Todd W. Halloran
Facsimile No.: (212) 758-7499
(b) If to the Company, to:
The Pantry, Inc.
1801 Douglas Drive
Sanford, North Carolina 27330
Attention: William Flyg
Facsimile No.: (919) 774-3329
10
<PAGE>
(c) If to Chase, to:
CB Capital Investors, L.P.
380 Madison Avenue, 12/th/ Floor
New York, NY 10017
Attention: Christopher Behrens
Facsimile No.: (212) 622-3101
or at such other addresses as shall be furnished by the parties by like notice,
and such notice or communication shall be deemed to have been given or made as
of the date actually received.
5.2 Headings; Agreement. The headings contained in this Agreement
-------------------
are inserted for convenience only and do not constitute a part of this
Agreement. The term "Agreement" for purposes of representations and warranties
hereunder shall be deemed to include any Exhibits hereto to be executed and
delivered by a party.
5.3 Publicity. So long as this Agreement is in effect, the parties
---------
hereto shall not, and shall cause their affiliates not to, issue or cause the
publication of any press release or other announcement with respect to the
transactions contemplated by this Agreement or the Ancillary Agreements without
the consent of the other parties, which consent shall not be unreasonably
withheld or delayed.
5.4 Entire Agreement. This Agreement (including any Disclosure
----------------
Schedules and Exhibits hereto) constitutes the entire agreement among the
parties and supersedes all other prior agreements and understandings, both
written and oral, among the parties, or any of them, with respect to the subject
matter hereof.
5.5 Conveyance Taxes. The Company agrees to assume liability for and
----------------
to hold the Purchasers harmless against any sales, use, transfer, stamp, stock
transfer, real property transfer or gains, and value added taxes, any transfer,
registration, recording or other fees, and any similar taxes incurred as a
result of the transactions contemplated hereby.
5.6 Assignment. This Agreement and all of the provisions hereof
----------
shall be binding upon and inure to the benefits of the parties hereto and their
respective successors and permitted assigns. Except as otherwise provided in
the Ancillary Agreements or any Exhibits hereto, and except for an assignment of
rights, interests or obligations by Purchasers after the Closing, neither this
Agreement nor any of the rights, interests or obligations shall be assigned by
any of the parties hereto without the prior written consent of the other
parties.
5.7 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
11
<PAGE>
5.8 Amendment. This Agreement may be amended by the parties hereto.
---------
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto, provided that after the Closing this
Agreement may be amended without each party's written agreement, but no such
amendment shall be enforceable against any party which has not signed such
amendment.
5.9 Governing Law. The validity and interpretation of this Agreement
-------------
shall be governed by the laws of the State of North Carolina, without reference
to the conflict of laws principles thereof.
5.10 Third Party Beneficiaries. This Agreement is not intended to
-------------------------
confer upon any other person any rights or remedies hereunder.
5.11 Limitation of Liability. In no event shall any partner or
-----------------------
representative of any Purchaser or of any partnership which is a partner of any
Purchaser or any partner of any such partnership, or any direct or indirect
stockholder, officer, director, partner or any other such person, be personally
liable for any obligation of any Purchaser under this Agreement. In no event
shall recourse with respect to the obligations under this Agreement of any
Purchaser be had to the assets or business of any person other than such
Purchaser.
[THE REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
12
<PAGE>
IN WITNESS WHEREOF, each of the Purchasers and the Company have caused this
Agreement to be signed by a duly authorized officer, partner or other person,
all as of the date first written above.
COMPANY: THE PANTRY, INC.,
a Delaware corporation
By: /s/ Charles P. Rullman
------------------------------
Name: Charles P. Rullman
------------------------
Its: Vice President
-------------------------
FSEP IV: FS EQUITY PARTNERS IV, L.P.,
a Delaware limited partnership
By: FS Capital Partners LLC
Its: General Partner
By: /s/ Jon D. Ralph
------------------------------
Name: Jon D. Ralph
------------------------
Title:
------------------------
CHASE: CB CAPITAL INVESTORS, L.P.,
a Delaware limited partnership
By: CB Capital Investors, Inc.
