<PAGE>
As filed with the Securities and Exchange Commission on May 6, 1999
Registration No. 333-74221
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 2
TO
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
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<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......... $115,000,000 $31,970
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</TABLE>
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(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. $27,800 of the registration fee was paid upon the initial filing of
this Registration Statement.
---------------
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 May 6, 1999
PROSPECTUS
6,250,000 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 $15.00 and
$17.00 per share. Currently, no public market exists for the shares. The common
stock has been approved for quotation 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 937,500 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.
Goldman, Sachs & 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
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 5
Risk Factors............................................................. 12
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Financial Data.................................................. 24
Unaudited Pro Forma Financial Data....................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 41
Industry Overview........................................................ 64
Business................................................................. 66
Management............................................................... 83
Transactions with Affiliates............................................. 91
Principal Shareholders................................................... 93
Description of Capital Stock............................................. 96
Shares Eligible for Future Sale.......................................... 99
Material U.S. Tax Considerations Applicable to Non-U.S. Holders of the
Common Stock............................................................ 101
Underwriting............................................................. 105
Legal Matters............................................................ 108
Experts.................................................................. 108
Where You Can Find More Information...................................... 109
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.
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 51 for 1
stock split which will occur prior to the completion of the offering and
assumes that the underwriters will not exercise their over-allotment option. We
use a 52 or 53 week fiscal year ending on the last Thursday in September of
each year. References to fiscal year refer to the fiscal year in which the
period ends.
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 March 25, 1999, we
operated 1,149 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, EBITDA of $89.8
million and net income of $4.5 million before an extraordinary charge of
approximately $11.6 million. In fiscal 1998 we generated cash from operations
of $48.0 million, used cash in investing activities of $286.5 million and
generated cash from financing activities of $269.5 million.
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 a five-pronged operating strategy that has
contributed to our strong financial results. 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 demand items that customers expect to find in our stores
. adding impulse items that carry higher than average margins
. improving promotional displays, signage and overall store presentation
5
<PAGE>
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 supply agreements that provide volume rebates and vendor
allowances
Reduce Expenses Through Strengthened Vendor Relationships and Tightened
Expense Controls. We have developed strong relationships with our merchandise
and gasoline suppliers, which have led to lower purchasing costs and greater
allowances and rebates. We have also 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 105 of our stores that have been remodeled,
average merchandise sales increased 10.1%, gasoline gallons increased 17.8% and
EBITDA increased 37.1% during the twelve months following remodeling. We also
have focused on upgrading our management information systems and complying with
EPA requirements and regulations.
Grow Through Acquisitions and New Store Development. From April 1997
through February 1999, we acquired 890 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 expand
our leadership position in our markets and enhance our sales, productivity and
profitability. 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 the continued implementation of our operating
strategy. 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: at the gasoline
pump, in the store and 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.
6
<PAGE>
Pursue Acquisitions and New Store Growth. The Pantry believes that growth
through acquisition is currently more economically attractive than growth
through new store development. With over 20,000 convenience stores operating in
our existing markets, we believe there are enough attractive acquisition
opportunities to double our store base in existing markets and expand into
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.
Our strategy is to continue to realize significant growth and cost
savings from acquisitions through
. remerchandising acquired stores
. upgrading store facilities and gasoline equipment
. changing selected sites to branded gasoline suppliers
. negotiating better terms with our suppliers
. spreading costs over a greater store base and eliminating duplicative
overhead
Our acquisition strategy is complemented by a new store development
program in existing and contiguous markets. We opened seven new stores in
fiscal 1998 and expect to open eight to ten new stores annually.
Recent Developments
Letters of Intent. We have entered into two non-binding letters of intent
with respect to the acquisition of an aggregate of 83 convenience stores
located in the Southeast. The letters of intent are subject to numerous
conditions, including negotiation and execution of definitive purchase
agreements and completion of due diligence. There can be no assurance that
these acquisitions will be completed.
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 Handy Way stores under the brand name CITGO.
In addition, Handy Way has developed a food service operation, including 76
locations offering quick service restaurants with nationally branded food
franchises such as Subway, Church's, Taco Bell and Hardee's.
7
<PAGE>
Our Controlling Shareholders
Freeman Spogli & Co. Incorporated currently controls The Pantry and has
five representatives on our seven member board of directors. Chase Manhattan
Capital, L.P. is also a significant shareholder of The Pantry and has one
representative on our board. After the offering affiliated investment funds of
Freeman Spogli will own 9,349,524 shares of common stock and warrants to
purchase 2,346,000 shares of common stock, which will represent beneficial
ownership of approximately 57.2% of the outstanding shares, including shares
underlying the warrants. After the offering, Chase Capital and its affiliates
will beneficially own 2,298,438 shares, or 12.7% of the outstanding shares.
Through their stock ownership and board representation, Freeman Spogli
and Chase Capital will be in a position to significantly affect our corporate
actions. See "Risk Factors--The interests of Freeman Spogli, our controlling
shareholder, may conflict with our interests and the interests of our other
shareholders." Freeman Spogli and Chase Capital are parties to a stockholders
agreement that provides for various rights relating to the sale of shares of
common stock by the parties. See "Transactions with Affiliates--Stockholders'
Agreement."
----------------
The Pantry was founded in North Carolina in 1967. 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.............
6,250,000 shares
Shares outstanding
after the offering.....
18,111,478 shares
Use of proceeds.........
We estimate that the net proceeds from the offering
will be approximately $92.0 million. We intend to use
these net proceeds to:
.repay outstanding debt
. redeem outstanding preferred stock and pay accrued
dividends
. make acquisitions during the nine month period
following the offering
Nasdaq National Market
symbol............
PTRY
Shares that May Be Issued After the Offering Upon the Exercise of Options and
Warrants
We are permitted, and in some cases obligated, to issue shares of common
stock in addition to the common stock to be outstanding after the offering. If
and when we issue these shares, the percentage of the common stock you own may
be diluted. The following is a summary of additional shares of common stock
that we have currently approved for issuance upon the exercise of options and
warrants after the offering:
. 576,861 shares issuable upon the exercise of options granted under our
1998 stock option plan and 4,523,139 options available for future
awards under our 1998 and 1999 stock option plans after the offering
. 2,346,000 shares issuable upon the exercise of outstanding warrants at
an exercise price of $7.45 per share
. 937,500 shares issuable upon the exercise of the underwriters' over-
allotment option
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 financial position and results of operations for the six month
periods ended March 26, 1998 and March 25, 1999 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," and our consolidated financial statements
and related notes.
The as adjusted balance sheet data reflects the sale of 6,250,000 shares
of common stock in the offering and the application of net proceeds from the
sale after deducting underwriting discounts and commissions and estimated
offering expenses. See "Use of Proceeds" and "Capitalization."
The statement of operations data includes unusual items and events that
affect comparability with other periods:
. During fiscal 1996, we recorded restructuring charges of $1.6 million
pursuant to a formal plan to restructure our corporate offices and
impairment of assets of $3.0 million.
. During fiscal 1998, we recorded a merger integration charge of
approximately $1.0 million for costs of combining our existing
business with the acquired business of Lil' Champ.
. During fiscal 1998, The Pantry incurred an extraordinary loss of
$8.0 million. 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.
The stores included in calculating comparable store sales growth are
stores that were under our management and in operation for the comparative
periods presented.
We have provided information in this prospectus relating to EBITDA.
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. We have included
information concerning EBITDA as one measure of our cash flow and historical
ability to service debt and because we believe investors find this information
useful. EBITDA as defined may not be comparable to similarly-titled measures
reported by other companies.
10
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
------------------------------ --------------------
Sept. Sept. Sept. 24, March 26, March 25,
26, 1996 25, 1997 1998 1998 1999
-------- -------- --------- --------- ---------
(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 $ 415,841 $ 675,399
Gross profit............ 91,218 97,279 233,351 98,652 155,941
Income from operations.. 1,874 10,771 31,843 9,492 20,540
Interest expense........ (11,992) (13,039) (28,946) (12,851) (18,873)
Net income (loss) before
income taxes and
extraordinary loss..... (8,114) (975) 4,673 (2,585) 1,795
Extraordinary loss...... -- -- (7,998) (6,800) (3,557)
Net income (loss)....... (8,114) (975) (3,325) (8,469) (2,480)
Earnings (loss) per
share before
extraordinary loss:
Basic.................. $ (1.89) $ (1.08) $ 0.18 $ (0.36) $ (0.03)
Diluted................ $ (1.89) $ (1.08) $ 0.16 $ (0.36) $ (0.03)
Weighted-average number
of shares outstanding:
Basic.................. 5,688 5,815 9,732 8,937 11,857
Diluted................ 5,688 5,815 11,012 8,937 11,857
Other Financial Data:
EBITDA.................. $ 15,626 $ 20,275 $ 60,501 $ 21,267 $ 38,370
Net cash provided by
(used in):
Operating activities... $ 5,415 $ 7,338 $ 48,032 $ 17,652 $ 13,405
Investing activities... (7,204) (25,079) (286,493) (163,153) (151,288)
Financing activities... (3,872) 15,750 269,518 170,698 128,478
Store operating expenses
as a percentage of
sales.................. 15.0% 14.1% 14.2% 14.9% 14.1%
General and
administrative expenses
as a percentage of
sales.................. 4.6% 3.9% 3.3% 3.7% 3.3%
Operating income as a
percentage of sales.... 0.5% 2.5% 3.2% 2.3% 3.0%
Store Operating Data:
Number of stores (end of
period)................ 379 390 954 883 1,149
Average sales per store:
Merchandise sales...... $ 481.1 $ 525.8 $ 533.3 $ 304.2 $ 304.3
Gasoline gallons (in
thousands)............ 450.0 501.2 603.9 329.2 397.5
Comparable store sales
growth:
Merchandise sales...... 2.8% 8.5% 5.3% 4.4% 11.4%
Gasoline gallons....... (4.3)% 7.2% 4.8% 5.8% 6.8%
</TABLE>
<TABLE>
<CAPTION>
March 25, 1999
---------------------
Actual As Adjusted
-------- -----------
(dollars in
thousands)
<S> <C> <C>
Balance Sheet Data:
Working capital (deficiency).............................. $(34,836) $ 14,827
Total assets.............................................. 722,930 772,593
Total debt and capital lease obligations.................. 472,446 453,446
Shareholders' equity...................................... 36,446 110,946
</TABLE>
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.
Because gasoline sales comprise a substantial portion of our revenues,
interruptions in the supply of gasoline and increases in the cost of gasoline
could adversely affect our business, financial condition or results of
operations
Gasoline profit margins have a significant impact on our earnings because
gasoline revenue has increased as a percentage of our total revenue over the
past three fiscal years. Gasoline revenue has averaged 51.4% of our revenues
during that period. Several factors beyond our control affect the volume of
gasoline we sell and the gasoline profit margins we achieve:
. the supply and demand for gasoline
. any volatility in the wholesale gasoline market
. the pricing policies of competitors in local markets
In particular, a material increase in the price of gasoline could adversely
affect demand for our gasoline.
In addition, sudden increases in the cost of gasoline could adversely
affect our business, financial condition or results of operations if gasoline
sales volume is reduced. We face this particular risk because:
. we typically have no more than a seven-day supply of gasoline
. our gasoline contracts do not guarantee an uninterrupted, unlimited
supply of gasoline in the event of a shortage
Reductions in volume of gasoline sold or our gasoline profit margins
could have a material adverse effect on our results of operations. In addition,
because gasoline sales generate customer traffic to our stores, decreases in
gasoline sales could impact merchandise sales.
If we are unable to pass along price increases of tobacco products to our
customers, our business, financial condition or results of operations could be
adversely affected because tobacco sales comprise an important part of our
revenues
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
12
<PAGE>
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, a
$0.30 per pack rebate in February 1999, a $0.55 per pack rebate in March 1999,
no rebate in April 1999 and a $0.35 per pack rebate in May 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 business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Our Operations--Merchandise Sales."
Our growth and operating results could suffer if we are unable to identify and
acquire suitable companies, discover undisclosed liabilities, obtain financing
and integrate acquired stores
An important part of The Pantry's growth strategy is to acquire other
convenience stores that complement our existing stores or broaden our
geographic presence. From April 1997 through April 1999, we acquired 890
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 risks that could cause our actual growth or operating
results to differ adversely compared to 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.
. 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.
. 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.
Approximately $49.0 million of the net proceeds of this offering will be
invested in short term cash instruments pending the completion of additional
acquisitions. Such funds may be used to pay for acquisitions for up to nine
months after completion of this offering. There can be no assurance that we
will complete additional acquisitions in such time period. If the amount of net
proceeds is not used to pay for acquisitions within nine months, it must be
used instead to repay outstanding bank debt.
Restrictive covenants in our debt agreements may restrict our ability to
implement our growth strategy, respond to changes in industry conditions,
secure additional financing and engage in acquisitions
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
13
<PAGE>
may require us to achieve specific financial ratios and to obtain lender
consent prior to completing 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 restricted by these
covenants. We also 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 which would adversely affect our
business, financial condition and results of operations.
We are growing rapidly and our failure to effectively manage our growth may
adversely affect our business, financial condition and results of operations
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 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. Failure to
make these improvements may affect our business, financial condition and
results of operations.
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 $9.0
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.
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, financial condition and
results of operations.
We depend on one principal wholesaler for the majority of our merchandise and
loss of this supplier could have an adverse impact on our cost of goods and
business, financial condition and results of operations
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. Therefore, a change of
suppliers could have a material adverse affect on our cost of goods and
business, financial condition and results of operations.
Changes in traffic patterns and the type, number and location of competing
stores could result in the loss of customers and a corresponding decrease in
revenues for affected stores
The convenience store and retail gasoline industries are highly
competitive and we may not be able to compete successfully. Changes in traffic
patterns and the type, number and location of competing stores could result in
the loss of customers and a corresponding decrease in revenues for affected
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
14
<PAGE>
experienced management and hourly employees may adversely affect the
profitability of the convenience store industry. Any or all of these factors
could create heavy competitive pressures and have an adverse effect on our
business, financial condition and results of operations.
The Pantry competes with numerous other convenience stores and
supermarkets. In addition, our stores offering self-service gasoline compete
with gasoline service stations 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 our
competitors have been in existence longer and have greater financial, marketing
and other resources than us. As a result, our competitors may be able to
respond better to changes in the economy and new opportunities in our industry.
Because substantially all of our stores are located in the southeastern United
States, our revenues could suffer if the economy of that region deteriorates
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 business, financial condition and results of
operations could be adversely impacted.
Unfavorable weather conditions in the spring and summer months could adversely
affect our business, financial condition and results of operations
Weather conditions in our operating area impact our business, financial
condition and results of operations. 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 could be adversely affected.
In addition, approximately 37% of our stores are 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."
If our history of losses continues, we may be unable to complete our growth
strategy and financing plans
We have experienced losses during our most recent three fiscal years. Our
net losses were $8.1 million in fiscal 1996, $1.0 million in fiscal 1997, $3.3
million in fiscal 1998 and $2.5 million during the six months ended March 25,
1999. We incurred interest expense of $12.0 million in fiscal 1996, $13.0
million in fiscal 1997 and $28.9 million in fiscal 1998 and $18.9 million in
the six months ended March 25, 1999. We also incurred an extraordinary loss of
$8.0 million in fiscal 1998 and $3.6 million in the six months ended March 25,
1999, in each case related to the early extinguishment of debt.
If we incur net losses in future periods, we may not be able to implement
our growth strategy in accordance with our present plans. Continuation of our
net losses may also require us to secure additional financing sooner than
anticipated. Such financing may not be available in sufficient amounts, or on
terms acceptable to us, and may dilute existing shareholders. If we do achieve
profitability, we may not sustain or increase profitability in the future. This
may, in turn, cause our stock price to decline.
15
<PAGE>
We are subject to extensive environmental regulation, and increased regulation
or our failure to comply with existing regulations could require substantial
capital expenditures or affect our business, financial condition and results of
operations
Our business is subject to extensive environmental requirements,
particularly environmental laws regulating underground storage tanks.
Compliance with these regulations may require significant capital expenditures.
Federal, state and local regulations governing underground storage tanks
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 material compliance with the December
1998 upgrade requirements. Failure to comply with any environmental regulations
or an increase in regulations could affect our business, financial condition
and results of operations.
We may incur substantial liabilities for remediation of environmental
contamination at our locations
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 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 hazardous substances, we may be deemed to have
arranged for the disposal or treatment of hazardous or toxic substances and,
therefore, may be liable for removal or remediation costs, as well as 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, The
Pantry estimates that up to $12.7 million may 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 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
underground storage tanks in Florida through a combination of private insurance
and a letter of credit.
16
<PAGE>
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."
The large amount of our total outstanding debt and our obligation to service
that debt could divert necessary funds from operations, limit our ability to
obtain financing for future needs and expose us to interest rate risks
We are highly leveraged, which means that the amount of our outstanding
debt is large compared to the net book value of our assets, and have
substantial repayment obligations under our outstanding debt. As of March 25,
1999 we had:
. Total consolidated debt including capital lease obligations of
approximately $472.4 million
. Shareholders' equity of approximately $36.4 million
As of March 25, 1999, our borrowing availability under our bank credit
facility was approximately $56.0 million.
Our bank credit facility contains numerous financial and operating
covenants that limit our ability, and the ability of most of our subsidiaries,
to undertake certain transactions. These covenants require that we meet certain
interest coverage, net worth and leverage tests. The indenture governing our
senior subordinated notes and our bank credit facility permit us and our
subsidiaries to incur or guarantee additional debt, subject to limitations.
Our level of debt and the limitations imposed on us by our debt
agreements could have other important consequences to our shareholders,
including the following:
. We will have to use a portion of our cash flow from operations for
debt service, rather than for our operations or to implement our
growth strategy
. We may not be able to obtain additional debt financing for future
working capital, capital expenditures, acquisitions or other
corporate purposes
. We are vulnerable to increases in interest rates because the debt
under our bank credit facility is at a variable interest rate
Violations of or changes to government regulations 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 business,
financial condition and results of operations.
17
<PAGE>
There are numerous legislative proposals pending in the South Carolina
legislature relating to video gaming, including initiatives to impose
additional significant taxes or regulatory measures as well as initiatives to
ban video gaming. Enactment of some of these initiatives could adversely impact
our results of operations. See "Business--Government Regulation and
Environmental Matters."
The interests of Freeman Spogli, our controlling shareholder, may conflict with
our interests and the interests of our other shareholders
As a result of its stock ownership and board representation, Freeman
Spogli will be in a position to affect our corporate actions such as mergers or
takeover attempts in a manner that could conflict with the interests of our
other shareholders. Freeman Spogli will own 9,349,524 shares of common stock
and warrants to purchase 2,346,000 shares of common stock after the offering.
Based on its ownership of common stock and warrants after the offering, Freeman
Spogli will beneficially own 57.2% of the common stock. In addition, five of
the seven members of our board of directors will be representatives of Freeman
Spogli immediately after the offering.
Because we depend on our senior management's experience and knowledge of our
industry, we would be materially affected if senior management left The Pantry
We are 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 2001. 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 senior personnel as needed in
the future. We do not maintain key personnel life insurance on our senior
executives and other key employees.
Future sales of additional shares into the market may depress the market price
of the common stock
If our existing shareholders sell shares of 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
consideration for future acquisitions.