Its: General Partner
By: /s/ Christopher Behrens
-----------------------------
Name:
------------------------
Title:
-----------------------
13
<PAGE>
EXHIBIT 10.28
SECOND AMENDMENT TO DISTRIBUTION SERVICE AGREEMENT
THIS SECOND AMENDMENT TO DISTRIBUTION SERVICE AGREEMENT (the "Amendment")
is made and entered into effective as of the 1st day of November, 1998, by and
between The Pantry, Inc., a Delaware corporation ("Pantry"), Lil' Champ Food
Stores, Inc., a Florida corporation ("Lil' Champ") (Pantry and Lil' Champ being
hereinafter sometimes referred to collectively as the "Company") and McLane
Company, Inc., a Texas corporation ("McLane").
RECITALS
WHEREAS, the Company and McLane entered into a Distribution Service
Agreement effective as of March 29, 1998 (the "Service Agreement"); and
WHEREAS, the Company and McLane entered into a First Amendment to the
Service Agreement effective as of July 6, 1993 (the "First Amendment"); and
WHEREAS, the Company has acquired additional convenience food stores that
it desires to make subject to the Service Agreement, such additional stores
being more particularly described on Exhibit A attached hereto and incorporated
herein for all purposes (the "Additional Stores");
NOW, THEREFORE, for and in consideration of the promises, covenants and
conditions contained herein and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Company and McLane
do hereby agree as follows:
1. Additional Stores to be Subject to Service Agreement. The Company and
----------------------------------------------------
McLane hereby agree that the Additional Stores shall, effective as of November
1, 1998, be subject to and governed by all terms and conditions of the Service
Agreement, except as specifically modified by this Amendment, and shall be
considered "stores" for all purposes of the Service Agreement.
2. Service Allowance. *****The Service Allowance for the Additional
-----------------
Stores shall be amortized over the remaining term of the Service Agreement using
the straight line method of amortization in accordance with generally accepted
accounting principles.
3. Sale or Closure of Additional Stores. In the event the Company should
------------------------------------
sell, close or otherwise cease operation of any of the Additional Stores, the
Company shall pay to McLane within ten (10) business days after such sale,
closure or cessation of operation, the remaining unamortized portion of the
Service Allowance attributable to such stores.
* Selected portions have been deleted as confidential pursuant to Rule 406.
Complete copies of the entire exhibit have been filed separately with the
Securities and Exchange Commission and marked "CONFIDENTIAL TREATMENT."
<PAGE>
4. Volume Incentive. *****
----------------
5. Section 3.2 Note Applicable. Section 3.2 of the Service Agreement
---------------------------
shall not be applicable to the Additional Stores.
6. No Other Modifications. Except as specifically modified by this
----------------------
Amendment, all terms and conditions of the Service Agreement shall be fully
applicable to the Additional Stores. No terms or conditions of this Amendment
have any applicability to any stores already subject to the Service Agreement
and all terms and conditions of the Service Agreement continue to remain in full
force and effect with respect to such stores.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date first written above.
LIL' CHAMP FOOD STORES, INC.
By: /s/ William T. Flyg
---------------------------
Printed Name: William T. Flyg
-----------------
Title: Executive Vice President
------------------------
THE PANTRY, INC.
By: /s/ William T. Flyg
---------------------------
Printed Name: William T. Flyg
-----------------
Title: Senior Vice President
------------------------
McLANE COMPANY, INC.
By: /s/ William Grady Rosier
---------------------------
William Grady Rosier
President and CEO
* Selected portions have been deleted as confidential pursuant to Rule 406.
Complete copies of the entire exhibit have been filed separately with the
Securities and Exchange Commission and marked "CONFIDENTIAL TREATMENT."