Upon completion of the offering, we will have 18,111,478 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 6,250,000 shares sold in the offering are freely tradable. Of the
remaining shares, 11,647,962 shares are held by affiliated investment funds of
Freeman Spogli and affiliates of 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." In addition, Freeman Spogli and Chase Capital have
registration rights allowing them to require The Pantry to register the resale
of their shares. See "Shares Eligible for Future Sale--Registration Rights
Agreement."
Because our common stock has never been publicly traded, we cannot predict the
extent to which a trading market will develop for our 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.
18
<PAGE>
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 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 convenience store industry and
general market and economic conditions. Some of these factors are beyond our
control.
You will experience immediate and substantial dilution in the book value of the
common stock
The initial public offering price is expected to be substantially higher
than the book value per share of our common stock. If you purchase common stock
in the offering, you will experience immediate and substantial dilution of
$19.23 per share in the net tangible book value of the common stock from the
initial public offering price. See "Dilution."
Our charter includes provisions which may have the effect of preventing or
hindering a change in control and adversely affecting the market price of our
common stock
Our certificate of incorporation gives our board of directors the
authority to issue up to five 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.
Other provisions of our certificate of incorporation and bylaws and of
Delaware law could make it more difficult for a third party to acquire us or
hinder a change in management even if doing so would be beneficial to our
shareholders. These governance provisions could hurt the market price of our
common stock. See "Description of Capital Stock--Antitakeover Provisions."
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. Because of the overall complexity of the
Year 2000 issue 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 systems,
systems of acquired companies or third party systems or by our failure to
adequately prepare for the results of such errors or defects, including costs
of related litigation.
19
<PAGE>
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."
20
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 6,250,000 shares of common
stock at an assumed price of $16.00 per share are estimated to be approximately
$92.0 million, after deducting the underwriting discount and estimated offering
expenses payable by us. Net proceeds will be $106.0 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 ($19.0 million), to redeem our outstanding
preferred stock ($17.5 million), pay accrued dividends on the preferred stock
($6.5 million) and to make acquisitions ($49.0 million). We intend to invest
the $49.0 million, pending use for acquisitions, in short term, investment
grade money-market instruments. If we have not used any portion of this $49.0
million to make acquisitions within nine months after the offering, our bank
credit facility requires that any unused portion must be used to repay term
loan indebtedness.
We continuously evaluate and review acquisition candidates as part of our
growth strategy and we are at various stages of evaluation, discussion or
negotiation with a number of such candidates. Some of these candidates may be
material. At this time we have no definitive agreements to make acquisitions.
There can be no assurance that we will complete additional acquisitions in the
nine month time period.
The $19.0 million used to repay indebtedness under the bank credit
facility will be applied to the acquisition term facility, which has been
amended to permit reborrowing of the $19.0 million after the offering. The
acquisition term facility matures in January 2004. As of April 30, 1999 $19.0
million was outstanding under the acquisition term facility and an additional
$239.0 million of term indebtedness was outstanding under our bank credit
facility. Borrowings under the acquisition term facility bear interest, as of
April 30, 1999, at a rate of 7.92%. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--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.
21
<PAGE>
CAPITALIZATION
The following table describes our capitalization as of March 25, 1999 on
an actual basis and on an as adjusted basis to reflect our receipt of the
estimated net proceeds of $92.0 million from the sale of 6,250,000 shares of
common stock. The as adjusted amount also assumes the application of
$19.0 million of the net proceeds to repay indebtedness under our bank credit
facility, $17.5 million to redeem our preferred stock and $5.8 million to pay
accrued dividends. 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 March 25, 1999
---------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents................................ $ 24,999 $ 74,662
======== ========
Current debt:
Current maturities of long-term debt.................... 5,431 5,431
Current maturities of capital lease obligations......... 1,240 1,240
-------- --------
Total current debt................................... 6,671 6,671
-------- --------
Long-term debt:
Senior subordinated notes............................... 200,000 200,000
Bank credit facility.................................... 252,629 233,629
Other long-term debt.................................... 1,648 1,648
Capital lease obligations............................... 11,498 11,498
-------- --------
Total long-term debt................................. 465,775 446,775
-------- --------
Total debt......................................... 472,446 453,446
Shareholders' equity:
Preferred stock, par value $.01 per share; 150,000
shares authorized, actual; 5,000,000 authorized, as
adjusted; 17,500 Series B shares issued and
outstanding, actual; no shares issued and outstanding,
as adjusted........................................... -- --
Common stock, par value $.01 per share; 300,000 shares
authorized, actual (50,000,000 after stock split);
50,000,000 shares authorized, as adjusted; 11,861,478
shares issued and outstanding, actual; 18,111,478
shares issued and outstanding, as adjusted(a)......... 119 181
Additional paid-in capital............................. 70,727 145,165
Shareholder loans...................................... (937) (937)
Retained earnings (deficit)............................ (33,463) (33,463)
-------- --------
Total shareholders' equity........................... 36,446 110,946
-------- --------
Total capitalization............................... $508,892 $564,392
======== ========
</TABLE>
- --------
(a) Does not include 2,922,861 shares issuable upon exercise of outstanding
stock options or warrants.
22
<PAGE>
DILUTION
Our net tangible book value as of March 25, 1999 was a deficit of $133.0
million or $(11.21) per share of common stock. Net tangible book value per
share represents the amount of our total tangible assets, which excludes
goodwill of $169.4 million, less our total liabilities, divided by the total
number of outstanding shares of common stock outstanding.
After giving effect to the sale of 6,250,000 shares at an assumed initial
public offering price of $16.00 per share and the receipt and application of
the net proceeds (after deducting the underwriting discount and offering
expenses) our adjusted net tangible book value as of March 25, 1999 would have
been a deficit of approximately $58.5 million or approximately $(3.23) per
share. This represents an immediate increase in such net tangible book value of
$7.98 per share to existing shareholders and an immediate dilution of $(19.23)
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............. $16.00
Net tangible book value per share as of March 25, 1999...... $(11.21)
Increase per share attributable to new shareholders......... 7.98
-------
Adjusted net tangible book value per share as of March 25,
1999 after the offering.................................... (3.23)
-------
Dilution per share to new investors......................... $(19.23)
=======
</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 5,100,000 shares of common stock reserved for issuance pursuant to
options outstanding under our stock option plans and 2,346,000 shares of common
stock reserved for issuance pursuant to common stock warrants issued to Freeman
Spogli. See "Transactions with Affiliates" and "Management--Stock Option
Plans."
The following table describes, as of March 25, 1999, 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 $16.00 per share.
<TABLE>
<CAPTION>
Total Consideration Average
Shares Purchased Paid (in thousands) Price
--------------------- ---------------------- ---------
Number Percentage Amount Percentage Per Share
---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 11,861,478 65.5% $102,497(a) 50.6% $ 8.64
New investors(b)........ 6,250,000 34.5 100,000 49.4 16.00
---------- ----- -------- ----- ------
Total................. 18,111,478 100.0% $202,497 100.0% $11.18
========== ===== ======== ===== ======
</TABLE>
- --------
(a) Includes $26.0 million paid for Series A preferred stock which was
contributed to The Pantry in October 1997.
(b) The number of shares held by new public investors will be 6,250,000 or
approximately 34.5% of the total number of shares outstanding after the
offering. If the underwriters exercise their over-allotment option in full,
public investors will own 7,187,500 shares, or approximately 37.7% of the
total number of shares of common stock outstanding after the offering.
23
<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 six
month periods ended March 26, 1998 and March 25, 1999 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.
The statement of operations data includes unusual items and events that
affect comparability with other periods:
. 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.
. 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 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.
. During 1996, we recorded restructuring charges of $1.6 million
pursuant to a formal plan to restructure our corporate offices. 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." In addition, pursuant to SFAS No. 121, we evaluated our
long-lived assets for impairment on a store-by-store basis. Based on
this evaluation, we determined that certain long-lived assets were
impaired and recorded an impairment loss of $0.4 million for property
and equipment and $2.6 million for goodwill.
. 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.
. In fiscal 1994, we recorded an extraordinary loss of $0.7 million,
net of taxes, related to the early extinguishment of debt.
The stores included in calculating same store sales growth are stores
that were under our management and in operation for the comparative periods
presented.
24
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
--------------------------------------------------- --------------------
Sept. Sept. Sept. Sept. Sept. 24, March 26, March 25,
29, 1994 28, 1995 26, 1996 25, 1997 1998 1998 1999
-------- -------- -------- -------- --------- --------- ---------
(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 $ 193,765 $ 303,962
Gasoline sales......... 175,083 187,165 192,737 220,166 509,958 215,718 360,917
Commissions............ 4,466 4,516 3,979 4,787 14,128 6,358 10,520
-------- -------- -------- -------- --------- --------- ---------
Total revenue........... 368,793 379,061 384,807 427,393 984,884 415,841 675,399
Cost of sales:
Merchandise............ 123,142 121,976 125,979 132,846 303,968 126,865 204,825
Gasoline............... 153,476 161,179 167,610 197,268 447,565 190,324 314,633
-------- -------- -------- -------- --------- --------- ---------
Gross profit............ 92,175 95,906 91,218 97,279 233,351 98,652 155,941
Store operating
expense................ 53,201 56,206 57,841 60,208 140,089 61,853 95,215
General and
administrative
expenses............... 17,893 18,159 17,751 16,796 32,761 15,532 22,356
Unusual charges......... -- -- 4,594 -- 1,016 -- --
Depreciation and
amortization........... 10,164 11,470 9,158 9,504 27,642 11,775 17,830
-------- -------- -------- -------- --------- --------- ---------
Income from operations.. 10,917 10,071 1,874 10,771 31,843 9,492 20,540
Interest expense........ (12,047) (13,240) (11,992) (13,039) (28,946) (12,851) (18,873)
Income (loss) before
income taxes and other
items.................. (181) (3,639) (10,778) (975) 4,673 (2,585) 1,795
Income (loss) before
other items............ 191 (3,285) (8,114) (975) 4,673 (1,669) 1,077
Extraordinary loss...... (671) -- -- -- (7,998) (6,800) (3,557)
Net income (loss)....... $ (480) $ (4,245) $ (8,114) $ (975) $ (3,325) $ (8,469) $ (2,480)
Net loss applicable to
common share holders... $ (510) $ (4,245) $(10,768) $ (6,279) $ (6,267) $ (10,055) $ (3,926)
Earnings (Loss) Per
Share Before
Extraordinary Loss:
Basic.................. $ 0.03 $ (0.64) $ (1.89) $ (1.08) $ 0.18 $ (0.36) $ (0.03)
Diluted................ $ 0.03 $ (0.64) $ (1.89) $ (1.08) $ 0.16 $ (0.36) $ (0.03)
Weighted-Average Number
of Shares Outstanding:
Basic.................. 5,100 5,100 5,688 5,815 9,732 8,937 11,857
Diluted................ 5,100 5,100 5,688 5,815 11,012 8,937 11,857
Other Financial Data:
EBITDA.................. $ 21,081 $ 21,541 $ 15,626 $ 20,275 $ 60,501 $ 21,267 $ 38,370
Net cash provided by
(used in):
Operating activities... $ (4,120) $ 11,903 $ 5,415 $ 7,338 $ 48,032 $ 17,652 $ 13,405
Investing activities... (10,612) (15,281) (7,204) (25,079) (286,493) (163,153) (151,288)
Financing activities... 25,955 (950) (3,872) 15,750 269,518 170,698 128,478
Capital expenditures.... 9,862 32,250 11,134 16,577 48,356 20,462 26,507
Store Operating Data:
Number of stores (end of
period)................ 406 403 379 390 954 883 1,149
Average sales per store:
Merchandise sales...... $ 460.4 $ 462.7 $ 481.1 $ 525.8 $ 533.3 $ 304.2 $ 304.3
Gasoline gallons (in
thousands)............ 423.7 440.3 450.0 501.2 603.9 329.2 397.5
Comparable store sales
growth:
Merchandise............ 1.3% (0.8)% 2.8% 8.5% 5.3% 4.4% 11.4%
Gasoline gallons....... 2.8% 0.5% (4.3)% 7.2% 4.8% 5.8% 6.8%
Operating Data:
Merchandise gross
margin................. 34.9% 34.9% 33.0% 34.4% 34.0% 34.5% 32.6%
Gasoline gallons sold
(in millions).......... 158.5 160.3 160.7 179.4 466.8 189.3 365.3
Average retail gasoline
price per gallon....... $ 1.10 $ 1.17 $ 1.20 $ 1.23 $ 1.09 $ 1.14 $ 0.99
Average gasoline gross
profit per gallon...... $ 0.136 $ 0.162 $ 0.156 $ 0.128 $ 0.134 $ 0.134 $ 0.127
Store expenses as a
percentage of sales.... 14.4% 14.8% 15.0% 14.1% 14.2% 14.9% 14.1%
General and
administrative expenses
as a percentage of
sales.................. 4.9% 4.8% 4.6% 3.9% 3.3% 3.7% 3.3%
Operating income as a
percentage of sales.... 3.0% 2.7% 0.5% 2.5% 3.2% 2.3% 3.0%
Balance Sheet Data (end
of period):
Working capital
(deficiency)........... $ 6,652 $ (761) $ (6,513) $ (8,245) $ (8,983) $ 862 $ (34,836)
Total assets............ 124,015 127,720 120,880 142,799 554,828 397,995 722,930
Total debt and capital
lease obligations...... 102,382 101,798 101,431 101,302 340,683 271,473 472,446
Shareholders' equity
(deficit).............. (12,087) (16,332) (27,547) (17,873) 39,304 10,517 36,446
</TABLE>
25
<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:
The Initial Public Offering of our Common Stock:
The net proceeds from the sale of 6,250,000 shares of our common stock
at an assumed price of $16.00 per share are estimated to be $92.0 million,
after deducting the underwriting discount and estimated offering expenses
payable by us. The pro forma financial data assumes the net proceeds of the
offering are used to repay indebtedness under our bank credit facility of
$19.0 million, to redeem our outstanding preferred stock of $17.5 million and
pay accrued dividends of $5.8 million, with the remaining $49.7 million
available to make acquisitions during the nine months following the offering.
Fiscal 1998 Acquisitions:
<TABLE>
<CAPTION>
Number
of
Date Acquired Company Trade Name Locations Stores
---------------- ------------------------------ ---------- ----------------------- ------
<C> <C> <C> <S> <C>
Central North Carolina,
July 15, 1998 Stallings Oil Company, Inc. Zip Mart Virginia 42
July 2, 1998 Quick Stop Food Mart, Inc. Quick Stop Southeast North
Carolina, Coastal South
Carolina 75
May 2, 1998 United Fuels Corporation, Inc. Sprint Gainesville, Florida 10
March 19, 1998 Wooten Oil Company, Inc. Kwik Mart Eastern North Carolina 23
October 23, 1997 Lil' Champ Food Stores, Inc. Lil' Champ Northeast Florida 440(a)
</TABLE>
- --------
(a) Net of the disposition of 48 convenience stores located throughout eastern
Georgia.
The approximate cost of the 1998 acquisitions and the sources of funding
are as follows:
<TABLE>
<CAPTION>
Company Acquisition Cost Funding Sources
------------------- ---------------- --------------------------------------
(in thousands)
<C> <C> <S>
Stallings Oil $29,300 Proceeds of $25.0 million from our
1998 bank credit facility and cash on
hand
Quick Stop 56,000 Proceeds of $25.0 million from the
sale of 43,478 shares of our common
stock to existing shareholders, $25.0
million from our 1998 bank credit
facility and cash on hand
United Fuels 21,900 Proceeds of $19.0 million from our
1998 bank credit facility and cash on
hand
Wooten Oil 9,000 Proceeds of $9.0 million from our 1998
bank credit facility
Lil' Champ 136,400 Proceeds from the issuance of $200.0
million of senior subordinated notes
</TABLE>
26
<PAGE>
Fiscal 1998 Financing Transactions:
. October 23, 1997--we issued $200.0 million of senior subordinated
notes at an interest rate of 10.25%
. 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 Trade Name Locations Stores
----------------- -------------------------- ------------ ------------------------ ------
<C> <C> <C> <S> <C>
February 25, 1999 Taylor Oil Company ETNA North Carolina, Virginia 60
January 28, 1999 Miller Enterprises, Inc. Handy Way North-central Florida 121
and affiliates (a)
Southeast North
November 5, 1998 Express Stop, Inc. Express Stop Carolina, Eastern
South Carolina 22
East-central North
October 22, 1998 A.G. Lee Oil Company, Inc. Dash-N Carolina 10
</TABLE>
- --------
(a) Including certain real estate assets of Miller Brothers and Circle
Investments, Ltd., including land and buildings leased to and used in the
convenience store operations of Miller Enterprises, Inc.
The approximate cost of the 1999 acquisitions and the sources of funding
are as follows:
<TABLE>
<CAPTION>
Company Acquisition Cost Funding Sources
--------------------------------- ---------------- -------------------------
(in thousands)
<C> <C> <S>
Taylor Oil $23,250 Proceeds of $19.0 million
from our 1999 bank credit
facility and cash on hand
Miller Enterprises and affiliates 95,100 Proceeds of $95.0 million
from our 1999 bank credit
facility and cash on hand
Express Stop 21,800 Proceeds of $16.0 million
from our 1998 bank credit
facility and cash on hand
A.G. Lee Oil 3,750 Cash on hand
</TABLE>
Fiscal 1999 Financing Transactions:
. January 28, 1999--we entered into a new bank credit facility and used
the proceeds of $245.0 million plus cash on hand to:
.repay $94.0 million of existing debt under our 1998 bank credit
facility
. redeem $49.0 million of outstanding senior notes and pay $2.0
million of related premium costs
.finance $95.0 million of the Miller Enterprises and affiliates
acquisition price and
.pay related fees and accrued and unpaid interest
. The 1999 bank credit facility repaid and replaced the 1998 bank
credit facility and is comprised of $80.0 million Tranche A and
$160.0 million Tranche B term loans, a $45.0 million revolving credit
facility and a $50.0 million acquisition facility.
. February 25, 1999--we borrowed $19.0 million on our 1999 revolving
credit facility and used the proceeds plus cash on hand to finance
the purchase price of the Taylor Oil acquisition.
27
<PAGE>
Pro Forma Adjustments:
The unaudited pro forma balance sheet gives effect to the offering of our
common stock and the repayment of $19.0 million of our long-term debt. The
fiscal 1998 and 1999 transactions are reflected in our historical unaudited
balance sheet as of March 25, 1999.
The unaudited pro forma statement of operations for the six months ended
March 25, 1999 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 six-month period. The
periods for which the fiscal 1999 acquisitions have been included in the pro
forma statement of operations are as follows:
. Taylor Oil--the five-month period from October 1, 1998 through
February 24, 1999
. Miller Enterprises--the four-month period from October 1, 1998
through January 28, 1999
. Express Stop--the one-month period from October 1, 1998 through
October 31, 1998
. A.G. Lee Oil--the one-month period from October 1, 1998 through
October 22, 1998
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 1999
financing transactions as if such events occurred at the beginning of fiscal
1998. The periods for which the fiscal 1998 and 1999 acquisitions have been
included in the pro forma statement of operations are as follows:
1998 Acquisitions and Disposition:
. Stallings Oil--the nine-month period from October 1, 1997 through
June 30, 1998
. Quick Stop--the nine-month period from October 1, 1997 through June
30, 1998
. United Fuels--the six-month period from October 1, 1997 through March
31, 1998
. Wooten Oil--the five-month period from October 1, 1997 through
February 28, 1998
. Lil' Champ--the one-month period from September 28, 1997 through
October 23, 1997
. Lil' Champ disposition--the disposition of 48 convenience stores
located throughout eastern Georgia for the eleven-month period from
October 25, 1997 through August 31, 1998
1999 Acquisitions:
. Taylor Oil--the twelve-month period from January 1, 1998 through
December 31, 1998
. Miller Enterprises--the twelve-month period from October 1, 1997
through September 30, 1998
. Express Stop--the twelve-month period from October 1, 1997 through
September 30, 1998
. A.G. Lee Oil--the twelve-month period from October 1, 1997 through
September 30, 1998
28
<PAGE>
In connection with the Stallings Oil and Express Stop acquisitions, we
did not acquire certain operations of these entities, relating primarily to a
truckstop owned, operated and retained by Stallings Oil, and equity in earnings
of certain affiliates of Express Stop, Inc.
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 the following immaterial acquired
entities were not audited or reviewed by independent public accountants. The
information relating to these immaterial acquired entities is generally based
on internal financial statements prepared by the entity:
. Wooten Oil
. United Fuels
. A.G. Lee Oil
29
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET DATA
March 25, 1999
<TABLE>
<CAPTION>
The Pantry IPO Total
March 25, 1999 Adjustments Pro Forma
-------------- ----------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.. $ 24,999 $49,663(b) $ 74,662
Receivables, net........... 14,829 -- 14,829
Inventories................ 61,378 -- 61,378
Income taxes receivable.... 4,581 -- 4,581
Prepaid expenses........... 2,634 -- 2,634
Property held for sale..... 82 -- 82
Deferred income taxes...... 4,133 -- 4,133
-------- ------- --------
Total current assets..... 112,636 49,663 162,299
-------- ------- --------
Property and equipment, net.. 405,727 -- 405,727
Other assets:
Goodwill, net.............. 169,431(a) -- 169,431
Deferred lease cost, net... 247 -- 247
Deferred financing cost,
net....................... 13,130 -- 13,130
Environmental receivables,
net....................... 12,732 -- 12,732
Other...................... 9,027 -- 9,027
-------- ------- --------
Total other assets....... 204,567 -- 204,567
-------- ------- --------
Total assets........... $722,930 $49,663 $772,593
======== ======= ========
</TABLE>
See Notes to Unaudited Pro Forma Balance Sheet Data
30
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET DATA
March 25, 1999
<TABLE>
<CAPTION>
The Pantry
March 25, IPO Total
1999 Adjustments Pro Forma
---------- ----------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term debt....... $ 5,431 $ -- $ 5,431
Current maturities of capital lease
obligations............................... 1,240 -- 1,240
Accounts payable........................... 74,245 -- 74,245
Accrued expenses........................... 66,556 -- 66,556
-------- -------- --------
Total current liabilities................. 147,472 -- 147,472
-------- -------- --------
Senior subordinated notes.................. 200,000 -- 200,000
1999 bank credit facility.................. 252,629 (19,000)(b) 233,629
Other long-term debt....................... 1,648 -- 1,648
-------- -------- --------
Total long-term debt...................... 454,277 (19,000) 435,277
-------- -------- --------
Other non-current liabilities:
Environmental reserve...................... 17,185 -- 17,185
Capital lease obligations.................. 11,498 -- 11,498
Employment obligations..................... 749 -- 749
Accrued dividends on preferred stock....... 5,837 (5,837)(b) --
Deferred income taxes...................... 23,414 -- 23,414
Other non-current liabilities.............. 26,052 -- 26,052
-------- -------- --------
Total other non-current liabilities....... 84,735 (5,837) 78,898
-------- -------- --------
Shareholders' equity:
Preferred stock............................ -- -- --
Common stock............................... 119 62 (b) 181
Additional paid-in capital................. 70,727 91,938 (b) 145,165
(17,500)(b)
Shareholder loans.......................... (937) -- (937)
Retained deficit........................... (33,463) -- (33,463)
-------- -------- --------
Total shareholders' equity................ 36,446 74,500 110,946
-------- -------- --------
Total liabilities and shareholders'
equity................................... $722,930 $ 49,663 $772,593
======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Balance Sheet Data
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET DATA
(dollars in thousands except per share amounts)
(a) The 1998 and 1999 acquisitions have been accounted for using the purchase
method of accounting. Purchase price allocations for the Lil' Champ
acquisition, the Wooten Oil acquisition and the United Fuels acquisition
have been finalized. Purchase price allocations for all other 1998 and 1999
acquisitions have not been finalized and are based on available
information, internal estimates 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 at 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 been allocated to the net assets acquired based on preliminary
estimates. 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 pending the completion of appraisals
and other purchase price adjustments.
The purchase price of the Miller Enterprises and affiliates acquisition is
subject to certain working capital and capital expenditure adjustments
pending the completion of a closing balance sheet audit of Miller
Enterprises as of January 28, 1999.
In the Express Stop acquisition, $2,500 of the purchase price was subject
to an escrow agreement until March 1999, and was to be forfeited upon the
occurrence of specific events or conditions relating to the operations of
video poker machines in South Carolina. The events or conditions specified
in the purchase agreement did not occur, and the $2,500 held in escrow was
paid to Express Stop in March 1999.
(b) Reflects estimated net proceeds of $92,000 from the offering of 6,250,000
shares of our common stock at the assumed offering price of $16.00 per
share. Also reflects the application of such proceeds to repay outstanding
indebtedness under our bank credit facility of $19,000 and redeem preferred
stock of $17,500 and pay accrued dividends of $5,837. The remaining
proceeds of $49,663 from the offering will be invested in short-term
investments pending use for acquisitions. If such amount has not been used
for acquisitions within nine months of the offering, this amount will be
used to repay term loan debt under the 1999 bank credit facility.
32
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
Six Months Ended March 25, 1999
<TABLE>
<CAPTION>
Historical
--------------------------
Six Months
Ended Acquisition
March 25, Fiscal and
1999 1999 Financing IPO Total
The Pantry Acquisitions(a) Adjustments Subtotal Adjustments Pro Forma
---------- --------------- ----------- -------- ----------- ---------
(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales...... $303,962 $ 49,122 $ -- $353,084 $-- $353,084
Gasoline sales......... 360,917 80,645 -- 441,562 -- 441,562
Commissions............ 10,520 757 -- 11,277 -- 11,277
-------- -------- ------- -------- ---- --------
Total revenue......... 675,399 130,524 -- 805,923 -- 805,923
-------- -------- ------- -------- ---- --------
Cost of Sales:
Merchandise............ 204,825 29,666 -- 234,491 -- 234,491
Gasoline............... 314,633 70,450 -- 385,083 -- 385,083
-------- -------- ------- -------- ---- --------
Total cost of sales... 519,458 100,116 -- 619,574 -- 619,574
-------- -------- ------- -------- ---- --------
Gross profit............ 155,941 30,408 -- 186,349 -- 186,349
-------- -------- ------- -------- ---- --------
Store operating
expenses............... 95,215 23,397 (1,507)(c) 118,323 -- 118,323
1,218 (d)
General and
administrative
expenses............... 22,356 2,631 -- 24,987 -- 24,987
Merger integration
costs.................. -- 695 -- 695 -- 695
Stock compensation
charge................. -- 2,029(b) -- 2,029 -- 2,029
Impairment of long-lived
assets................. -- 47 -- 47 -- 47
Depreciation and
amortization........... 17,830 2,036 842 (e) 20,412 -- 20,412
(163)(f)
(133)(g)
-------- -------- ------- -------- ---- --------
Total operating........ 135,401 30,835 257 166,493 -- 166,493
-------- -------- ------- -------- ---- --------
Income from operations.. 20,540 (427) (257) 19,856 -- 19,856
-------- -------- ------- -------- ---- --------
Other Income (Expense):
Interest............... (18,873) (131) (2,743)(h) (21,747) 784 (l) (20,963)
Miscellaneous.......... 128 25 (13)(i) 140 -- 140 (m)
-------- -------- ------- -------- ---- --------
Total other........... (18,745) (106) (2,756) (21,607) 784 (20,823)
-------- -------- ------- -------- ---- --------
Income (loss) before
income taxes........... 1,795 (533) (3,013) (1,751) 784 (967)
Income tax expense
(benefit).............. 718 (508) (911)(j) (701) 314(j) (387)
-------- -------- ------- -------- ---- --------
Net income (loss) before
extraordinary loss..... $ 1,077 $ (25) $(2,102)(k) $ (1,050) $470 $ (580)
======== ======== ======= ======== ==== ========
Earnings (Loss) Per
Share Before
Extraordinary Loss(k):
Basic.................. $ (0.03) $ (0.03)
======== ========
Diluted................ $ (0.03) $ (0.03)
======== ========
Weighted-Average Number
of Shares Outstanding:
Basic.................. 11,857 18,038
======== ========
Diluted................ 11,857 18,038
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations Data
33
<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(n) Acquisitions(o) Adjustments Subtotal Adjustments Pro Forma
------------- -------------- --------------- --------------- --------- ----------- ----------
(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales...... $460,798 $ 75,593 $156,227 $ (402)(i) $ 692,216 $ -- $ 692,216
Gasoline sales......... 509,958 181,814 267,481 (15,823)(i) 943,430 -- 943,430
Commissions............ 14,128 3,633 5,217 (467)(i) 22,511 -- 22,511
-------- -------- -------- -------- --------- ------ ----------
Total revenues....... 984,884 261,040 428,925 (16,692) 1,658,157 -- 1,658,157
-------- -------- -------- -------- --------- ------ ----------
Cost of Sales:
Merchandise............ 303,968 54,219 103,097 (207)(i) 461,077 -- 461,077
Gasoline............... 447,565 161,074 237,327 (13,004)(i) 832,962 -- 832,962
-------- -------- -------- -------- --------- ------ ----------
Total cost of sales.. 751,533 215,293 340,424 (13,211) 1,294,039 -- 1,294,039
-------- -------- -------- -------- --------- ------ ----------
Gross profit............ 233,351 45,747 88,501 (3,481) 364,118 -- 364,118
-------- -------- -------- -------- --------- ------ ----------
Store operating
expenses............... 140,089 27,164 60,021 (3,015)(i) 222,560 -- 222,560
(4,424)(c)
2,725 (d)
General and
administrative
expenses............... 32,761 7,506 11,909 (356)(i) 51,778 -- 51,778
(42)(p)
Merger integration
costs.................. 1,016 -- 261 -- 1,277 -- 1,277
Impairment of long-lived
assets................. -- -- 188 -- 188 -- 188
Depreciation and
amortization........... 27,642 5,189 5,517 (169)(i) 41,259 -- 41,259
3,160 (e)
371 (f)
(451)(g)
-------- -------- -------- -------- --------- ------ ----------
Total operating
expense................ 201,508 39,859 77,896 (2,201) 317,062 -- 317,062
-------- -------- -------- -------- --------- ------ ----------
Income from operations.. 31,843 5,888 10,605 (1,280) 47,056 -- 47,056
-------- -------- -------- -------- --------- ------ ----------
Other Income (Expense):
Interest............... (28,946) (1,687) (430) (12,483)(h) (43,546) 1,568 (l) (41,978)
Miscellaneous.......... 1,776 137 627 (193)(i) 2,347 -- 2,347(m)
-------- -------- -------- -------- --------- ------ ----------
Total other ......... (27,170) (1,550) 197 (12,676) (41,199) 1,568 (39,631)
-------- -------- -------- -------- --------- ------ ----------
Income (loss) before
income taxes........... 4,673 4,338 10,802 (13,956) 5,857 1,568 7,425
Income tax expense...... -- 364 915 1,064 (j) 2,343 627 (j) 2,970
-------- -------- -------- -------- --------- ------ ----------
Net income (loss) before
extraordinary item..... $ 4,673 $ 3,974 $ 9,887 $(15,020)(k) $ 3,514 $ 941 $ 4,455
======== ======== ======== ======== ========= ====== ==========
Earnings Per Share
Before Extraordinary
Loss (k):
Basic.................. $ 0.18 $ 0.28
======== ==========
Diluted................ $ 0.16 $ 0.26
======== ==========
Weighted-Average Number
of Shares Outstanding:
Basic.................. 9,732 15,982
======== ==========
Diluted................ 11,012 17,262
======== ==========
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations Data
34
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
(dollars in thousands)
(a) The fiscal 1999 acquisitions included in the unaudited pro forma statement
of operations for the six months ended March 25, 1999 consist of the
historical financial statements of the following entities:
<TABLE>
<CAPTION>
One-month Four-month Five-month
period period period
October 1, October 1, October 1,
1998 1998 1998
through through through
October January 28, February
31, 1998 1999 24, 1999
---------- ----------- ---------- Total
Express Miller Taylor Other 1999 Fiscal 1999
Stop Enterprises Oil Acquisitions Acquisitions
---------- ----------- ---------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales...... $1,698 $ 36,072 $10,737 $ 615 $49,122
Gasoline sales......... 2,407 45,191 32,012 1,035 80,645
Commissions............ 191 404 104 58 757
------ -------- ------- ------ -------
Total revenue......... 4,296 81,667 42,853 1,708 130,524
------ -------- ------- ------ -------
Cost of Sales:
Merchandise............ 1,232 20,736 7,237 461 29,666
Gasoline............... 2,184 39,608 27,701 957 70,450
------ -------- ------- ------ -------
Total cost of sales... 3,416 60,344 34,938 1,418 100,116
------ -------- ------- ------ -------
Gross profit............ 880 21,323 7,915 290 30,408
------ -------- ------- ------ -------
Store operating
expenses............... 433 17,961 4,754 249 23,397
General and
administrative
expenses............... 105 1,503 1,015 8 2,631
Merger integration
costs.................. -- 695 -- -- 695
Stock compensation
charge................. -- 2,029 -- -- 2,029
Impairment of long-lived
assets................. -- -- 47 -- 47
Depreciation and
amortization........... 61 1,281 685 9 2,036
------ -------- ------- ------ -------
Total operating
expense.............. 599 23,469 6,501 266 30,835
------ -------- ------- ------ -------
Income (loss) from
operations............. 281 (2,146) 1,414 24 (427)
------ -------- ------- ------ -------
Other Income (Expense):
Interest............... (5) (126) -- -- (131)
Miscellaneous.......... 13 2 -- 10 25
------ -------- ------- ------ -------
Total other........... 8 (124) -- 10 (106)
------ -------- ------- ------ -------
Income (loss) before
income taxes........... 289 (2,270) 1,414 34 (533)
Income tax expense
(benefit).............. -- (508) -- -- (508)
------ -------- ------- ------ -------
Net income (loss) before
extraordinary item..... $ 289 $ (1,762) $ 1,414 $ 34 $ (25)
====== ======== ======= ====== =======
</TABLE>
(b) On January 26, 1999, in anticipation of its acquisition by The Pantry,
Miller Enterprises redeemed 18,502 shares of its restricted stock. In
connection with this redemption of stock, Miller Enterprises recognized a
charge to compensation expense of $2,029 for the period October 1, 1998
through January 28, 1999. This non-recurring charge is not reflective of
The Pantry's continuing operations after the Miller acquisition and would
not have been incurred by The Pantry had it owned Miller Enterprises as of
the beginning of fiscal 1998.
(c) Historically, Miller Enterprises incurred rental expense related to stores
leased from its affiliates. These stores were acquired by us in connection
with the Miller Enterprises acquisition and all leases with Miller
Enterprises affiliates were terminated. As a result, rental expenses of
$1,507 for the six months ended March 25, 1999 and $4,424 for the year
ended September 24, 1998 have been eliminated.
35
<PAGE>
(d) Reflects an increase in store rental expense of $1,218 for Taylor Oil for
the six months ended March 25, 1999 and $288 for Quick Stop and $2,437 for
Taylor Oil for the year ended September 24, 1998 in connection with an
obligation to lease certain stores from the former owners of Quick Stop
and Taylor Oil at current market values at the dates of acquisition. The
rent increases were effective concurrent with the Quick Stop acquisition,
which occurred on July 2, 1998, and the Taylor Oil acquisition, which
occurred on February 25, 1999.
(e) The 1998 and 1999 acquisitions have been accounted for using the purchase
method of accounting. Purchase price allocations for the Lil' Champ
acquisition, the Wooten Oil acquisition and the United Fuels acquisition
have been finalized. Purchase price allocations for all other 1998 and
1999 acquisitions have not been finalized and are based on available
information, internal estimates 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 at 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 been allocated to the net assets acquired based on preliminary
estimates. 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 pending the completion of appraisals
and other purchase price adjustments.
The purchase price of the Miller Enterprises and affiliates acquisition is
subject to certain working capital and capital expenditure adjustments
pending the completion of a closing balance sheet audit of Miller
Enterprises as of January 28, 1999.
In the Express Stop acquisition, $2,500 of the purchase price was subject
to an escrow agreement until March 1999, and was to be forfeited upon the
occurrence of specific events or conditions relating to the operations of
video poker machines in South Carolina. The events or conditions specified
in the purchase agreement did not occur, and the $2,500 million held in
escrow was paid to Express Stop in March 1999.
The following table summarizes the additional amortization expense to be
incurred in connection with the various 1998 and 1999 transactions
described above:
<TABLE>
<CAPTION>
Estimated Six Months Ended Year Ended
Recorded Useful Life March 25, September 24,
Acquisitions Goodwill (in years) 1999 1998
------------ -------- ----------- ---------------- -------------
<S> <C> <C> <C> <C>
1998 acquisitions:
Lil' Champ............. $ 42,622 30 $-- $ 118
Wooten Oil............. 126 30 -- --
United Fuels........... 7,386 30 -- 123
Quick Stop............. 35,928 30 -- 898
Stallings Oil.......... 15,505 30 -- 388
1999 acquisitions:
A.G. Lee Oil........... 355 30 12
Express Stop........... 12,163 30 203 405
Miller Enterprises and
affiliates............ 25,000 30 417 833
Taylor Oil............. 13,300 30 222 443
-------- ---- ------
$152,385 842 3,220
========
Less historical recorded
predecessor amounts.... -- 60
---- ------
Adjustment.............. $842 $3,160
==== ======
</TABLE>
36
<PAGE>
(f) 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 Six Months Ended Year Ended
Equipment Useful Life March 25, September 24,
Acquisitions Acquired (in years) 1999 1998
------------ ------------- ----------- ---------------- -------------
<S> <C> <C> <C> <C>
1998 acquisitions:
Lil' Champ............. 155,382 10-35 $ -- $ 985
Wooten Oil............. 7,600 10 -- 317
United Fuels........... 15,400 10 -- 770
Quick Stop............. 15,000 10-35 -- 1,125
Stallings Oil.......... 10,313 10-35 -- 773
Georgia stores
disposition........... -- -- (516)
1999 acquisitions:
A.G. Lee Oil........... 2,500 10 63 250
Express Stop........... 7,095 10 118 711
Miller Enterprises and
affiliates............ 79,335 10-35 2,934 5,867
Taylor Oil............. 4,750 10 198 475
-------- ------ -------
$297,375 3,313 10,757
======== ------ -------
Less historical recorded
amounts................ 3,476 10,386
------ -------
Adjustment.............. $ (163) $ 371
====== =======
</TABLE>
(g) Reflects additional amortization of deferred financing costs resulting from
entering into our 1999 bank credit facility and the removal of deferred
financing costs associated with the repayment of our 1998 bank credit
facility and the repurchase of our senior notes as follows:
<TABLE>
<CAPTION>
Straight-
Financing line Six Months
Costs Amortization Ended Year Ended
Incurred Period March 25, September 24,
Transaction (Written-off) (in years) 1999 1998
----------- ------------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Issuance of $200 million
senior subordinated
notes and 1998 bank
credit facility........ $14,044 7 $ -- $ 167
Repurchase of $51
million of senior
notes.................. (2,006) 7 -- (24)
Entering into 1999 bank
credit facility........ 3,210 6 269 535
Repurchase of $49
million of outstanding
senior notes and
repayment of 1998 bank
credit facility........ (3,972) 7 (400) (1,129)
----- -------
Adjustment.............. $(133) $ (451)
===== =======
</TABLE>
(h) Reflects additional interest expense in connection with the various 1998
and 1999 financing and acquisitions transactions as follows:
<TABLE>
<CAPTION>
Principal Interest Six Months Ended Year Ended
Borrowed Rate March 25, September 24,
Acquisition/Financing (Retired) (per annum) 1999 1998
--------------------- --------- ----------- ---------------- -------------
<S> <C> <C> <C> <C>
Issuance of senior
subordinated notes..... $200,000 10.25% $ -- $ 1,708
Redemption of senior
notes in Lil' Champ
acquisition............ (51,000) 12.50 -- (531)
1998 acquisitions....... 78,000 8.25 -- 4,187
1999 acquisitions and
proceeds to redeem
outstanding senior
notes ................. 186,000 8.25 4,916 15,361
Redemption of senior
notes from proceeds of
1999 bank credit
facility............... (49,000) 12.50 (2,042) (6,125)
------- -------
Subtotal............... 2,874 14,600
Less historical recorded
amounts related to
indebtedness not
assumed................ 131 2,117
------- -------
Adjustment.............. $ 2,743 $12,483
======= =======
</TABLE>
37
<PAGE>
In connection with the 1998 and 1999 acquisitions, The Pantry did not
assume certain debt obligations of the acquired entities totaling
approximately $54,700 and having interest rates ranging from 5.75% to
8.75%.