<PAGE>
DISTRIBUTION SERVICE AGREEMENT
This Distribution Service Agreement (the "Agreement") is made and entered
into and is effective as of the 29th day of March 1998, by and between The
Pantry, Inc., a Delaware corporation ("Pantry") and Lil' Champ Food Stores Inc.,
a Florida corporation ("Lil' Champ") (Pantry and Lil' Champ are hereinafter
sometimes referred to collectively as the "Company") and McLANE COMPANY, INC., a
Texas corporation (hereinafter referred to as "McLane").
RECITALS
WHEREAS, Company is in the business of operating retail convenience food
stores; and
WHEREAS, McLane is in the business of wholesale distribution of food and
non-food/ general products throughout the United States of America;
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants contained herein, the parties hereto agree as follows:
ARTICLE I
SCOPE OF AGREEMENT
1.1 Company Stores. For purposes of this Agreement, the term "stores"
--------------
means the owned or managed convenience food stores of Company. Should Company
build new or otherwise acquire additional stores after the date of this
Agreement, such additional stores shall be included within the definition of
stores.
1.2 Franchisees and Licensees. During the term of this Agreement, Company
-------------------------
agrees to recommend McLane as the supplier to any franchisees and licensees of
Company, if any.
1.3 Purchase of Products and Services. During the term of this Agreement
---------------------------------
and from the Service Commencement Date (as herein defined), Company will
purchase from McLane and McLane will sell to Company, all of Company's
requirements of wholesale food and non-food/ general merchandise products
customarily supplied by convenience food wholesalers; provided, however, that
the foregoing shall have no effect upon products purchased by Company from other
vendors for whom McLane is not an approved supplier for existing and future
branded fast food operations; and further, provided, that Company may purchase
(i) traditional DSD products from DSD (direct store delivery) vendors, and (ii)
all types of products currently being purchased from other vendors other than
full-time convenience food wholesalers (it being understood that McLane may at
any time propose for additional business). Such products to be purchased from
McLane shall include those standard convenience food store items, including, but
not limited to, the following (the "Products"):
1
<PAGE>
(a) Groceries, including coffee, tea, cereal, canned meats,
condiments, juice, baby food, canned and dry goods and eggs;
(b) Deli foods, including meats and salads, breakfast foods, nachos
and bulk sausage, franks, cheese and fish;
(c) Frozen foods, such as fruits, vegetables and juices;
(d) Frozen fast foods, such as burritos, pizza, pizza pieces, frozen
sandwiches and salads;
(e) Candy, snacks and popcorn;
(f) Cigarettes and tobacco products;
(g) Cold packaged meats, lunch meats and cheeses;
(h) Shortening, breading and kitchen supplies;
(i) Private or controlled label soft drinks and beverages;
(j) Post mix products;
(k) Store supply items, i.e., bags, wraps, fast food supplies
(including napkins, individual condiments and cleaners);
(l) Cooler items, i.e., cheese, biscuits, dips, cultured products,
butter and margarine;
(m) Health and beauty aids, hosiery, and film and flash; and,
(n) General items, including motor oil, other automotive products,
housewares, hardware, electrical supplies, baby supplies, sunglasses, lighters.
toys and pet supplies.
McLane, by and through its divisions and/or subsidiaries, shall supply
and deliver those products described hereinabove which are ordered by Company on
a weekly basis according to those prices outlined in the Billing Plans attached
hereto as Exhibit "A" and made a part hereof. The foregoing described product
categories and pricing plan may be adjusted as market conditions change, and
significant changes in fuel prices may also involve additional charges, all in
accordance with Article V hereof.
2
<PAGE>
McLane's right to propose coverage of other vendor/supplier sources would
require a competitive offer with the terms offered by vendors.
1.4 Application of Agreement to Acquired Stores. This Agreement shall
-------------------------------------------
apply to any convenience store or group of convenience stores directly or
indirectly acquired by the Company subsequent to the date of this Agreement
which store(s) are not then covered by an existing supply agreement. Should
said acquired store(s) be covered by an existing supply agreement, this
Agreement shall apply upon the expiration of the then existing supply agreement.
The Company is permitted to renegotiate with an existing supplier as the
existing agreement expires and McLane has the option to match the terms offered
by existing supplier for such acquired stores.
The Company will be paid a service allowance for each acquired store or new
store pursuant to Section 3.2.
1.5 Cost. All merchandise (whether purchased by McLane directly from a
----
manufacturer or from another source), other then cigarettes, shall be billed at
McLane's cost, plus applicable percentage markups for each UIN department as set
forth on the Billing Plan, plus any federal, state or local taxes where
prescribed by law (e.g. state tax on tobacco products). This total is then
reduced by promotional deals and allowances granted by manufacturers
specifically to retailers for the time period provided by the manufacturers
during their buy period. For purposes of this Agreement, McLane's cost shall
mean the manufacturer's current publicly quoted delivered cost based on the
buying bracket in which McLane normally buys that product for that particular
McLane division or subsidiary. Delivered cost includes freight expense from
manufacturers' shipping point to the appropriate McLane division or subsidiary
and provides sort and segregation of that product. Backhaul income generated by
McLane using its own or another authorized carrier, at McLane's expense, shall
be retained by McLane. This publicly quoted delivered cost will be without
regard to any cash discount or volume rebates allowed by the manufacturer to
McLane. McLane reserves the right to impute cash discounts of up to two percent
(2%) or any portion thereof which is not allowed by the manufacturer to McLane
and to do so based upon the delivered cost. For purposes of this Agreement the
term "manufacturer" means the person or entity that manufactures or causes
others to manufacture goods or products which are marketed under brands or
labels controlled by such person or entity.
1.6 Favored Nations. McLane warrants that the net price of Products based
---------------
on a market basket approach, inclusive of all allowances, discounts and rebates,
paid by Company for Products delivered hereunder will be at least equal to the
net price paid by any other customer of McLane based upon any other respective
customers of McLane in the same geographic location and in the same class of
trade and similar volume.
1.7 Obligations on Default/Termination. In the event this Agreement is
----------------------------------
terminated as a result of a breach of and/or default in the terms and/or
conditions of this Agreement by
3
<PAGE>
Company or for any other reason, then Company shall pay McLane all of the
remaining unamortized portion of the Service Allowance described in Section 3.1
herein.
ARTICLE II
SUPPLY SERVICES
2.1 Product Delivery. McLane, by and through its divisions and/or
----------------
subsidiaries, shall supply and deliver those Products described hereinabove
which we ordered by Company on a weekly basis except as otherwise agreed to by
the parties. Deliveries will be scheduled on Sunday through Friday during the
hours of 6 a.m. and 9 p.m. for Lil Champ stores. Deliveries will be scheduled
on Sunday through Friday twenty-four (24) hours a day for Pantry stores. Stores
will not be required to accept delivery during hours when such stores are
closed, where city ordinance prohibits or when a delivery would create a major
business disruption. McLane delivery vehicles will be allowed to park on either
side of a Store permitting McLane's ramp to touch down on Store's sidewalk. At
no time will entry to Store or gas pumps be blocked by McLane delivery vehicles.
Deliveries should be conducted so as not to reasonably hinder parking at stores
but delivery vehicles shall be entitled to park so as to be able to lower the
walkboard onto the sidewalk in front of a store provided space is available when
the delivery vehicle arrives.
McLane will hold reviews every four (4) weeks with Company to analyze
McLane's order quality (i.e., over, short and damaged products) and on-time
deliveries. McLane agrees that it shall maintain a service level (i.e., the
ratio of products invoiced to products ordered) *****
2.2 *****
2.3 Other Customers of McLane. This Agreement shall in no way act to
-------------------------
foreclose McLane from supplying and delivering products or services to any other
customers or entity.
2.4 *****
ARTICLE III
COMPENSATION
3.1 Service Allowance. *****
-----------------
3.2 Service Allowance Annual Adjustment. *****
-----------------------------------
3.3 Volume Incentive. *****
----------------
* Selected portions have been deleted as confidential pursuant to Rule 406.
Complete copies of the entire exhibit have been filed separately with the
Securities and Exchange Commission and marked "CONFIDENTIAL TREATMENT."