The interest rates disclosed above are based on the current weighted-
average interest rates for which The Pantry has an obligation. Assuming a
0.125% increase or decrease in the variable rate bank credit facility,
interest expense, net of taxes, would increase or decrease by $90 for the
six months ended March 25, 1999 and $179 for the year ended September 24,
1998.
(i) Reflects the elimination of certain operations not acquired. These
operations relate to a truckstop owned, operated, and retained by Stalling
Oil and equity in earnings of affiliates of Express Stop which were not
acquired by The Pantry.
<TABLE>
<CAPTION>
Six Months Year Ended
Ended March 25, September 24,
1999 1998
------------------- -----------------
Decrease in expenses (decrease in income)
<S> <C> <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:
Miscellaneous income...... (13) (193)
</TABLE>
(j) Adjusts income tax expense for an assumed tax rate of 40% for each of the
periods presented.
(k) For each period presented, net income (loss) excludes an extraordinary loss
of $3,557 related to the redemption of $48,995 of senior notes and the
amendment of our bank credit facility. In addition, net income (loss)
before extraordinary items for the year ended September 24, 1998 excludes
an extraordinary loss of $7,998 incurred related to the costs of the
redemption of $51,000 of senior notes.
(l) Reflects the application of net proceeds of approximately $19,000 to repay
outstanding indebtedness at the weighted-average rate of 8.25%.
(m) Does not reflect interest income of $1,093 for the six months ended March
25, 1999 and $2,185 for the year ended September 24, 1998 from investment
of the estimated remaining offering proceeds of $49,663 at an assumed
interest rate of 4.4%.
38
<PAGE>
(n) The fiscal 1998 acquisitions and disposition included in the unaudited pro
forma statement of operations for the year ended September 24, 1998 consist
of the historical financial statements of the following entities:
<TABLE>
<CAPTION>
One-month
period Nine-month Nine-month
September 28, period period
1997 through October 1, 1997 October 1, 1997
October 23, through through
1997 June 30, 1998 June 30, 1998 Other 1998 Total 1998
------------- --------------- --------------- Acquisitions/ Acquisitions/
Lil' Champ Quick Stop Stallings Oil Disposition Disposition
------------- --------------- --------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales...... $17,752 $ 45,623 $ 20,029 $(7,811) $ 75,593
Gasoline sales......... 21,397 69,277 88,452 2,688 181,814
Commissions............ 570 2,278 1,806 (1,021) 3,633
------- -------- -------- ------- --------
Total revenue......... 39,719 117,178 110,287 (6,144) 261,040
------- -------- -------- ------- --------
Cost of Sales:
Merchandise............ 11,421 34,108 14,357 (5,667) 54,219
Gasoline............... 18,682 62,691 78,289 1,412 161,074
------- -------- -------- ------- --------
Total cost of sales... 30,103 96,799 92,646 (4,255) 215,293
------- -------- -------- ------- --------
Gross profit............ 9,616 20,379 17,641 (1,889) 45,747
------- -------- -------- ------- --------
Store operating
expenses............... 5,957 12,029 12,784 (3,606) 27,164
General and
administrative
expenses............... 1,698 2,771 1,334 1,703 7,506
Depreciation and
amortization........... 952 2,233 2,029 (25) 5,189
------- -------- -------- ------- --------
Total operating
expense.............. 8,607 17,033 16,147 (1,928) 39,859
------- -------- -------- ------- --------
Income from operations.. 1,009 3,346 1,494 39 5,888
------- -------- -------- ------- --------
Other Income (Expense):
Interest............... (121) (497) (1,055) (14) (1,687)
Miscellaneous.......... -- 137 -- -- 137
------- -------- -------- ------- --------
Total other expense... (121) (360) (1,055) (14) (1,550)
------- -------- -------- ------- --------
Income before income
taxes.................. 888 2,986 439 25 4,338
Income tax expense
(benefit).............. 364 -- -- -- 364
------- -------- -------- ------- --------
Net income before
extraordinary item..... $ 524 $ 2,986 $ 439 $ 25 $ 3,974
======= ======== ======== ======= ========
</TABLE>
39
<PAGE>
(o) The fiscal 1999 acquisitions included in the unaudited pro forma statement
of operations for the year ended September 24, 1998 consist of the
historical financial statements of the following entities:
<TABLE>
<CAPTION>
Twelve-month Twelve-month Twelve-month
period period period
October October January
1, 1997 1, 1997 1, 1998
through through through
September September December 31,
30, 1998 30, 1998 1998
------------ ------------ ------------
Total
Miller Other 1999 Fiscal 1999
Express Stop Enterprises Taylor Oil Acquisitions Acquisitions
------------ ------------ ------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales...... $20,720 $100,338 $ 25,587 $ 9,582 $156,227
Gasoline sales......... 27,736 139,734 83,054 16,957 267,481
Commissions............ 2,209 1,988 267 753 5,217
------- -------- -------- ------- --------
Total revenue......... 50,665 242,060 108,908 27,292 428,925
------- -------- -------- ------- --------
Cost of Sales:
Merchandise............ 15,747 63,387 17,022 6,941 103,097
Gasoline............... 24,765 124,258 72,856 15,448 237,327
------- -------- -------- ------- --------
Total cost of sales... 40,512 187,645 89,878 22,389 340,424
------- -------- -------- ------- --------
Gross profit............ 10,153 54,415 19,030 4,903 88,501
------- -------- -------- ------- --------
Store operating
expenses............... 5,284 40,173 11,135 3,429 60,021
General and
administrative
expenses............... 968 8,442 1,926 573 11,909
Merger integration
costs.................. -- 261 -- -- 261
Impairment of long-lived
assets................. -- -- 188 -- 188
Depreciation and
amortization........... 788 3,214 1,400 115 5,517
------- -------- -------- ------- --------
Total operating
expense.............. 7,040 52,090 14,649 4,117 77,896
------- -------- -------- ------- --------
Income from operations.. 3,113 2,325 4,381 786 10,605
------- -------- -------- ------- --------
Other Income (Expense):
Interest............... (116) (305) -- (9) (430)
Miscellaneous.......... 181 356 -- 90 627
------- -------- -------- ------- --------
Total other .......... 65 51 -- 81 197
------- -------- -------- ------- --------
Income (loss) before
income taxes........... 3,178 2,376 4,381 867 10,802
Income tax expense
(benefit).............. -- 915 -- -- 915
------- -------- -------- ------- --------
Net income (loss) before
extraordinary item..... $ 3,178 $ 1,461 $ 4,381 $ 867 $ 9,887
======= ======== ======== ======= ========
</TABLE>
(p) 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.
40
<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.
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. 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 of our stores. We have a contract with McLane until 2003.
Although we believe there are adequate alternative supply sources, a change of
suppliers, especially McLane, could have a material adverse affect on our cost
of goods and results of operations.
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.
41
<PAGE>
The table below provides information concerning the eleven largest
acquisitions we have completed since fiscal 1996:
<TABLE>
<CAPTION>
Number of
Date Acquired Company Trade Name Locations Stores
----------------- ------------------------------ ------------ -------------------------------- ---------
<C> <C> <S> <C> <C>
February 25, 1999 Taylor Oil Company ETNA North Carolina, Virginia 60
January 28, 1999 Miller Enterprises, Inc. Handy Way North-central Florida 121
November 5, 1998 Express Stop, Inc. Express Stop Southeast North Carolina, 22
Eastern South Carolina
October 22, 1998 A.G. Oil Company, Inc. Dash-N East-central North Carolina 10
July 15, 1998 Stallings Oil Company, Inc. Zip Mart Central North Carolina, Virginia 42
July 2, 1998 Quick Stop Food Mart, Inc. Quick Stop Southeast North Carolina, 75
Coastal South Carolina
May 2, 1998 United Fuels Corporation, Inc. Sprint Gainesville, Florida 10
March 19, 1998 Wooten Oil Company, Inc. Kwik Mart Eastern North Carolina 23
October 23, 1997 Lil' Champ Food Stores, Inc. Lil' Champ Northeast Florida 440(a)
June 12, 1997 Carolina Ice Company, Inc. Freshway Eastern North Carolina 15
April 17, 1997 Gregorie Oil Co., Inc. 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 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 30.3% and
a decrease in same store operating expenses of 6.6% 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.
42
<PAGE>
Quarterly Results of Operations
The following table presents the unaudited quarterly net sales, gross
profit, operating income, net loss and EBITDA for each of our fiscal quarters
in fiscal 1997, 1998 and 1999. 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>
1997 1998
------------------------------------- -------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- ------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue... $100,331 $95,910 $111,032 $120,120 $195,171 $220,670 $254,577 $314,466
Gross profit.... 22,200 21,291 25,314 28,474 45,365 53,287 60,365 74,334
Income from
operations..... 1,346 484 3,808 5,133 4,877 4,615 10,159 12,192
Net income
(loss)......... (1,383) (1,761) 833 1,336 (6,889)(a) (1,580) 2,509(a) 2,635(a)
Earnings (loss)
per share
before extraordinary
loss:
Basic........... $ (0.28) $ (0.34) $ (0.27) $ (0.19) $ (0.12) $ (0.23) $ 0.16 $ 0.30
Diluted......... $ (0.28) $ (0.34) $ (0.27) $ (0.19) $ (0.12) $ (0.23) $ 0.14 $ 0.27
EBITDA.......... $ 3,609 $ 2,719 $ 6,118 $ 7,829 $ 10,028 $ 11,239 $ 16,909 $ 22,325
EBITDA
margin(c)...... 3.6% 2.8% 5.5% 6.5% 5.1% 5.1% 6.6% 7.1%
<CAPTION>
1997 1998
------------------------------------- -------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- ------- -------- -------- -------- -------- -------- --------
(percent of annual total)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue... 23.5% 22.4% 26.0% 28.1% 19.8% 22.4% 25.8% 32.0%
Gross profit.... 22.8% 21.9% 26.0% 29.3% 19.4% 22.8% 25.9% 31.9%
Income from
operations..... 12.5% 4.5% 35.3% 47.7% 15.3% 14.5% 31.9% 38.3%
EBITDA.......... 17.8% 13.4% 30.2% 38.6% 16.6% 18.6% 27.9% 36.9%
<CAPTION>
1999
----------------------
Q1 Q2
--------- ------------
<S> <C> <C> <C> <C>
Total revenue... $315,607 $359,792
Gross profit.... 72,380 83,561
Income from
operations..... 10,493 10,047
Net income
(loss)......... 1,065 (3,545)(b)
Earnings (loss)
per share
before extraordinary
loss:
Basic........... $ 0.03 $ (0.06)
Diluted......... $ 0.03 $ (0.06)
EBITDA.......... $ 18,683 $ 19,687
EBITDA
margin(c)...... 5.9% 5.5%
<CAPTION>
<S> <C> <C> <C> <C>
Total revenue...
Gross profit....
Income from
operations.....
EBITDA..........
</TABLE>
- -------
(a) Includes extraordinary loss of $6,800 in Q1, an extraordinary gain of $289
in Q3 and an extraordinary loss of $1,487 in Q4 related to the repayment of
$51 million of our senior notes. Also included in Q4 is a charge of $1,016
relating to our formal plan to integrate the acquired businesses of
Lil' Champ with our operations.
(b) Includes an extraordinary loss of $3,557 in Q2 in connection with the
issuance of our 1999 bank credit facility and the retirement of $49.0
million of our outstanding senior notes.
(c) EBITDA margin represents EBITDA, as defined, as a percentage of total
revenue.
43
<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 Six Months Ended
------------------------------ ---------------------
Sept. Sept. Sept. March 26, March 25,
26, 1996 25, 1997 24, 1998 1998 1999
-------- -------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales..... $188,091 $202,440 $460,798 $193,765 $303,962
Gasoline sales........ 192,737 220,166 509,958 215,718 360,917
Commissions........... 3,979 4,787 14,128 6,358 10,520
-------- -------- -------- -------- --------
Total revenue........... $384,807 $427,393 $984,884 $415,841 $675,399
======== ======== ======== ======== ========
Gross profit............ $ 91,218 $ 97,279 $233,351 $ 98,652 $155,941
Total operating
expenses............... 80,186 77,004 173,866 77,385 117,571
Depreciation and
amortization........... 9,158 9,504 27,642 11,775 17,830
-------- -------- -------- -------- --------
Income from operations.. $ 1,874 $ 10,771 $ 31,843 $ 9,492 $ 20,540
======== ======== ======== ======== ========
Net income (loss)....... $ (8,114) $ (975) $ (3,325) $ (8,469) $ (2,480)
======== ======== ======== ======== ========
<CAPTION>
Fiscal Year Ended Six Months Ended
------------------------------ ---------------------
Sept. Sept. Sept. March 26, March 25,
26, 1996 25, 1997 24, 1998 1998 1999
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales..... 48.9 % 47.4 % 46.8 % 46.6 % 45.0 %
Gasoline sales........ 50.1 51.5 51.8 51.9 53.4
Commissions........... 1.0 1.1 1.4 1.5 1.6
-------- -------- -------- -------- --------
Total revenue........... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
======== ======== ======== ======== ========
Gross profit............ 23.7 % 22.7 % 23.7 % 23.7 % 23.1 %
Total operating
expenses............... 20.8 18.0 17.7 18.6 17.4
Depreciation and
amortization........... 2.4 2.2 2.8 2.8 2.6
-------- -------- -------- -------- --------
Income from operations.. 0.5 % 2.5 % 3.2 % 2.3 % 3.0 %
======== ======== ======== ======== ========
</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 and the six months ended March 26, 1998 include
results from operations for each of the acquisitions from the date of each
acquisition only. Due to the method of accounting for fiscal 1999 acquisitions,
the consolidated statements of operations for the six months ended March 25,
1999 include the results of operations for each of the fiscal 1999 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 after the last day of each fiscal period. As a result, comparisons to
prior operating results and prior balance sheets are impacted materially.
44
<PAGE>
Six Months Ended March 25, 1999 Compared to the Six Months Ended March 26, 1998
Total Revenue. Total revenue for the six months ended March 25, 1999 was
$675.4 million compared to $415.8 million during the six months ended March 26,
1998, an increase of $259.6 million or 62.4%. The increase in total revenue is
primarily attributable to the revenue from stores acquired or opened since
March 26, 1998 of $213.0 million, as well as an additional month of Lil' Champ
revenue, same store merchandise sales growth of 11.4% and same store gasoline
gallon growth of 6.8%. Our total revenue increase was partially offset by a
lower average retail gasoline price of $0.99 for the six months ended March 25,
1999 compared to $1.14 for the six months ended March 26, 1998.
Merchandise Revenue. Merchandise revenue for the six months ended March
25, 1999 was $304.0 million compared to $193.8 million during the six months
ended March 26, 1998, an increase of $110.2 million or 56.9%. The increase in
merchandise revenue is primarily attributable to the revenue from stores
acquired or opened since March 26, 1998 of $77.5 million, as well as an
additional month of Lil' Champ merchandise revenue and same store merchandise
sales growth. Same store merchandise revenue for the six months ended March 25,
1999 increased 11.4% over the six months ended March 26, 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 focused store merchandising, more competitive
gasoline pricing, enhanced store appearance and increased in-store promotional
activity.
Gasoline Revenue and Gallons. Gasoline revenue for the six months ended
March 25, 1999 was $360.9 million compared to $215.7 million during the six
months ended March 26, 1998, an increase of $145.2 million or 67.3%. The
increase in gasoline revenue is primarily attributable to the revenue from
stores acquired or opened since March 26, 1998 of $132.5 million, as well as an
additional month of Lil' Champ gasoline revenue and same store gallon sales
growth of 6.8%. Gasoline revenue growth was partially offset by a $0.15 or
13.3% decrease in average gasoline retail prices compared to the six months
ended March 26, 1998.
In the six months ended March 25, 1999, gasoline gallons sold were
365.3 million compared to 189.3 million during the six months ended March 26,
1998, an increase of 176.0 million gallons or 93.0%. The increase is primarily
attributable to the gasoline gallons sold by stores acquired or opened since
March 26, 1998 of 136.9 million, as well as an additional month of Lil' Champ
gasoline gallons and same store gallon growth. Same store gasoline gallon sales
for the six months ended March 25, 1999 increased 6.8% over the six months
ended March 26, 1998. The same store gallon increase is primarily attributable
to increased customer traffic resulting from more competitive gasoline pricing,
rebranding and promotional activity, gasoline equipment upgrades, enhanced
store appearance and general economic and market conditions.
Commission Revenue. Commission revenue for the six months ended March 25,
1999 was $10.5 million compared to $6.4 million during the six months ended
March 26, 1998, an increase of $4.1 million or 64.1%. The increase in
commission revenue is primarily attributable to the revenue from stores
acquired or opened since March 26, 1998 of $3.0 million, as well as an
additional month 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.
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Total Gross Profit. Total gross profit for the six months ended March 25,
1999 was $155.9 million compared to $98.7 million for the six months ended
March 26, 1998, an increase of $57.2 million or 58.0%. The increase in gross
profit is primarily attributable to the profits from stores acquired or opened
since March 26, 1998 of $43.7 million, as well as an additional month of Lil'
Champ gross profit and same store profit increases. The total gross profit
increases were achieved despite decreases in our merchandise and gasoline
margins and result from the increase in average revenues and gross profit per
store.
Merchandise Gross Profit and Margin. Merchandise gross profit was $99.1
million for the six months ended March 25, 1999 compared to $66.9 million for
the six months ended March 26, 1998, an increase of $32.2 million or 48.1%.