4
<PAGE>
3.4 Payment Terms for Products Purchased. *****
------------------------------------
3.5 Tote and Canister Charges. *****
-------------------------
ARTICLE IV
TERM AND TERMINATION
4.1 Term. This Agreement commence and become effective on the date hereof
----
and, unless earlier terminated in accordance with terms of this Agreement, will
continue thereafter for a period of five (5) years from the Service Commencement
Date. Upon termination of this Agreement, McLane and Company will each fulfill
their respective obligations hereunder with respect to all orders that have been
placed by Company and/or delivered by McLane prior to the effective date of such
termination.
4.2 Service Commencement Date. The "Service Commencement Date" means
-------------------------
March 9, 1998, unless changed by mutual agreement of the parties.
4.3 Termination. In the event Company fails to make payments for any
-----------
Products or services purchased from McLane at such time as payment is required
to be made by this Agreement ("Payment Default"), McLane will have the immediate
right to suspend performance of its obligations under this Agreement until such
time as the Payment Default is cured. In the event of a Payment Default, if
such default is not cured within twenty-four (24) hours after Company receives
notice of default from McLane, then this Agreement shall terminate and all
amounts outstanding to McLane, including, but not limited to, the remaining
unamortized portion of the Service Allowance, will be immediately due and
payable. However, nothing in this Agreement shall constitute a waiver of
McLane's remedies under applicable law.
Additionally, McLane may suspend performance of its obligations and/or
terminate this Agreement in the event of Insolvency of Pantry or Lil' Champ. In
the event of a termination, the Company shall immediately repay the unamortized
portion of the Service Allowance to McLane.
The Company may terminate this Agreement (i) immediately on written notice
to McLane following a default by McLane with respect to the payment of any
amounts owed to the Company under the terms of this Agreement, which default has
remained uncured for five (5) days after McLane's receipt of written notice of
such default from Company, (ii) ***** , (iii) immediately following the
insolvency of McLane, (iv) *****, (v) immediately, following the violation of
Section 6.4 by McLane or (vi) *****
* Selected portions have been deleted as confidential pursuant to Rule 406.
Complete copies of the entire exhibit have been filed separately with the
Securities and Exchange Commission and marked "CONFIDENTIAL TREATMENT."
5
<PAGE>
For purposes of this Agreement,
(A) "Insolvency" shall mean that, with respect to an entity, such
entity shall (i) make a general assignment for the benefit of creditors or an
agent authorized to liquidate its assets, (ii) become the subject of an "order
for relief" within the meaning of the United States Bankruptcy Code, and such
order is not stayed within sixty (60) days, (iii) file a petition in bankruptcy
or for reorganization, or effect a plan or other arrangement with creditors,
(iv) file an answer to a creditor's petition, admitting the material allegations
thereof, for involuntary bankruptcy or for reorganization or to effect a plan or
other arrangement with creditor, (v) apply to a court for the appointment of a
receiver or custodian for substantially all of its assets or properties, with or
without consent, and such receiver is not discharged with sixty (60) days after
appointment or (vi) adopt a plan of complete liquidation of its assets; and
(B) *****
4.4 Auditing. Company's authorized representative shall have the right
--------
during normal business hours upon minimum of fourteen (14) days notice to
examine only those records applicable to Company's specific account in order to
verify cost and the cost plus margin. If such examination discloses an
overstatement of cost or the cost plus margin price, McLane shall reimburse
Company for the overcharge. If such examination discloses an understatement of
cost or the cost plus margin price, Company shall reimburse McLane for the
undercharge. If a pattern of overcharge is established, Company has the right
to terminate this Agreement. In order for a "pattern of overcharge" to be
established, Company must conclusively establish that during any twelve (12)
consecutive month period, the overstatements must be in excess of the
understatements by more than five percent (5%) of the total amount of the
Company's purchases from McLane in such twelve (12) month period.
ARTICLE V
RENEGOTIATION
After the Service Commencement Date, either party hereto shall have the
right to send a notice requesting renegotiation of this Agreement (a
"Renegotiation Notice") in the event of a change in the present circumstances
which affect product or delivery cost or if McLane's Products and services or
prices to Company are not competitive based on a total market basket approach
with respect to the Products and services to be provided by McLane to Company
pursuant to this Agreement. In addition, any comparison of prices and services
shall only be with a full-line distributor competitor of McLane. This Agreement
shall continue unchanged
* Selected portions have been deleted as confidential pursuant to Rule 406.
Complete copies of the entire exhibit have been filed separately with the
Securities and Exchange Commission and marked "CONFIDENTIAL TREATMENT."
6
<PAGE>
until the parties agree on any change(s) to be made, unless terminated pursuant
to the following terms and provisions of this Article. If the parties do not
agree to a change or changes within sixty (60) days after a Renegotiation Notice
is sent, the party sending the Renegotiation Notice shall have the right to
terminate this Agreement by sending a Notice of Termination to the other party
within three (3) days after the expiration of such sixty (60) day renegotiation
period, and in such event the termination shall become effective sixty (60) days
after the date of the other party's receipt of the Notice of Termination.
Neither party shall have any right to send more than one Renegotiation Notice
within any calendar year. *****
ARTICLE VI
MISCELLANEOUS
6.1 Organization, Good Standing, Etc. Company hereby represents and
--------------------------------
warrants to McLane that it is a corporation duly organized, validly existing
and in good standing under the laws of the state of its incorporation and has
all requisite power and authority, and all material licenses, permits and
certificates to own and operate its properties and assets and to carry on its
business. Company further represents and warrants and it is duly qualified to
do business and is in good standing as a foreign corporation in each other
jurisdiction in which the ownership or operation of its properties or assets or
the nature of its business requires such qualification.
6.2 Assignment. This Agreement shall be binding upon, and inure to the
----------
benefit of the parties hereto and their respective successors and permitted
assigns, but may not be assigned by any party hereto without the prior written
consent of the other party; provided, however, that McLane shall be entitled to
perform its duties and obligations hereunder using one or more of its
Subsidiaries or divisions.
6.3 Notices. Any notice, request, consent, waiver of other communication
-------
required or permitted hereunder shall be effective only if it is in writing and
delivered personally, by telecopy or by registered or certified mail, postage
prepaid, to the other party at the following address (or to such other address
as the parties shall provide to the other in writing):
If to Company:
--------------
President Lil' Champ Food Stores, Inc.
P.O. Box 23180
Jacksonville, Florida 32241-3180
Telephone: (904) 464-7200
Telecopier: (904) 464-7234
The Pantry, Inc.
1801 Douglas Drive
* Selected portions have been deleted as confidential pursuant to Rule 406.
Complete copies of the entire exhibit have been filed separately with the
Securities and Exchange Commission and marked "CONFIDENTIAL TREATMENT."
7
<PAGE>
Sanford, North Carolina 27330
ATTN: Mr. Eugene B. Horne, Jr.
Telecopier: (919) 774-3329
With a Copy to:
--------------
Freeman Spogli & Co. Incorporated
11100 Santa Monica Boulevard
Suite 1900
Los Angeles, California 90025
ATTN: Mr. Peter J. Sodini
If to McLane:
------------
President and CEO
McLane Company, Inc.
P.O. Box 6115
Temple, Texas 76503-6115
With a Copy to:
--------------
General Counsel
McLane Company, Inc.
P.O. Box 6115
Temple, Texas 76503-6115
Telephone: (817) 771-7573
Telecopier: (817) 771-7515
Any such notice, request, consent, waiver or other communication will be deemed
to have been given and received as of the date personally delivered or
telecopied, or three (3) business days after being mailed as aforesaid.
6.4 Confidentiality. McLane and Company each agree that all information
---------------
communicated to it by the other, whether before or after the Service
Commencement Date, will be and was received in strict confidence, will be used
only for purposes of this Agreement and that no such information, including
without limitation the provisions of this Agreement, will be disclosed by the
recipient party, its agents or employees without the prior written consent of
the other party, except as may be necessary by reason of legal, accounting or
regulatory requirements beyond the reasonable control of the recipient party.