This increase is primarily attributable to the profits from stores acquired or
opened since March 26, 1998 of $24.5 million, as well as an additional month of
Lil' Champ merchandise gross profit and same store profit increases. The
decline in merchandise gross margin to 32.6% for the six months ended March 25,
1999 from 34.5% for the six months ended March 26, 1998 is attributable to the
addition of stores acquired or opened since March 26, 1998 which, on average,
have lower merchandise margins than The Pantry base stores. In addition, the
impact of product cost increases in tobacco category resulted in lower
merchandise gross margins.
Gasoline Gross Profit and Per Gallon Margin. Gasoline gross profit was
$46.3 million for the six months ended March 25, 1999 compared to $25.4 million
for the six months ended March 26, 1998, an increase of $20.9 million or 82.3%.
This increase is primarily attributable to the profits from stores acquired or
opened since March 26, 1998 of $16.2 million, as well as an additional month of
Lil' Champ gasoline gross profit and same store profit increases. The gasoline
gross profit per gallon was $0.127 for the six months ended March 25, 1999
compared to $0.134 for the six months ended March 26, 1998, a 5.2% decrease in
gasoline margin per gallon.
Store Operating and General and Administrative Expenses. Store operating
expenses for the six months ended March 25, 1999 were $95.2 million compared to
$61.9 million for the six months ended March 26, 1998, an increase of $33.3
million or 53.8%. The increase in store operating expenses is primarily
attributable to the personnel and lease expenses associated with the stores
acquired or opened since March 26, 1998 of $25.8 million, as well as an
additional month of Lil' Champ store operating expenses. As a percentage of
total revenue, store operating expenses decreased to 14.3% in the six months
ended March 25, 1999 from 14.9% in the six months ended March 26, 1998.
General and administrative expenses for the six months ended March 25,
1999 were $22.4 million compared to $15.5 million during the six months ended
March 26, 1998, an increase of $6.9 million or 44.5%. The increase in general
and administrative expenses is attributable to increased administrative
expenses associated with the stores acquired or opened since March 26, 1998 of
$5.1 million, as well as an additional month of Lil' Champ general and
administrative expenses. As a percentage of total revenue, general and
administrative expenses decreased to 3.3% in the six months ended March 25,
1999 from 3.7% in the six months ended March 26, 1998.
Income from Operations. Income from operations was $20.5 million for the
six months ended March 25, 1999 compared to $9.5 million during the six months
ended March 26, 1998, an increase of $11.0 million or 115.8%. This 115.8%
increase in income from operations compares favorably to a 62.4% increase in
total revenues. The increase in operating income was partially offset
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by a $6.1 million increase in depreciation and amortization. The increase in
depreciation and amortization expense is primarily attributed to the
depreciation and amortization of goodwill expense associated with businesses
acquired, as well as increases in depreciation associated with other capital
improvements and the amortization of deferred financing costs. As a percentage
of total revenue, income from operations increased to 3.0% in the six months
ended March 25, 1999 from 2.3% in the six months ended March 26, 1998.
EBITDA. EBITDA represents income from operations before depreciation,
amortization and extraordinary and unusual items. EBITDA for the six months
ended March 25, 1999 was $38.4 million compared to $21.3 million for the six
months ended March 26, 1998, an increase of $17.1 million or 80.3%. 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 our cash flow and historical
ability to service debt and because we believe investors find this information
useful. 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
subordinated notes, borrowings under our bank credit facility and our
previously outstanding senior notes. Interest expense for the six months ended
March 25, 1999 was $18.9 million compared to $12.9 million for the six months
ended March 26, 1998, an increase of $6.0 million or 46.5%. The increase in
interest expense is attributable to a full six months of interest on the senior
subordinated notes and borrowings under our bank credit facility. The interest
expense increase is partially offset by:
. the interest savings associated with the October 23, 1997 redemption
and refinancing of $51.0 million of our 12% senior notes with
proceeds from our senior subordinated notes
. the interest savings associated with the January 28, 1999 redemption
and refinancing of the remaining $49.0 million of our 12% senior
notes; the $49.0 million in principal was refinanced with proceeds
from our bank credit facility at a floating interest rate currently
set at 8.2%
Income Tax Benefit (Expense). The income tax expense for the six months
ended March 25, 1999 was $0.7 million compared to income tax benefit of $0.9
million for the six months ended March 26, 1998. This increase was primarily
attributable to the increase in income before income taxes. Income tax benefit
(expense) is recorded net of a change in 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 six months ended March 25, 1999, we recognized
an extraordinary loss, net of taxes, of approximately $3.6 million in
connection with the January 28, 1999 redemption of the remaining $49.0 million
in outstanding principal amount of our senior notes and the restructuring of
our bank credit facility. The loss was the sum, net of taxes, of a $1.2 million
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call premium and the write-off of deferred financing costs associated with the
senior notes and the bank credit facility of $2.4 million.
In the six months ended March 26, 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 covenants contained in the indenture.
The senior notes indenture contained covenants including restrictions on The
Pantry's ability to incur additional debt and to make acquisitions. 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 set forth below.
Net Loss. The net loss for the six months ended March 25, 1999 was $2.5
million compared to a net loss of $8.5 million for the six months ended March
26, 1998. In the six months ended March 25, 1999 and March 26, 1998, we
recognized extraordinary losses as discussed above. The Pantry's income before
extraordinary loss was $1.1 million for the six months ended March 25, 1999
compared to a loss of $1.7 million during the six months ended March 26, 1998,
an increase of $2.8 million.
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
$451.4 million for the eleven month period ended September 24, 1998, the
revenue from stores acquired or opened in fiscal 1998 of $92.2 million, a full
year of revenue from stores acquired or opened in fiscal 1997, same store
merchandise sales growth of 5.3% and same store gasoline gallon sales growth of
4.8%.
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 127.7%. The increase in merchandise revenue is primarily
attributable to Lil' Champ merchandise revenue of $212.2 million for the eleven
month period ended September 24, 1998, the revenue from stores acquired or
opened in fiscal 1998 of $30.5 million, a full year of revenue from stores
acquired or opened in fiscal 1997 and same store 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 $231.7 million for the eleven month period
ended September 24, 1998, the revenue from stores acquired or opened in fiscal
1998 of $61.1 million, 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 or 11.4% lower than in fiscal 1997. The decrease in average retail
price is primarily attributable to lower wholesale gasoline pricing.
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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%, 204.9 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 193.8%. The increase in commission revenue is primarily attributable to Lil'
Champ revenue of $7.5 million for the eleven month period ended September 24,
1998 and revenue from stores acquired or opened in fiscal 1998 of $0.5 million.
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 $108.5 million for the eleven month period ended September 24,
1998, the gross profit from stores acquired or opened in fiscal 1998 of $15.7
million, 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 4.0 basis
points despite cost inflation in the tobacco category.
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
more favorable retail price and wholesale cost 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 $65.0 million for
the eleven month period ended September 24, 1998, the operating and lease
expenses associated with the stores acquired or opened in fiscal 1998 of $9.6
million and a full year of 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
95.2%. 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.
Merger Integration Costs. In connection with the Lil' Champ acquisition,
we incurred merger integration costs of approximately $1.0 million related to
the combination of our existing business with the acquired business of Lil'
Champ. These costs include $0.3 million related to the relocation of personnel,
$0.6 million related to the provision for duplicated contracted services that
provide no future economic benefit and $0.1 million for other consolidation and
related expenses.
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Income from Operations. Income from operations for fiscal 1998 was $31.8
million compared to $10.8 million for fiscal 1997, an increase of $21.0 million
or 194.4%. The increase is primarily attributable to Lil' Champ income from
operations of $16.7 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 operating 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 198.0%. 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
122.3%. 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 provide for operating loss carryforwards and available
tax credits based on estimated future earnings and for temporary differences
based on expected timing of reversals. In fiscal 1998, the valuation allowance
increased $620,000, which resulted primarily from the allowance for 1998
federal net operating loss benefits, offset by a $1.2 million allowance
adjustment related to state net economic losses.
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
extraordinary item relates to the purchase of $51.0 million in principal amount
of senior notes and includes the tender offer costs of $5.1 million, the
consent solicitation costs of $0.9 million, and the write-off of a respective
portion of recorded deferred financing costs of $2.0 million. The extraordinary
item also reflects an income tax benefit of approximately $1.2 million.
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 230.0%. 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.
The Pantry's income before extraordinary loss was $4.7 million for fiscal 1998
compared to a loss of $1.0 million during fiscal 1997, an increase of $5.7
million. The income before extraordinary loss for fiscal 1998 represents an
increase of $12.8 million over fiscal year 1996.
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
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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 $27.5
million or 14.3%, 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, less favorable
conditions in the wholesale and retail gasoline markets 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 18.7 million gallons or 11.6%. 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 20.0% 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 6.7%
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 4.2%, 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 $0.8 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 $17.8 million in fiscal 1996, a decrease of $1.0 million, or 6.0%.
The decrease in both total dollar 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 4.6% in fiscal 1996.
Restructuring Charges. As a result of the change in ownership that
occurred during fiscal 1996, The Pantry restructured its corporate offices.
These charges included $0.8 million for involuntary termination benefits paid
to 58 employees and $0.8 million for the termination of the
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former chairman and chief executive officer's employment agreement, including
related expenses. These amounts were expended during 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 468.4%. The increase is attributable to the items discussed above, as well
as nonrecurring restructuring charges of $1.6 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 $15.6
million in fiscal 1996, an increase of $4.7 million or 30.1%, 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 8.3%,
due to a temporary interest rate increase on our senior notes from 12% to 12
1/2% and 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. For the twelve months ended December 26, 1997, the
Pantry's consolidated fixed charge coverage ratio fell below 1.63 to 1, as
required in the senior notes indenture, resulting in an increase in the
interest rate on the senior notes from 12% to 12 1/2%. On June 26, 1998, the
Pantry exceeded the coverage ratio requirement and the interest rate was
changed back to 12%.
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 to provide for operating
loss carryforwards and available tax credits based on estimated future earnings
and for temporary differences based on expected timing of reversals. In 1997,
the valuation allowance increased $325,000.
Net Loss. Net loss for fiscal 1997 was $1.0 million compared to $8.1
million for fiscal 1996, 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 $1.6 million and charges for impairment of long-lived
assets of $3.0 million in fiscal 1996 not present in fiscal 1997. The Pantry's
loss before extraordinary loss was $1.0 million for fiscal 1997 compared to a
loss of $8.1 million during fiscal 1996, an improvement of $7.1 million.
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
decreased from $17.7 million for the six months ended March 26, 1998 to $13.4
million for the six months ended March 25, 1999, due to increases in inventory
and receivables and a decrease in accrued interest. We had $25.0 million of
cash and cash equivalents on hand at March 25, 1999.
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1998 Acquisitions and Disposition. In fiscal 1998 we acquired a total of
641 convenience stores in eight transactions for approximately $254.3 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
connection with the Lil' Champ acquisition we sold 48 Lil' Champ convenience
stores, representing all of our convenience store operations and idle property
in Georgia. The sale was completed September 1, 1998. As required by SFAS No.
121, these assets were measured at fair value less costs to sell during the
allocation period following the consummation date of the acquisition.
Accordingly, no gain or loss was recorded on disposition.
1999 Acquisitions. To date in fiscal 1999, we have acquired a total of
214 convenience stores in five transactions for approximately $145.6 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 $20.5 million in the six months ended March
26, 1998 and approximately $26.5 million in the six months ended March 25,
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 our capital expenditures and new store development through
cash flow from operations, a sale-leaseback program or similar lease activity,
vendor reimbursements and asset dispositions. Our sale-leaseback program
includes the packaging of our owned convenience store real estate, both land
and buildings, for sale to investors in return for their agreement to leaseback
the property to The Pantry under long-term leases. Generally, the leases are
operating leases at market rates with terms of twenty years with four five-year
renewal options. The lease payment is based on market rates ranging from 10.5%
to 11.5% applied to the cost of each respective property. We retain ownership
of all personal property and gasoline marketing equipment. Our bank credit
facility limits or caps the proceeds of sale-leasebacks that The Pantry can use
to fund its operations or capital expenditures. Vendor reimbursements primarily
relate to oil company payments to either enter into long term supply agreements
or to upgrade gasoline marketing equipment, including canopies, gasoline
dispensers and signs. Under our sale-leaseback program The Pantry received $1.5
million during the six months ended March 25, 1999 and $4.9 million during
fiscal 1998.
In fiscal 1998, we received approximately $20.7 million in sale-leaseback
proceeds, asset dispositions and vendor reimbursements for capital
improvements. As a result, net capital expenditures, excluding all
acquisitions, for fiscal 1998 were $27.7 million. In the six months ended March
25, 1999, we received approximately $7.8 million from sale-leaseback proceeds,
asset dispositions, and vendor reimbursements for capital improvements. Net
capital expenditures, excluding all acquisitions, for the six months ended
March 25, 1999 were $18.7 million. We anticipate net capital expenditures for
fiscal 1999 will be approximately $45.0 million, of which $26.5 million has
been expended to date.
Long-term Debt. At April 30, 1999, our long-term debt consisted primarily
of $200.0 million of senior subordinated notes and $258.0 million outstanding
under our bank credit facility. We are currently in compliance with our debt
covenants.
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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:
. a $45.0 million revolving credit facility available for working
capital financing, general corporate purposes and issuing commercial
and standby letters of credit under which $15.7 million of letters of
credit are outstanding as of April 30, 1999
. a $79.1 million Tranche A term loan facility and a $159.9 million
Tranche B term loan facility, both of which are borrowed
. 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
and will be repaid with the proceeds of this offering
As of April 30, 1999, we had $29.3 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.
Our lenders have agreed, subject to completion of the offering, to amend
the bank credit facility to:
. permit the use of offering proceeds to redeem preferred stock and pay
related accrued dividends and to make up to $50.5 million of
acquisitions for a nine month period after the offering
. permit reborrowing of the $19.0 million repaid on the acquisition
term facility
. permit the authorization of preferred stock
. amend the pro forma leverage ratio
. increase the maximum permitted capital expenditures
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 million in fiscal 2003, $45.1 million in fiscal 2004,
$76.0 million in fiscal 2005, and $44.0 million in fiscal 2006. We are required
to pay down our bank credit facility as follows:
. with net proceeds from asset sales, subject to exceptions for sale-
leaseback transactions
. with 50% of the proceeds from the issuance of any of our equity
securities other than this offering and sales of our equity
securities to our management employees
. with all of the proceeds from the issuance of any of our debt
securities
. 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.
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The loans under our bank credit facility are secured by a first priority
security interest in our tangible and intangible assets including the stock 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 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
percentage or a base rate plus a 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:
. incur additional indebtedness
. declare dividends or redeem or repurchase capital stock
. prepay, redeem or purchase debt
. incur liens
. make loans and investments
. make capital expenditures
. engage in mergers, acquisitions or asset sales
. engage in transactions with affiliates
Our bank credit facility provides that the maximum amount we can spend
on any acquisition is $50.0 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 $46.0 million in fiscal 1999 and $34.0 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 $82.0 million in fiscal 1999, increasing each year to
$100.0 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
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principal, premium, if any, and interest, jointly and severally, by our
subsidiaries, except for PH Holding and its subsidiaries. The senior
subordinated notes contain covenants that, among other things, restrict our
ability and any restricted subsidiary's ability to:
. incur additional indebtedness
. pay dividends or make distributions
. issue stock of subsidiaries
. make certain investments
. repurchase stock
. create liens
. enter into transactions with affiliates
. enter into sale-leaseback transactions
. engage in mergers or consolidations
Our senior subordinated notes also place 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.
Restrictive covenants in our debt agreements may restrict our ability to
implement our acquisition strategy. See "Risk Factors--Restrictive Covenants in
our debt agreements may restrict our ability to implement our growth strategy,
respond to changes in industry conditions, secure additional financing and
engage in acquisitions."
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, net of taxes, of approximately
$3.6 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 $220.0 million outstanding under our bank credit facility.
Cash Flows From Financing Activities. During fiscal 1998, we financed the
Lil' Champ acquisition purchase price of $136.4 million, the refinancing of
existing Lil' Champ debt of $10.7 million, the repurchase of $51.0 million 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 of $200.0 million, proceeds from our bank credit facility of
$78.0 million, cash on hand and the net proceeds of approximately $57.0 million
from the sale of common stock to our existing stockholders and management.
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<PAGE>
During the six months ended March 25, 1999, we financed our 1999
acquisitions and the redemption of $49.0 million of senior notes and the
related fees and expenses with proceeds from our bank credit facility, cash on
hand and the net proceeds of approximately $1.1 million from the sale of common
stock to 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 needs 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 to sixteen
months. To continue our acquisition strategy after that time, we will have to
obtain additional debt or equity financing. There can be no assurance that such
financing will be available on favorable terms, or at all.
Shareholders' Equity. As of March 25, 1999, our shareholders' equity
totaled $36.4 million. The $2.9 million decrease in shareholders' equity
compared to shareholders' equity at September 24, 1998 is attributed to our net
loss of $2.5 million and dividends and interest on the Series B preferred stock
of $1.5 million. The decrease was partially offset by the net proceeds of
approximately $1.1 million from the sale of common stock to employees under our
stock subscription plan.
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 March 25, 1999 includes the cumulative
effect of the accrued dividends on previously outstanding preferred stock of
$5.0 million, the accrued dividends on the series B preferred stock of $5.8
million, the net cost of equity transactions and 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 systems. In
order to comply with this requirement, as of April 30, 1999, we maintain surety
bonds in the aggregate amount of approximately $900,000 in favor of state
environmental enforcement agencies in the states of North Carolina, South
Carolina and Virginia and a letter of credit in the aggregate amount of
approximately $1.1 million issued by a commercial bank in favor of state
environmental enforcement agencies in the states of Florida, Tennessee, Indiana
and Kentucky and rely on reimbursements from applicable state trust funds. In
Florida, we also meet such financial responsibility requirements through
private commercial liability insurance.
All states in which we operate or have operated underground storage tank
systems have established trust funds for the sharing, recovering, and
reimbursing of cleanup costs and liabilities
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<PAGE>
incurred as a result of releases from underground storage tank systems. These
trust funds, which essentially provide insurance coverage for the cleanup of
environmental damages caused by the operation of underground storage tank
systems, are funded by an underground storage tank registration fee and a tax
on the wholesale purchase of motor fuels within each state. We have paid
underground storage tank 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 or occurrence 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 the per-site deductible; costs incurred in connection with releases
occurring or reported to trust funds prior to their inception; removal and
disposal of underground storage tank systems; and 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 underground storage tank
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 a letter of credit. In addition to up to $4.5 million that we may
expend for remediation, The Pantry estimates that up to $12.7 million may 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 $17.2 million as of March 25, 1999 represent
estimates for future expenditures for remediation, tank removal and litigation
associated with 205 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 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 March 25,
1999, these anticipated reimbursements of $12.7 million are recorded as long-
term environmental receivables. In Florida, remediation of such contamination
reported before January 1, 1999 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 applicable trust fund does not
cover a deductible or has a co-pay which may be less than the cost of such
remediation. 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 expenditures, some or
all of which may not be eligible for reimbursement from state trust funds.
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
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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 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.
The following discussion about the implementation of our Year 2000
program, the costs expected to be associated with the program and the results
we expect to achieve constitute forward-looking information. As noted below,
there are many uncertainties involved with the Year 2000 issue, including the
extent to which we will be able to adequately provide for contingencies that
may arise, as well as the broader scope of the Year 2000 issue as it may affect
third parties and our trading partners. Accordingly, the costs and results of
our Year 2000 program and the extent of any impact on our results of operations
could vary materially from that stated herein.