The provision of this paragraph will survive termination, for any reason, of
this Agreement. No party shall disclose the terms and conditions of this
Agreement to any third party.
8
<PAGE>
6.5 Reporting. Company shall furnish McLane its current financial
---------
statements prepared in accordance with generally accepted accounting principles
along with annual audited financial statements, 120 days from Company's fiscal
year end. Such financial statements shall be furnished annually and shall be
addressed to Credit Department, McLane Company, Inc., P.O. Box 6115, Temple,
Texas 76503-6115. The failure of Company to furnish such financial statements
shall be grounds for termination of this Agreement.
6.6 Publicity. Neither McLane nor Company will issue or make, or cause to
---------
have issued or made, any media release or public announcement concerning this
Agreement or the transactions contemplated hereby without the prior approval of
the other party, except as may be necessary by reason of legal, accounting or
regulatory requirements beyond the reasonable control of such party.
6.7 Counterparts. This Agreement may be executed in one or more
------------
counterparts for the convenience of the parties hereto, all of which together
shall constitute one and the same instrument.
6.8 Severability. If any provision of this Agreement is declared or found
------------
to be illegal, unenforceable or void by a court of competent jurisdiction, then
both parties will be relieved of all obligations arising under such provision,
but only to the extent that such provision is illegal, unenforceable or void, it
being the intent and agreement of the parties that this Agreement will be deemed
amended by modifying such provision to the extent necessary to make it legal and
enforceable. If the remainder of this Agreement is not affected by such
declaration or finding, then each provision not so affected will be enforced to
the extent permitted by law.
6.9 Entire Agreement. Notwithstanding any provision or reference in this
----------------
Agreement to the contrary, this Agreement contains the entire understanding of
the parties relating to the subject matter contained herein and supersedes all
prior agreements and understanding, written or oral, relating to the subject
matter hereof including, without limitation, that one certain Service Agreement
dated March 21, 1996, by and between Lil' Champ and McLane and that one certain
Service Agreement dated December 27, 1995, by and between Pantry and McLane.
This Agreement cannot be modified, amended of terminated except in writing
signed by the party against whom enforcement is sought. No waiver of any of the
provisions of this Agreement shall be deemed, or shall constitute, the waiver of
any other provision, whether or not similar, nor shall any waiver constitute a
continuing waiver. No waiver shall be binding unless executed in writing by the
party against whom an assertion of waiver is made.
6.10 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of North Carolina.
6.11 Authority to Bind. Each person executing this Agreement warrants that
-----------------
he or she has full legal authority to execute this Agreement for and on behalf
of the respective corporations and to bind such corporations.
9
<PAGE>
6.12 Turn of the Century. Company and McLane represent and warrant that
-------------------
they will use all reasonable efforts to ensure software programs interface and
record, store, process, and present calendar dates correctly, including calendar
dates falling on or after January 1, 2000. A party shall not be liable to any
other party for any breach of this Agreement caused in whole or in part by such
other party's reasonable efforts not being successful.
6.13 Limitation of Liability. Notwithstanding any provision or reference
-----------------------
in this Agreement to the contrary, in no event shall McLane be liable to Company
for any consequential, special, exemplary, incidental or punitive damages,
including lost profits or business opportunities, or, losses attributable to or
arising from overhead allocations or general and administrative costs and
expenses, or for the acts or omissions of Company.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of
the date first written above.
LIL' CHAMP FOOD STORES, INC.
By: /s/ Peter J. Sodini
--------------------------
Its:
-------------------------
THE PANTRY, INC.
By: /s/ Peter J. Sodini
--------------------------
Its: President and CEO
-------------------------
McLANE COMPANY, INC.
By: /s/ William Grady Rosier
--------------------------
WILLIAM GRADY ROSIER
PRESIDENT AND CEO
McLANE COMPANY, INC.