We completed our assessment phase of Year 2000 vulnerability early in
fiscal 1998, after a formal third-party assessment was completed in November
1997. Assessment activities found that 30% of our systems would require
remediation and 20% of our systems were planned for replacement or would be
best served if replaced. Based on this third-party assessment, internal
assessment and project results as of March 25, 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.
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 2000
compliance. We have assessed software and technology infrastructures, embedded
systems such as microchips in point-of-sale systems, fuel consoles and office
equipment, and building facilities such as telephone-related systems, HVAC and
security. 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. To date 20% of our applications
requiring remediation have been tested and 75% of the systems being replaced
have been implemented and are in use.
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We have initiated communications with our vendors, suppliers and
financial institutions to determine the extent to which we are vulnerable to
those third parties' failure to be Year 2000 compliant. To date, 80% of vendors
surveyed have responded. The replies indicate that all anticipate their company
will be Year 2000 compliant before the end of the calendar year. Specifically,
our grocery wholesaler, McLane, has stated in their "Year 2000 Readiness
Disclosure" that they are "committed to identifying and correcting all business
critical Year 2000 problems by June 1, 1999." 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 vendors, 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.
In addition, we have reviewed the assets acquired since our original
assessment for Year 2000 compliance. This includes the acquisition of other
companies, as well as procurement and service arrangements. We believe that our
recently acquired assets will be Year 2000 compliant by September 1999. The
assessments have been conducted through the due diligence process, vendor
compliance communications and requests for disclosure statements as part of
contract negotiations. In most instances with the acquisition of other
companies, the systems and suppliers of these companies are the same as those
used in our existing operations.
State of Readiness as of April 22, 1999
<TABLE>
<CAPTION>
Estimated Estimated
Phase Percent Complete Completion Date(a)
- -------------------------------------------- ---------------- ------------------
<S> <C> <C>
Awareness................................... 95% December 1999
Assessment.................................. 90% June 1999
Remediation................................. 75% September 1999
Replacement................................. 75% September 1999
Testing..................................... 35% September 1999
Contingency Planning........................ 5% September 1999
</TABLE>
- --------
(a) Indicates work should be substantially completed. We will continue to
reevaluate awareness, assess acquired assets and update contingency plans
as needed.
We do not believe either the direct or indirect costs of Year 2000
compliance will be material to our operations or operating results. Our
expenditures, which will be funded through operating cash flow, consist
primarily of internal costs and expenses associated with third-party
contractors. To date, our spending with contractors and consultants has been
$75,000. We anticipate spending for the remainder of the fiscal year to be
approximately $300,000.
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. These plans will be drafted
and in place by September 1999, leaving the fourth calendar quarter to address
low priority and low impact issues.
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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 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 March 25, 1999, 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 six
months ended March 25, 1999, the consumer price index increased less than one
percent. For the same period, the producer price index, a measure of wholesale
cost inflation decreased approximately 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 six months ended
March 25, 1999, the consumer price index for the category labeled "cigarettes"
increased approximately 19.3%. For the same period, the producer price index
for the category labeled "cigarettes" increased 30.9%. On November 23, 1998,
major cigarette manufacturers that supply The Pantry increased 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 we expect to pass
cigarette cost increases on to our 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 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 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.
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The following tables presents the future principal cash flows and
weighted-average interest rates expected on our existing long-term debt
instruments. Fair values have been determined based on quoted market prices as
of April 30, 1999.
<TABLE>
<CAPTION>
Expected Maturity Date (as of September 24, 1998)
-------------------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000 Fiscal 2001 Fiscal 2002 Fiscal 2003 Thereafter Total Fair Value
----------- ----------- ----------- ----------- ----------- ---------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt.......... $ 67 $ 39 $49,038 $ 47 $78,049 $200,074 $327,314 $338,064
Weighted average
interest rate.......... 10.06% 10.06% 9.76% 9.72% 10.19% 10.25% 10.06%
</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.
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.
The following table presents the future principal cash flows and
weighted-average interest rates expected on our existing long-term debt
instruments. Fair values have been determined based on quoted market prices as
of April 30, 1999.
<TABLE>
<CAPTION>
Expected Maturity Date (as of March 25, 1999)
-------------------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000 Fiscal 2001 Fiscal 2002 Fiscal 2003 Thereafter Total Fair Value
----------- ----------- ----------- ----------- ----------- ---------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt.......... $2,896 $10,686 $17,939 $20,943 $37,931 $369,313 $459,708 $470,458
Weighted average
interest rate.......... 9.08% 9.10% 9.14% 9.20% 9.27% 9.38% 9.07%
</TABLE>
The following table presents the future principal cash flows and weighted
average interest rates assuming completion of the offering and application of
offering proceeds to repay $19.0 million outstanding under the bank credit
facility.
<TABLE>
<CAPTION>
Expected Maturity Date (as of March 25, 1999 pro forma for the offering)
-------------------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000 Fiscal 2001 Fiscal 2002 Fiscal 2003 Thereafter Total Fair Value
----------- ----------- ----------- ----------- ----------- ---------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt.......... $2,896 $10,686 $17,939 $20,943 $18,931 $369,313 $440,708 $451,458
Weighted average
interest rate.......... 9.13% 9.15% 9.20% 9.27% 9.34% 9.38% 9.12%
</TABLE>
Qualitative Disclosures. Our primary exposure relates to:
. interest rate risk on long-term and short-term borrowings
. our ability to pay or refinance long-term borrowings at maturity at
market rates
. the impact of interest rate movements on our ability to meet interest
expense requirements and exceed financial covenants
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. 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
. our ability to successfully deal with Year 2000 issues that may arise
in our or third party operations
. our ability to control costs, including our ability to achieve 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 senior management,
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.
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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, outpacing the
3.1% compound annual growth rate 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:
. a high percentage of sales from necessity items, including gasoline,
consumables and food
. a small average transaction size
. 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 cost savings and operating efficiencies 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 assets as a result of oil
industry consolidation
. noncompetitiveness of small operators as other industry
participants become larger and efficiently spread costs over a
greater store base
. increasing environmental regulations that have resulted in higher
capital costs
. higher new-store development costs
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. 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
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 margin and mix, monitor
inventory levels, implement pricing by geographic area, 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 1,149 stores as of March 25, 1999 and from $384.8
million in total revenue in fiscal 1996 to $1.7 billion in total pro forma
revenue for fiscal 1998.
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<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 March 25, 1999, we
operated 1,149 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, EBITDA of $89.8
million and net income of $4.5 million before an extraordinary charge of
approximately $11.6 million, $3.6 million of which was recorded in the second
quarter of fiscal 1999. In fiscal 1998 we generated cash from operations of
$48.0 million, used cash in investing activities of $286.5 million and
generated cash from financing activities of $269.5 million.
Approximately 34% of our stores are located in Raleigh, Charlotte,
Jacksonville and Orlando, which are four of the ten fastest growing major
metropolitan 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, these 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 includes:
. 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
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<PAGE>
These initiatives contributed to the following financial results:
<TABLE>
<CAPTION>
Fiscal Year Ended Compound
------------------------------ Annual
Sept. 26, Sept. 25, Sept. 24, Growth
1996 1997 1998 Rate
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Total revenue (in millions)........... $384.8 $427.4 $ 984.9 60.0%
EBITDA (in millions).................. $ 15.6 $ 20.3 $ 60.5 96.9%
Income from operations (in millions).. $ 1.9 $ 10.8 $ 31.8 312.2%
Net income (loss) (in millions)....... $ (8.1) $ (1.0) $ (3.3) --
EBITDA margin......................... 4.1% 4.7% 6.1% --
Operating margin...................... 0.5% 2.5% 3.2% --
Net cash provided by (used in):
Operating activities (in millions).. $ 5.4 $ 7.3 $ 48.0 --
Investing activities (in millions).. $ (7.2) $(25.1) $(286.5) --
Financing activities (in millions).. $ (3.9) $ 15.8 $ 269.5 --
Average merchandise sales per store
(in thousands)....................... $481.1 $525.8 $ 533.3 5.3%
Average gallons sold per store (in
thousands)........................... 450.0 501.2 603.9 15.8%
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)...... 379 390 954 --
</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 demand items that customers expect to find in our stores
. 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 additional customers into our stores and increase gross profit
dollars.
We also seek to attract customers by consistently stocking brand name,
high volume 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 high demand items, and then
offer a broad assortment of high margin, impulse items to 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 11.4% for the first six months of 1999. Average
merchandise gross profit dollars per store have improved from $158,300 in
fiscal 1996 to $181,900 in fiscal 1998.
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<PAGE>
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
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, Shell and Texaco. We have also
entered into supply 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 6.8% for the six months ended
March 25, 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, 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. Our contract with McLane extends until 2003. 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 $233,294 in
fiscal 1996 to $270,082 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 functions such as payroll, maintenance and inventory-taking 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.
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<PAGE>
Increase Capital Expenditures. Since fiscal 1996, we have implemented a
capital expenditure program focused on:
. store facility and gasoline equipment upgrades
. technology and store automation improvements
. 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, 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 105 of our stores that
have been remodeled, average merchandise sales increased 10.1%, gasoline
gallons increased 17.8% and EBITDA increased 37.1% 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 $42.7 million,
$13.1 million 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 software 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 material 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 890 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:
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<PAGE>
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:
.key merchandising initiatives
.competitive gasoline prices
.upgraded facilities
.new service offerings
.improved technology
.improved customer service
.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 April 1997 we have acquired a
total of 890 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 $25 million on new technology at the gasoline pump, in the
store and 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:
.acquired stores provide an instant installed base of revenue and cash
flow
.we are able to grow more rapidly, thus providing increased benefits of
larger size
. we are able to enter new markets without adding merchandise square
footage or additional gasoline outlets to these markets
. acquisitions provide access to established high quality locations and
to markets that restrict new store development through stringent
environmental and zoning regulations
.acquiring stores is a lower cost alternative to developing new stores
With over 20,000 convenience stores operating in our existing markets,
we believe there are enough attractive acquisition opportunities to double our
store base in existing markets and expand
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<PAGE>
into 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:
.strategic fit and desirability of location
.price
. ability to improve productivity and profitability of a location
through the implementation of our operating strategy
.financial impact
Our strategy is to continue to realize growth and cost savings from
acquisitions through:
.remerchandising acquired stores with more SKUs and branded merchandise
.upgrading store facilities and gasoline equipment
.changing selected sites to branded gasoline suppliers
.negotiating better terms with our suppliers
. spreading costs over a greater store base, 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 2.7%, decrease same store operating expenses by 6.6% and
increase EBITDA by 30.3%. 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.
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.
Acquisitions involve risks that could cause our actual growth or
operating results to differ adversely from our expectations or the
expectations of securities analysts. In addition, restrictive covenants in our
debt agreements may restrict our ability to implement our acquisition
strategy. See "Risk Factors--Our growth and operating results could suffer if
we are unable to identify and acquire suitable companies, discover undisclosed
liabilities, obtain financing and integrate acquired stores" and "--
Restrictive covenants in our debt agreements may restrict our ability to
implement our growth strategy, respond to changes in industry conditions,
secure additional financing and engage in acquisitions."
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<PAGE>
Our Operations
We operate our stores under a variety of names, including The Pantry in
North Carolina, South Carolina, Indiana, Tennessee and Kentucky, and Lil' Champ
and Handy Way in Florida. We also operate 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 information with respect to our merchandise sales for the last two
fiscal years and for the six months ended March 26, 1998 and March 25, 1999:
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
------------------- -------------------
Sept. 25, Sept. 24, March 26, March 25,
1997 1998 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Merchandise sales (in millions)..... $202.4 $460.8 $193.8 $304.0
Average merchandise sales per store
(in thousands)..................... $525.8 $533.3 $304.2 $304.3
Comparable store merchandise sales.. 8.5% 5.3% 4.4% 11.4%
Merchandise gross margins (after
purchase rebates, mark-downs,
inventory spoilage and inventory
shrinkage)......................... 34.4% 34.0% 34.5% 32.6%
</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 142 locations offering 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.
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<PAGE>
The Pantry does not record merchandise sales by detailed categories.
However, based upon our merchandise purchases, we estimate merchandise sales by
category for the last two years are as follows:
Percentage of Merchandise Purchases
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------
Sept. 25, 1997 Sept. 24, 1998
-------------- --------------
<S> <C> <C>
Tobacco products.............................. 26.6% 27.6%
Beer.......................................... 15.1 17.2
Packaged beverages............................ 17.0 16.0
Self-service fast foods and beverages......... 7.1 6.5
General merchandise/health and beauty care.... 6.3 6.4
Candy......................................... 5.0 4.6
Newspapers and magazines...................... 5.2 3.8
Salty snacks.................................. 4.4 4.5
Dairy products................................ 2.9 3.5
Bread/cake.................................... 2.2 2.1
Grocery and other............................. 8.2 7.8
----- -----
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. Our arrangement with McLane is governed by a distribution
service agreement, pursuant to which we purchase all of our requirements of
wholesale food, non-food and general merchandise products. The products are
purchased at McLane's cost plus an agreed upon percentage, reduced by any
promotional allowances offered by manufactures and volume rebates offered by
McLane. The remaining term of the agreement is four years. McLane may terminate
the agreement upon a default in payment or if we become insolvent. 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 under
contracts with terms of up to four years. With a number of these vendors we do
not have contracts.
Cigarette prices have increased 15.4% during fiscal 1998 and 19.3% for
the six months ended March 25, 1999. 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, a $0.30 per pack rebate in
February 1999, a $0.55 per pack rebate for March 1999, no rebate in April 1999
and a $0.35 per pack rebate in May 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 other retailers stop
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<PAGE>
selling cigarettes. 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 new customers as well as providing additional services for
existing customers.
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 information
regarding our gasoline operations for the last two fiscal years and the six
months ended March 26, 1998 and March 25, 1999:
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
------------------- -------------------
Sept. 25, Sept. 24, March 26, March 25,
1997 1998 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Gasoline sales (in millions).......... $220.2 $510.0 $215.7 $360.9
Gasoline gallons sold (in millions)... 179.4 466.8 189.3 365.3
Average gallons sold per store (in
thousands)........................... 501.2 603.9 329.2 397.5
Average retail price per gallon....... $ 1.23 $ 1.09 $ 1.14 $ 0.99
Average gross profit per gallon....... $0.128 $0.134 $0.134 $0.127
Locations selling gasoline............ 364 884 789 1,068
Number of company-owned branded
locations............................ 300 667 505 768
Number of company-owned unbranded
locations............................ 35 192 258 278
Number of third-party locations
(branded and unbranded).............. 29 25 26 22
Number of locations with pay-at-the-
pump credit card readers............. 125 379 208 525
Number of locations with multi-product
dispensers........................... 142 697 465 817
</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 1,068 stores that sold gasoline as of March 25, 1999, 778 or
72.8%, 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 March 25, 1999, we owned the gasoline operations at 1,046 locations
and at 22 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
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<PAGE>
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-operated locations are more profitable.
We purchase our gasoline from major oil companies and independent
refiners. As of March 25, 1999, 72.8% of our locations selling fuel sell under
a major oil company brand name. Our arrangements with major oil companies are
governed by supply agreements pursuant to which we purchase gasoline and diesel
fuel for our branded locations. The fuel is purchased at the stated rack price
at each terminal and the terms of these supply agreements range from seven to
thirteen years. We purchase the balance of our gasoline from a variety of
independent fuel distributors. 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 nine days.
Store Locations
As of March 25, 1999, we operated 1,149 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
metropolitan areas 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 March 25, 1999:
<TABLE>
<CAPTION>
Number of Percent of
Stores Total Stores
--------- ------------
<S> <C> <C>
Florida............................................ 548 47.7%
North Carolina..................................... 338 29.4
South Carolina..................................... 161 14.0
Kentucky........................................... 45 3.9
Indiana............................................ 20 1.7
Tennessee.......................................... 19 1.7
Virginia........................................... 18 1.6
----- -----
Total.............................................. 1,149 100.0%
===== =====
</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 Six Months
--------------------------------------- Ended
Sept. 28, Sept. 24, Sept. 25, Sept. 26, March 25,
1995 1996 1997 1998 1999
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Number of stores at
beginning of period.... 406 403 379 390 954
Acquired or opened...... 10 4 36 653 216
Closed or sold.......... (13) (28) (25) (89) (21)
--- --- --- --- -----
Number of stores at end
of period.............. 403 379 390 954 1,149
=== === === === =====
</TABLE>
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<PAGE>
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 890 convenience stores in 11 major and
numerous smaller transactions located in Florida, North Carolina, South
Carolina and Virginia. 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.
We focus on acquiring chains within our existing and contiguous marketing
areas. In evaluating potential acquisition candidates, we consider a number of
factors including:
.strategic fit and desirability of location
.price
. ability to improve productivity and profitability of a location
through the implementation of our operating strategy
.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 $8.7 million in fiscal 1997 and $34.0 million in fiscal 1998.
During this period, $13.1 million was 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.
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<PAGE>
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. 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 from Professional Datasolutions, Inc., a wholly-owned
subsidiary of McLane. Handy Way has the Resource Management Series system in
place and has kept pace with 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, the Resource Management Series 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 margin and mix, monitor
inventory levels, implement pricing by geographic area, improve receiving and
pricing accuracy, increase expense control and management reporting and improve
communication between individual stores and headquarters.
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<PAGE>
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 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, our competitors have been
in existence longer and have 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 being an important factor in the marketing of the company and our
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 material 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 that require us to make 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 underground
storage tanks.
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 underground storage tank
systems. In order to comply with the applicable requirements, as of April 30,
1999, we maintain surety bonds in the aggregate amount of approximately
$900,000 in favor of state environmental agencies in North Carolina, South
Carolina and Virginia and a letter of credit in the aggregate amount of
approximately $1.1 million issued by a commercial bank in favor of state
environmental agencies in the states of Florida, Tennessee, Kentucky and
Indiana. We also rely upon the reimbursement provisions of applicable state
trust funds. In Florida, we also meet such financial responsibility
requirements through private commercial liability insurance. We have sold
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<PAGE>
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:
. installing underground storage tank systems
. upgrading underground storage tank systems
. taking corrective action in response to releases
. closing underground storage tank systems
. keeping appropriate records
. 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 underground storage tank 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 material compliance
with the leak detection requirements applicable to our underground
storage tanks.
. Corrosion Protection. The 1988 EPA regulations require that all
underground storage tank systems have corrosion protection by
December 22, 1998. We began installing non-corrosive fiberglass tanks
and piping in 1982. All of the underground storage tank systems at
our stores are in material compliance with these 1988 EPA
regulations.
. 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 underground storage tank systems are in
material compliance with these EPA regulations.
State Trust Funds
All states in which we operate underground storage tank systems have
established trust funds for the sharing, recovering and reimbursing of cleanup
costs and liabilities incurred as a result of releases from underground storage
tank systems. These trust funds, which essentially provide insurance coverage
for the cleanup of environmental damages caused by the operation of underground
storage tank systems, are funded by a underground storage tank registration fee
and a tax on the wholesale purchase of motor fuels within each state. We pay
underground storage tank 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
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<PAGE>
but generally provides from $150,000 to $1.0 million per site or occurrence 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:
. the per-site deductible
. costs incurred in connection with releases occurring or reported to
trust funds prior to their inception
. removal and disposal of underground storage tank systems
. 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 underground
storage tank 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 up to $4.5 million that we may expend for remediation, The
Pantry estimates that up to $12.7 million may 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.
The Pantry has been reimbursed, at rates of approximately 97%, for
expenses filed with the state trust funds or other responsible third parties
including insurers in the amounts of $3.1 million during the past three fiscal
years. We anticipate our reimbursement rate to increase as we have entered into
agreements with our primary environmental contractors whereby these contractors
guarantee 100% reimbursement from the state trust funds for the work they
perform. The Pantry maintains a 5% bad debt allowance for environmental
receivables.
Sale of Alcoholic Beverages
In areas where our stores are located, state or local laws limit the
hours of operation for 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.
Video Poker Licenses
Stores in South Carolina operating video poker machines are subject to
extensive 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
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<PAGE>
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. There are numerous legislative proposals pending in the South
Carolina legislature relating to video gaming, including initiatives to impose
additional significant taxes or regulatory measures as well as initiatives to
ban video gaming. Enactment of some of these initiatives could adversely impact
our results of operations.
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 March 31, 1999, we employed 6,701 full-time and 1,548 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
7,686 are employed in our stores and 563 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 March 25, 1999 we owned 378 of our stores and leased the real
property at 771 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. The aggregate rental paid for
fiscal 1998 was $23.6 million. The following table lists the expiration dates
of our leases, including renewal options:
<TABLE>
<CAPTION>
Lease Expiration Number of Stores
---------------- ----------------
<S> <C>
1999-2001............... 46
2002-2008............... 145
2009-2013............... 119
2014-2018............... 72
2019-2023............... 30
2024-2028............... 61
2029 and thereafter..... 298
</TABLE>
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. Beyond payment of normal rent,
early termination of these leases would result in no significant penalty to The
Pantry.
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<PAGE>
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.
All of our real estate, both owned and leased, is pledged as collateral
under our bank credit facility.
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 cleanup costs and liabilities incurred as a result of releases
from underground storage tank systems. See "--Government Regulation and
Environmental Matters."
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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., 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.
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<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. and River Holding
Corp.
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.
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<PAGE>
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.
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 our four
other most highly compensated 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 $42,337 266,271 $2,500
President and Chief 1997 305,218 150,000 98,892 -- 2,500
Executive Officer 1996 124,086 50,000 3,392 -- --
Dennis R. Crook......... 1998 175,000 87,000 7,471 60,078 4,253
Senior Vice President, 1997 151,832 70,000 1,025 -- 2,019
Administration and 1996 82,933 20,000 41,250 -- --
Gasoline Marketing
William T. Flyg......... 1998 175,000 75,000 6,041 57,528 --
Senior Vice President, 1997 109,615 54,000 3,076 -- --
Finance and Chief
Financial Officer
Douglas Sweeney......... 1998 180,000 90,000 10,174 71,910 4,651
Senior Vice President, 1997 149,983 72,000 2,593 -- 2,014
Operations 1996 91,334 20,000 1,352 --
Daniel J. McCormack..... 1998 110,000 60,000 10,412 60,078 2,645
Vice President,
Marketing 1997 95,488 45,000 4,269 -- 1,279
1996 45,334 15,000 5,934 -- --
</TABLE>
- --------
(a) Consists primarily of executive medical, moving and relocation
reimbursements.
(b) Consists of matching contributions to our 401(k) Savings Plan. See "--
Benefit Plan" below.
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<PAGE>
Option Grants
The following table sets forth information with respect to stock options
granted to our Chief Executive Officer and our four other most highly
compensated executive officers during the year ended September 24, 1998:
Options/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------------------------------------- Value at Assumed
Number of % of Total Exercise Annual Rates of Stock
Securities Options/SARs Price or Price Appreciation
Underlying Granted to Base for Option Term
Options/SARs Employees in Price Expiration ---------------------
Name Granted(#) Fiscal Year ($/Share) Date 5%($) 10%($)
---- ------------ ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sodini......... 207,111(a) 35.9 $ 8.82 01/01/08 $3,212,036 $5,282,695
59,160(b) 10.3 11.27 08/25/08 820,047 1,621,004
Dennis R. Crook......... 47,328(a) 8.2 8.82 01/01/08 733,999 1,207,176
12,750(b) 2.2 11.27 08/25/08 176,734 349,354
William T. Flyg......... 47,328(a) 8.2 8.82 01/08/08 733,999 1,207,176
10,200(b) 1.8 11.27 08/25/08 141,387 279,483
Douglas Sweeney......... 59,160(a) 10.3 8.82 01/01/08 917,499 1,508,970
12,750(b) 2.2 11.27 08/25/08 176,734 349,354
Daniel J. McCormack..... 47,328(a) 8.2 8.82 01/01/08 733,999 1,207,176
12,750(b) 2.2 11.27 08/25/08 176,734 349,354
</TABLE>
(Individual Grants)
- --------
(a) This option vests and becomes exercisable in three equal, annual
installments beginning on the first anniversary of the vesting commencement
date and expires to the extent not exercised by January 1, 2008.
(b) This option vests and becomes exercisable in three equal, annual
installments beginning on the first anniversary of the vesting commencement
date and expires to the extent not exercised by August 25, 2008.
Aggregate Option Exercises and Option Values
The following table sets forth information with respect to our Chief
Executive Officer and our four other most highly compensated executive officers
concerning option exercises for the fiscal year ended September 24, 1998 and
exercisable and unexercisable options held as of September 24, 1998:
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
September 24, 1998(#) September 24, 1998($)(a)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sodini......... -- -- 207,111 59,160 $507,625 $ 0
Dennis R. Crook......... -- -- 15,776 44,302 38,667 77,333
William T. Flyg......... -- -- 15,776 41,752 38,667 77,333
Douglas Sweeney......... -- -- 19,720 52,190 48,333 96,667
Daniel J. McCormack..... -- -- 15,776 44,302 38,667 77,333
</TABLE>
- --------
(a) These values are calculated using a share price of $11.27 per share, less
the exercise price of the options. This price was the price at which The
Pantry sold shares in July 1998.
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<PAGE>
Executive Employment Contracts
On October 1, 1997, we entered into an employment agreement with Mr.
Sodini. The term of this agreement has recently been extended until September
30, 2001. 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. Mr. Sodini's bonus arrangement is not tied to specific objectives.
Principal factors considered by the board of directors are EBITDA improvement,
comparable sales growth, acquisition quality and future outlook.
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.
For purposes of Mr. Sodini's employment agreement, a change of control
would occur if any person, other than the existing stockholders, becomes the
beneficial owner of more than 50% of The Pantry's outstanding voting
securities, whether by merger or otherwise, or upon liquidation of The Pantry.
Good reason includes the occurrence of a reduction in Mr. Sodini's compensation
or benefits, the inability of Mr. Sodini to discharge his duties effectively or
moving Mr. Sodini's employment base more than 25 miles from its current
location. Just cause includes a willful and continued failure to perform,
engaging in conduct injurious to The Pantry, or being convicted of a felony or
any crime of moral turpitude.
This agreement contains covenants prohibiting Mr. Sodini, through the
period ending on the latter of 18 months after termination or such time at
which he no longer received severance benefits from us, from competing with us
or soliciting employment from our employees. This offering will not cause a
change of control under Mr. Sodini's contract.
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 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, he shall be entitled to
severance pay including regular benefits for a period of two years from the
termination date, subject to certain limitations. For purposes of these
severance arrangements, a change of control would occur if Freeman Spogli and
Chase Capital no longer had voting control of The Pantry's board of directors.
Good reason includes the reduction in the employee's compensation or benefits,
the inability of the employee to discharge
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his duties effectively or moving the employee's employment base outside of
North Carolina. This offering will not cause a change of control under these
arrangements.
Benefit Plan
We sponsor a 401(k) employee retirement savings plan with Diversified
Investment Advisors 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 Plans
We adopted a stock option plan in January 1998. The 1998 stock option
plan provides for the grant of incentive stock options and nonqualified stock
options, as appropriate, to our officers, employees, consultants and members of
our board of directors. An aggregate of 1,275,000 shares of common stock has
been reserved for issuance under the 1998 stock option plan. As of March 25,
1999, 576,861 options to purchase shares of common stock were outstanding, and
698,139 shares were available for future grant. In granting stock options, the
board of directors considers the individual and collective performance of the
management team. Key items considered are EBITDA improvements, comparable store
sales growth, acquisition results and base store operating efficiency, such as
expense ratios and shrink losses. This offering will not trigger the
termination provisions of the stock option plan.
Prior to the consummation of the offering, we intend to adopt a new 1999
stock option plan providing for the grant of incentive stock options and non-
qualified stock options to our officers, directors, employees and consultants.
An aggregate of 3,825,000 shares of common stock will be reserved for issuance
under the 1999 stock option plan. Effective upon consummation of the offering,
a grant of approximately 200,000 shares will be made to officers and employees.
While all shares have not been allocated, we intend to grant incentive stock
options for 33,800 shares to Mr. Sodini, 13,000 shares to Mr. Crook, 13,000
shares to Mr. Flyg, 13,000 shares to Mr. Sweeney and 13,000 shares to Mr.
McCormack. These options will vest in three annual installments, expire in
seven years and be exercisable at the initial public offering price.
The stock option plans are (or will be) administered by the board of
directors, although the board of directors may designate a committee to
undertake the administration. The stock option plans provide that the
administrator may, among other things, select the participants in the stock
option plans, 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 plans 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 plans will terminate in the event of
acquisitions of The Pantry as set forth in the stock option plans, and in such
event, the administrator may determine whether unvested options will
accelerate. This offering will not cause the stock option plans to be
terminated. The stock option plans will terminate when all shares authorized
thereunder have been issued, unless terminated earlier pursuant to the terms of
the stock option plans or by the board of directors. Freeman Spogli has the
right to require the sale of all shares purchased under the stock option plans
in the event it sells all its holdings of common stock.
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Stock Subscription Plan
We adopted a stock subscription plan in August 1998. This plan permits
our employees, including directors and executive officers, to purchase up to an
aggregate of 158,100 shares of common stock at fair market value. The purchase
price for all common stock purchased under our stock subscription plan was
$11.27 per share and was paid in cash and/or the delivery to us of a secured
promissory note payable to us or one of our subsidiaries. As of March 25, 1999,
we have issued 134,436 shares of common stock to 38 employees under our stock
subscription plan. Freeman Spogli has the right to require the sale of all
shares purchased under the stock subscription plan in the event it sells all
its holdings of common stock. We have the right to repurchase shares purchased
under this plan upon an employee's termination of employment. This right
terminates on the first anniversary of the purchase date.
The following table sets forth for our Chief Executive Officer and our
four other most highly compensated 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......... 17,748 $100,100 8/31/2003 8.5%
Dennis R. Crook......... 4,437 50,025 8/31/2003 8.5%
William T. Flyg......... -- -- -- --
Douglas Sweeney......... 8,874 -- -- --
Daniel J. McCormack..... 4,437 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 may
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act. Prior to the
consummation of the offering, our directors and officers have been indemnified
to the full extent permitted by Delaware law under our certificate of
incorporation and bylaws. Upon consummation of the offering our bylaws will
provide that The Pantry may indemnify its directors and officers and we intend
to enter into agreements to indemnify our directors to the full extent
permitted by law. These agreements, among other things, will indemnify our
directors for 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 or officers 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
the event that a claim
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for indemnification against such liabilities, other than the payment by The
Pantry of expenses incurred or paid by a director or officer or of The Pantry
in the successful defense of any action, suit or proceeding, is asserted by
such director or officer in connection with the securities being registered,
The Pantry will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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.
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TRANSACTIONS WITH AFFILIATES
Stock Issuances
In November 1995, Freeman Spogli purchased 2,320,551 shares of our common
stock and 10,374.228 shares of our Series A preferred stock for an aggregate
purchase price of approximately $17.2 million and Chase Capital purchased
698,700 shares of our common stock and 3,123.6 shares of our Series A preferred
stock for an aggregate purchase price of approximately $5.2 million. The
purchase price for the common stock was $2.98 per share and the purchase price
for the Series A preferred stock was $1,000.00 per share. 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. Freeman Spogli purchased 2,152,812 shares of common stock and
9,624.336 shares of Series A preferred stock for an aggregate purchase
price of approximately $16.0 million and Chase Capital purchased 643,416 shares
of common stock and 2,876.448 shares of Series A preferred stock for an
aggregate purchase price of approximately $4.8 million. The purchase price for
the common stock was $2.98 per share and the purchase price for the Series A
preferred stock was $1,000.00 per share.
In December 1996, Freeman Spogli purchased 17,500 shares of our series B
preferred stock and warrants to purchase 2,346,000 shares of common stock for
approximately $17.5 million. The purchase price for the Series B preferred
stock was $1,000.00 per share and the purchase price for the warrants was
$1.00. The warrants are exercisable at $7.45 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 $6.5 million in accrued dividends.
In October 1997, in connection with the Lil' Champ acquisition, Freeman
Spogli purchased 3,030,471 shares of common stock and Chase Capital purchased
596,190 shares of common stock for an aggregate purchase price of approximately
$32.0 million. Peter J. Sodini purchased 45,339 shares of common stock for an
aggregate purchase price of $400,050, payable $185,000 in cash and $215,050 in
the form of a secured promissory note in our favor. The purchase price for the
common stock was $8.82 per share. 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 Quick Stop and the
acquisition of Stallings, Freeman Spogli purchased 1,845,690 shares of common
stock and Chase Capital purchased 371,688 shares of common stock for an
aggregate purchase price of $25.0 million. The purchase price for the common
stock was $11.27 per share.
In November 1998, Peter Starrett, a director of The Pantry, purchased
22,185 shares of common stock for a purchase price of $250,125. Freeman Spogli
has the right to require the sale of Mr. Starrett's shares in the event it
sells all of its holdings of common stock. In addition, we have the right to
repurchase Mr. Starrett's shares in the event he ceases to serve as a director.
This right terminates on the first anniversary of the purchase date.
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See "Management--Stock Subscription Plan" for a description of loans made
to our Chief Executive Officer and our four other most highly compensated
executive officers for purchases of common stock under our stock subscription
plan.
Payments to Freeman Spogli
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.
Stockholders' Agreement
We have entered into a stockholders' agreement with Freeman Spogli, Chase
Capital and Peter J. Sodini in which:
. Freeman Spogli has a right of first offer enabling it to purchase
shares held by Chase Capital or Mr. Sodini prior to transfers of
shares of common stock to non-affiliates, other than transfers
pursuant to a registration statement or under Rule 144
. Freeman Spogli has the right 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 if Freeman Spogli is selling all of its
shares
. Freeman Spogli, Chase Capital and Sodini have rights to be included
in sales of common stock by the other stockholders
. 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 agreed to provide certain financial and other information to
Chase Capital
. we have agreed that all our transactions with affiliates will be on
terms no less favorable to The Pantry than would be obtained in an
arms length transaction and to limit the fees payable to Freeman
Spogli
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of April 15, 1998,
with respect to the beneficial ownership of capital stock by each person who
beneficially owns more than 5% of such shares, our Chief Executive Officer and
each of our four other most highly compensated executive officers, each of our
directors and all of our executive officers and directors as a group.
<TABLE>
<CAPTION>
Percentage of Percentage of
Shares of Class Shares of Class
Common Stock ----------------- Preferred Stock -----------------
Name and Address of Beneficially Before After Beneficially Before After
Beneficial Owner(1) Owned Offering Offering Owned Offering Offering
------------------- ------------ -------- -------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Freeman Spogli & Co.
Incorporated(2)........ 11,695,524(2) 82.3% 57.2% 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)................ 2,030,025 17.1% 11.2 -- -- --
Christopher C.
Behrens(4)(5)........ 268,413 2.3 1.5 -- -- --
Peter J. Sodini(6)...... 270,198 2.2 1.5 -- -- --
Dennis R. Crook(7)...... 20,213 * * -- -- --
William T. Flyg(8)...... 15,776 * * -- -- --
Douglas Sweeney(9)...... 28,594 * * -- -- --
Daniel J.
McCormack(10).......... 20,213 * * -- -- --
Peter M. Starrett(11)... 22,185 * * -- -- --
All directors and
executive officers as a
group
(11 individuals)....... 14,371,141 99.2% 69.3% 17,500 100.0% --
</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 2,346,000 shares issuable on the exercise of currently
exercisable warrants. 7,213,491 shares, 1,845,690 shares and 290,343
shares of common stock are held of record by FS Equity Partners III, L.P.,
FS Equity Partners IV, L.P. and FS Equity Partners International, L.P.,
respectively. As general partner of FS Capital Partners, L.P., which is
general partner of FSEP III, FS Holdings, Inc. has the sole power to vote
and dispose of the shares owned by FSEP III. As general partner of FS&Co.
International, L.P., which is the general partner of FSEP International,
FS International Holdings Limited 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 FS
Holdings, FS International Holdings and Freeman Spogli and 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 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 FS Capital Partners and 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, FS Holdings and
FS Capital Partners 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.
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(3) Includes 16,823 and 677 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 1,073,703 shares held of record by Chase Manhattan Capital, L.P.
and 956,322 shares held by CB Capital Investors, L.P. The business address
of Chase Capital and CB Capital Investors is c/o Chase Capital Partners,
380 Madison Avenue, 12th Floor, New York, New York, 10017. The general
partner of Chase Capital is Chase Manhattan Capital Corporation, a New
York corporation, whose business address is the same as that of Chase
Capital. The general partner of CB Capital Investors is CB Capital
Investors, Inc., a New York corporation, whose business address is the
same as that of CB Capital Investors. Each of CMCC and CBCI is a wholly
owned subsidiary of The Chase Manhattan Bank, which is a wholly owned
subsidiary of The Chase Manhattan Corporation, each of whose business
addresses is 270 Park Avenue, New York, New York 10017. The directors of
each of CMCC and CBCI are general partners of Chase Capital Partners,
which is also the limited partner of each of Chase Capital and CB Capital
Investors and the investment manager of each of CMCC and CBCI. The
business address of CCP is the same as that of each of Chase Capital, CB
Capital Investors, CMCC and CBCI. The individual general partners of Chase
Capital Partners are John R. Baron, Christopher C. Behrens, Mitchell J.
Blutt, Arnold L. Chavkin, Michael R. Hannon, Donald J. Hofmann, Stephen P.
Murray, John M.B. O'Connor, Brian J. Richmand, Jonas Steinman, Shahan D.
Soghikian, Jeffrey C. Walker and Damion E. Wicker, each of whom is a U.S.
citizen, whose principal occupation is general partner of CCP and whose
business address (other than Mr. Soghikian) is the same as that of CCP.
Mr. Soghikian's address is c/o Chase Capital Partners, 50 California
Street, Suite 2940, San Francisco, CA 94111. The remaining general
partners of CCP are Chase Capital Corporation, a New York corporation, CCP
Principals, L.P. and CCP European Principals, L.P., each a Delaware
limited partnership. Beneficial ownership of the shares held by Chase
Capital and CB Capital Investors may thus be deemed to be attributable to
each of CMCC, CBCI, CCP and each of the general partners of CCP.
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, which is the limited partner of, and which acts as the
investment manager for, each of Chase Capital and CB Capital Investors.
The actual pro rata portion of such beneficial ownership by each such
entity or individual 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 Chase Capital Partners, Chase Capital and CB Capital
Investors. Each of Chase Capital Partners, Chase Capital and CB Capital
Investors 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 268,413 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 Partners 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 Partner's grant to Chase Capital of a proxy to vote
such shares and restrictions on Baseball Partner'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 207,111 shares of common stock issuable upon the exercise of
options exercisable within 60 days after April 15, 1999.