11
<PAGE>
EXHIBIT 12.1
THE PANTRY, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended 13 Weeks Ended
-------------------------------------------- ---------------
Sept. Sept. Sept. Sept. Dec. Dec.
29, 28, Sept. 25, 24, 25, 24,
1994 1995 26, 1996 1997 1998 1997 1998
------- ------- -------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Pretax (loss) income.... $ (181) $(3,639) $(10,778) $ (975) $ 4,673 $ (501) $ 1,397
Fixed Charges:
Interest Expense...... 12,047 13,241 11,992 13,039 28,946 5,817 8,912
Amortization of
deferred financing
costs................ 908 1,038 1,359 1,461 2,071 396 587
Rental expense(1)..... 2,183 2,253 2,709 2,901 7,919 1,399 2,829
------- ------- -------- ------- ------- ------ -------
Total fixed
charges............ $15,138 $16,532 $ 16,060 $17,401 $38,936 $7,612 $12,328
------- ------- -------- ------- ------- ------ -------
Earnings................ $14,957 $12,893 $ 5,282 $16,426 $43,609 $7,111 $13,725
------- ------- -------- ------- ------- ------ -------
Ratio (shortfall) of
earnings to fixed
charges................ $ (181) $(3,639) $(10,778) $ (975) 1.12 $ (501) 1.11
======= ======= ======== ======= ======= ====== =======
</TABLE>
- --------
(1) One-third of rental expense related to operating leases representing an
appropriate interest factor.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE PANTRY, INC.
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
<S> <C>
Sandhills, Inc.............................. Delaware
Lil' Champ Food Stores, Inc................. Florida
Pantry Properties, Inc...................... South Carolina
TC Capital Management, Inc.................. Delaware
PH Holdings Corporation..................... North Carolina
Global Communications, Inc.................. South Carolina
Miller Enterprises, Inc..................... Florida
Aucilla Properties, Inc..................... Florida
Peninsular Petroleum Company................ Florida
</TABLE>
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To The Board of Directors and Shareholders of
The Pantry, Inc.
Sanford, North Carolina
We consent to the use in this Registration Statement of The Pantry, Inc.
on Form S-1 of our report on The Pantry, Inc. dated December 18, 1998 (which
expresses an unqualified opinion and includes an explanatory paragraph relating
to the adoption of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, in fiscal 1996), appearing in the Prospectus, which is a part
of this Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of The Pantry, Inc.,
listed in Item 16. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
March 10, 1999
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of The Pantry, Inc. on
Form S-1 of our report on Lil'Champ Food Stores, Inc. (a wholly-owned
subsidiary of Docks, U.S.A., Inc.) dated February 14, 1997, appearing in the
Prospectus, which is a part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
Jacksonville, Florida
March 10, 1999
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion of our report dated March 6, 1998, except for Note
10, as to which the date is February 24, 1999, with respect to the balance
sheets of Quick Stop Food Mart, Inc. as of December 31, 1996 and 1997, and the
related statements of income, stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 1997, which report appears in
this registration statement on Form S-1 of The Pantry, Inc. dated March 10,
1999, and to the reference to our firm under the caption "Experts" in the
prospectus.
/s/ Cherry, Bekaert & Holland, L.L.P.
Fayetteville, North Carolina
March 10, 1999
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the inclusion of our audit report on the balance sheet of
Express Stop, Inc. as of December 31, 1997 and the statements of income,
retained earnings, and cash flows for the year then ended, in the Form S-1
Registration Statement of The Pantry, Inc., to be filed on or about March 10,
1999, and to a reference in the Registration Statement to our firm as experts
in accounting and auditing.
/s/ Griffin, Maxwell & Frazelle, P.A.
Fayetteville, North Carolina
March 10, 1999
<PAGE>
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the use, in this Registration Statement of The Pantry, Inc. on
Form S-1, of our report dated February 12, 1999 on the financial statements of
Taylor Oil Company appearing in the Prospectus which is part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Edwards, Falls & Renegar, P.L.L.C.
Winston-Salem, North Carolina
March 10, 1999