(7) Includes 15,776 shares of common stock issuable upon the exercise of
options exercisable within 60 days after April 15, 1999.
(8) Includes 15,776 shares of common stock issuable upon the exercise of
options exercisable within 60 days after April 15, 1999.
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(9) Includes 19,720 shares of common stock issuable upon the exercise of
options exercisable within 60 days after April 15, 1999.
(10) Includes 15,776 shares of common stock issuable upon the exercise of
options exercisable within 60 days after April 15, 1999.
(11) Mr. Starrett's business address is c/o Freeman Spogli & Co. Incorporated,
11100 Santa Monica Boulevard, Suite 1900, Los Angeles, California 90025.
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DESCRIPTION OF CAPITAL STOCK
The following is a summary description of our capital stock.
Authorized Capital Stock
Upon consummation of the offering, our authorized capital stock will
consist of 50,000,000 shares of common stock and 5,000,000 shares of preferred
stock. Of the 50,000,000 shares of common stock authorized, 5,100,000 shares
have been reserved for issuance pursuant to our stock option plans and
2,346,000 have been reserved for issuance pursuant to warrants held by Freeman
Spogli.
Common Stock
Each share of our common stock is entitled to one vote on all matters
submitted to a vote of our stockholders. 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 preemptive rights or 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 $24.0 million of the proceeds of the offering to redeem
all shares of Series B preferred stock currently outstanding and pay accrued
dividends. However, the board of directors will have the authority, without
further action by the shareholders, to issue from time to time up to five
million shares of 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.
Common Stock Warrants
We have outstanding warrants to purchase a total of 2,346,000 shares of
common stock at a purchase price of $7.45 per share that will expire December
30, 2006. The warrants contain adjustment provisions in the event we declare
dividends or distributions, make stock splits or engage in mergers,
reorganizations or reclassifications. These warrants are held by Freeman
Spogli.
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Antitakeover Provisions
Charter and Bylaw Provisions. Upon consummation of the offering our
certificate of incorporation and bylaws will contain the following provisions
which may have the effect of preventing or hindering an unsolicited acquisition
or delaying removal of incumbent directors and officers:
. Preferred Stock. As noted above, our board of directors has the
authority to issue preferred stock with rights or preferences that
could impede the success of any attempt to change control of The
Pantry
. Action by Written Consent. Shareholders of The Pantry may not act by
written consent after such time as no person holds more than 30% of
the common stock
. Special Meetings. Special meetings of shareholders may only be called
by the board of directors, the Chairman of the Board or the President
of The Pantry
. Advance Notification. Advance notice is required in the bylaws with
respect to shareholder proposals and the nomination of candidates for
election of directors, other than nominations made by the board of
directors or a committee thereof
. Vacancies. Newly created directorships and vacancies in board seats
may be filled only by the board of directors prior to an annual
meeting of shareholders
. Amendments. Amendments to the provisions described above require
approval of holders of at least 66% of the outstanding shares
Delaware Antitakeover Statute. After consummation of the offering our
certificate of incorporation will provide that we will be subject to Section
203 of the Delaware General Corporation law after such time as no person holds
more than 40% of the common stock. Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless:
. prior to such date, the board of directors of the corporation
approves either the business combination or the transaction that
resulted in the stockholder's becoming an interested stockholder;
. upon consummation of the transaction that resulted in the
stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock,
excluding shares held by directors, officers and certain employee
stock plans; or
. on or after the consummation date the business combination is
approved by the board of directors and by the affirmative vote at an
annual or special meeting of stockholders of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
For purposes of Section 203, a "business combination" includes, among
other things, a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder, and an "interested
stockholder" is generally a person who, together with affiliates and associates
of such person:
. owns 15% or more of the corporation's voting stock; or
. is an affiliate or associate of the corporation and was the owner of
15% or more of the outstanding voting stock of the corporation at any
time within the prior three years.
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Transfer Agent and Registrar
The transfer agent and registrar for the common stock is First Union
National Bank.
Listing
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "PTRY."
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have outstanding 18,111,478
shares of common stock, assuming no exercise of options granted under our stock
option plans or of warrants held by Freeman Spogli. We have reserved 5,100,000
shares of common stock for issuance under our stock option plans, of which
options to purchase 576,861 shares are outstanding. We have also reserved
2,346,000 shares of common stock for issuance upon the exercise of the
warrants.
The shares of common stock sold in the offering will be freely tradable
without restriction or limitation under the Securities Act, except for any
shares held by our "affiliates," as defined under Rule 144 of the Securities
Act. Of our remaining 11,861,478 shares:
. 11,727,042 shares are "restricted securities," as defined under
Rule 144, that we issued and sold in private transactions and that
may be sold publicly only if registered under the Securities Act or
exempt from registration
. 134,436 shares that we sold to our employees in transactions
registered under the Securities Act are freely tradeable
Rule 144
In general, under Rule 144, as currently in effect, a person, including
an "affiliate" of The Pantry, who has beneficially owned "restricted
securities" for at least one year is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of:
. one percent of the then outstanding shares of common stock or
. the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding filing of notice of the sale
with the Securities and Exchange Commission
provided that we satisfy various manner of sale and notice requirements and
make available current public information about The Pantry.
Under Rule 144(k), a holder of "restricted securities" who is not an
"affiliate" of The Pantry 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 under 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,
the issuer.
Lock-Up Agreements
We and our executive officers and directors and all of our existing
stockholders have agreed not to sell or otherwise dispose of any shares of the
common stock for a period of 180 days after the date of this prospectus without
the prior written consent of Merrill Lynch.
Registration Rights Agreement
We have entered into a registration rights agreement with Freeman Spogli,
Chase Capital and Mr. Sodini obligating us:
. on up to three occasions at the request of holders of at least 50% of
the common stock held by the parties to the agreement, to register
the resale of all common stock held by the requesting holders
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. at any time commencing six months after this offering, to register
the resale of shares of common stock having a value of more than $5
million at the request of any party
. at any time, to allow any party to include shares in any registration
of common stock by us
Under the registration rights agreement, Freeman Spogli, Chase Capital
and Mr. Sodini have the right to purchase their pro rata portion of additional
shares issued by us. This right will terminate upon consummation of this
offering.
Registration Statement
We intend to register the shares of common stock issued, issuable or
reserved for issuance under the stock option plans as soon as practicable
following the date of this prospectus. These shares then will be freely
tradable in the open market, subject to the lock-up agreements described above
and, in the case of sales by "affiliates," to the requirements of Rule 144. As
of April 15, 1999, options to purchase approximately 285,991 shares of common
stock were vested, all of which will be subject to the 180-day lock-up period.
See "Management--Stock Option Plans."
Market Price
We cannot estimate the number of shares that may be sold in the future by
our stockholders or the effect that sales of shares by our stockholders will
have on the market price of the common stock. Sales of substantial amounts of
common stock, or the prospect of these sales, could materially adversely affect
the market price of the common stock.
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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 any of
its political subdivisions, 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 in any calendar year by virtue of being present in the United
States on at least 31 days in that calendar year and for an aggregate of at
least 183 days during the current calendar year and the two preceding calendar
years. For purposes of this calculation, you would count 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. This law is subject to change, possibly
retroactively, which could affect the continued validity of this discussion.
The tax treatment of the holders of the 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 covered in this discussion.
This 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 the common stock as a capital asset and not as part of a
"hedge," "straddle," "conversion transaction," "synthetic security" or other
integrated investment. We urge prospective investors to consult their tax
advisors regarding the U.S. federal tax consequences of acquiring, holding and
disposing of the 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
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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.
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, absent
knowledge to the contrary, that dividends paid to an address in a foreign
country are paid to a resident of that country. Under U.S. Treasury regulations
effective for payments after December 31, 1999, holders will be required to
satisfy certification requirements to claim treaty benefits. These regulations
also contain special rules regarding treaty benefits available for payments
made to intermediary or disregarded entities.
Except as otherwise provided under an applicable treaty, dividends that
are effectively connected with a 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 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 a 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 on gain recognized on a disposition of the 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 these
cases, the 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, the 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
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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.
However, even if we are or have been a U.S. real property holding
corporation a "non-5% holder" that 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. A non-5% holder is a non-U.S. holder that 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.
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. 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. 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. This 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 the 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 is a withholding tax imposed at the rate
of 31% on payments to persons that fail to furnish information under the United
States information reporting requirements. Additional information reporting
generally will not apply to dividends paid on the 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.
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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 Form W-8
or is a corporation or other exempt recipient that meets certain requirements.
In general, payment of the proceeds of a sale of common stock to or
through a United States office of a broker 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 Form W-8;
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.
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co.
and NationsBanc Montgomery Securities LLC are acting as representatives of each
of the underwriters named below. Subject to the terms and conditions described
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.............................................
Goldman, Sachs & Co. .............................................
NationsBanc Montgomery Securities LLC.............................
Total........................................................
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject
to the terms and conditions described in the purchase agreement, 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 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.
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 described 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
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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 $1.0 million 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 some legal matters by counsel for the underwriters and 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
937,500 additional shares of common stock at the public offering price
described 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. 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 above
table.
Reserved Shares
At the request of The Pantry, the underwriters have reserved for sale, at
the initial public offering price, up to 5% of the shares 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
. 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
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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
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "PTRY."
Initial Public Offering Price
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
. 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.
Qualified Independent Underwriter
We will use part of the proceeds of the offering to repay indebtedness.
Because more than ten percent of the net proceeds of the offering may be paid
to members or affiliates of members of the National Association of Securities
Dealers, Inc. participating in the offering, the offering will be conducted in
accordance with NASD Conduct Rule 2710(c)(8), which requires that the public
offering price of an equity security be no higher than the price recommended by
a qualified independent underwriter which has participated in the preparation
of the registration statement and performed its usual standard of due diligence
with respect thereto. Merrill Lynch, Pierce, Fenner & Smith Incorporated has
agreed to act as qualified independent underwriter with respect to the
offering, and the price of the common stock will be no higher than the price
recommended by Merrill Lynch, Pierce, Fenner & Smith Incorporated.
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
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.
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The representatives may also impose a penalty bid on other 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.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
The Pantry by Riordan & McKinzie, a Professional Corporation, Los Angeles,
California and 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 "Principal
Shareholders."
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 (which include an explanatory paragraph relating to the adoption of
statement of Financial Accounting Statements No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of)
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. 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.
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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.
The combined financial statements of Miller Enterprises, Inc. and
Peninsular Petroleum Company as of April 2, 1997 and April 1, 1998 and for each
of the three years ended March 27, 1996, April 2, 1997 and April 1, 1998
included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing.
The statement of net assets acquired from Miller Brothers and Circle
Investments, Ltd. as of January 28, 1999 of The Pantry, Inc. included in this
prospectus has been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and has been so included in reliance
upon the report of such firm given their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE 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
concerning the provisions of documents are necessarily summaries of the
material provisions of such documents, and prospective investors are referred
to the copy of the applicable document filed with the Commission.
The Pantry currently files periodic reports in accordance with the
Securities Exchange Act with the Commission. Upon consummation of the offering
The Pantry will be subject to the information and periodic reporting
requirements of the Securities Exchange Act and will file periodic reports,
proxy statements and other information, with the Commission. You may read and
copy any document we file, at the Commission's public reference facility 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.
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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 March 25, 1999 (unaudited)................................... F-4
Consolidated Statements of Operations for the years ended September 26,
1996, September 25, 1997 and September 24, 1998, and the six months
ended March 26, 1998 and March 25, 1999 (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 six months ended March 25, 1999 (unaudited).......... F-7
Consolidated Statements of Cash Flows for the years ended September 26,
1996, September 25, 1997 and September 24, 1998, and the six months
ended March 26, 1998 and March 25, 1999 (unaudited).................... F-8
Notes to Consolidated Financial Statements.............................. F-10
LIL' CHAMP FOOD STORES, INC.:
Independent Auditors' Report............................................ F-53
Balance Sheets as of December 30, 1995 and December 28, 1996, and
September 27, 1997 (unaudited)......................................... F-54
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-55
Statements of Shareholder's Equity for the years ended December 30, 1995
and December 28, 1996, and the nine months September 27, 1997
(unaudited)............................................................ F-56
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-57
Notes to Financial Statements........................................... F-58
QUICK STOP FOOD MART, INC.:
Report of Independent Certified Public Accountants...................... F-69
Balance Sheets as of December 31, 1996 and 1997, and June 30, 1998
(unaudited)............................................................ F-70
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-71
Statements of Stockholders' Equity for the years ended December 31,
1995, 1996 and 1997, and the six months ended June 30, 1998
(unaudited)............................................................ F-72
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-73
Notes to Financial Statements........................................... F-74
EXPRESS STOP, INC.:
Report of Independent Auditors.......................................... F-81
Balance Sheets as of December 31, 1997 and September 30, 1998
(unaudited)............................................................ F-82
Statements of Income for the year ended December 31, 1997, and the nine
months ended September 30, 1997 and 1998 (unaudited)................... F-83
Statements of Retained Earnings for the year ended December 31, 1997,
and the nine months ended September 30, 1997 and 1998 (unaudited)...... F-84
</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-85
Notes to Financial Statements.......................................... F-86
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
Report of Independent Certified Public Accountants..................... F-92
Combined Balance Sheets as of April 2, 1997 and April 1, 1998, and
December 30, 1998..................................................... F-93
Combined Statements of Income for the years ended March 27, 1996, April
2, 1997, April 1, 1998 and the nine months ended December 25, 1997 and
December 30, 1998..................................................... F-94
Combined Statements of Stockholders' Equity for the years ended March
27, 1996, April 2, 1997, and April 1, 1998............................ F-95
Combined Statements of Cash Flows for the years ended March 27, 1996,
April 2, 1997, and April 1, 1998, and for the nine months ended
December 25, 1997 and December 30, 1998............................... F-96
Notes to Combined Financial Statements................................. F-97
STATEMENT OF NET ASSETS ACQUIRED FROM MILLER BROTHERS AND CIRCLE
INVESTMENTS, LTD.
Independent Auditors' Report........................................... F-106
Statement of Net Assets Acquired from Miller Brothers and Circle
Investments, Ltd. as of January 28, 1999.............................. F-107
Notes to Statement of Net Assets Acquired.............................. F-108
TAYLOR OIL COMPANY:
Independent Auditors' Report........................................... F-109
Statement of Assets Sold .............................................. F-110
Statements of Income from Retail Operations for the years ended
December 31, 1996, 1997 and 1998...................................... F-111
Statements of Cash Flows from Retail Operations for the years ended
December 31, 1996, 1997 and 1998...................................... F-112
Notes to Financial Statements.......................................... F-113
</TABLE>
F-2
<PAGE>
The accompanying financial statements give effect to the consummation of
the 51-for-1 stock split that is expected to take place prior to the
commencement of the proposed offering of securities. The following report is in
the form that will be furnished by Deloitte & Touche LLP upon the consummation
of the stock split described in Note 12 to the financial statements assuming
that from December 18, 1998 to the date of such stock split no other material
events have occurred that would affect the accompanying financial statements or
require disclosure therein.
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
Pantry'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 Pantry 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.
Raleigh, North Carolina
December 18, 1998" (May , 1999 as to Note )
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
May 5, 1999
F-3
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited as to March 25, 1999 information)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 25, September 24, March 25,
1997 1998 1999
------------- ------------- -----------
(Unaudited)
ASSETS
------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents............. $ 3,347 $ 34,404 $ 24,999
Receivables (net of allowance for
doubtful accounts of $150 at
September 25, 1997; $280 at
September 24, 1998 and $395 at March
25, 1999)............................ 2,101 9,907 14,829
Inventories (Note 3).................. 17,161 47,809 61,378
Income taxes receivable (Note 6)...... -- 488 4,581
Prepaid expenses...................... 1,204 2,216 2,634
Property held for sale................ 3,323 3,761 82
Deferred income taxes, net (Note 6)... 1,142 3,988 4,133
-------- -------- --------
Total current assets............... 28,278 102,573 112,636
-------- -------- --------
Property and equipment, Net (Notes 4,
5, 7 and 10).......................... 77,986 300,978 405,727
-------- -------- --------
Other assets:
Goodwill (net of accumulated
amortization of $9,705 at September
25, 1997, $11,940 at September 24,
1998 and $13,854 at March 25, 1999)
(Notes 2 and 10)..................... 20,318 120,025 169,431
Deferred lease costs (net of
accumulated amortization of $8,956
at September 25, 1997, 9,001 at
September 24, 1998 and $9,024 at
March 25, 1999) ..................... 314 269 247
Deferred financing costs (net of
accumulated amortization of $4,345
at September 25, 1997, $4,871 at
September 24, 1998 and $5,840 at
March 25, 1999) (Note 5)............. 4,578 14,545 13,130
Environmental receivables (Note 8).... 6,511 13,187 12,732
Deferred income taxes (Note 6)........ 156 -- --
Escrow for Lil' Champ acquisition
(Note 2)............................. 4,049 -- --
Other................................. 609 3,243 9,027
-------- -------- --------
Total other assets................. 36,535 151,269 204,567
-------- -------- --------
Total assets........................... $142,799 $554,820 $722,930
======== ======== ========
</TABLE>
F-4
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS--(Continued)
(Unaudited as to March 25, 1999 information)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 25, September 24, March 25,
1997 1998 1999
------------- ------------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
-----------------------------
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt (Note
5)....................................... $ 33 $ 45 $ 5,431
Current maturities of capital lease
obligations (Note 7)..................... 285 1,240 1,240
Accounts payable:
Trade................................... 16,035 49,559 66,280
Money orders............................ 3,022 5,181 7,965
Accrued interest (Note 5)................. 4,592 11,712 10,794
Accrued compensation and related taxes.... 3,323 6,719 7,862
Income taxes payable (Note 6)............. 296 -- --
Other accrued taxes....................... 2,194 7,007 8,538
Accrued insurance......................... 3,887 5,745 8,501
Other accrued liabilities................. 2,856 24,348 30,861
-------- -------- --------
Total current liabilities............. 36,523 111,556 147,472
-------- -------- --------
Long-term debt (Note 5)..................... 100,305 327,269 454,277
-------- -------- --------
Other noncurrent liabilities:
Environmental costs (Note 8).............. 7,806 17,137 17,185
Deferred income taxes (Note 6)............ -- 20,366 23,414
Capital lease obligations (Note 7)........ 679 12,129 11,498
Employment obligations.................... 1,341 934 749
Accrued dividends on preferred stock
(Notes 2 and 13)......................... 7,958 4,391 5,837
Other..................................... 6,060 21,734 26,052
-------- -------- --------
Total other non-current liabilities... 23,844 76,691 84,735
-------- -------- --------
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 March 25, 1999
(aggregate liquidation value: September
25, 1997--$43,499; September 24, 1998 and
March 25, 1999--$17,500) (Notes 2 and 13) -- -- --
Common stock, $.01 par value, 15,300,000
shares authorized; 5,815,479 issued and
outstanding at September 25, 1997,
11,704,857 issued and outstanding at
September 24, 1998 and 11,864,478 issued
and outstanding at March 25, 1999
(Note 12)................................ 58 117 119
Additional paid-in capital................ 5,339 68,939 70,727
Shareholder loans......................... -- (215) (937)
Accumulated deficit....................... (23,270) (29,537) (33,463)
-------- -------- --------
Total shareholders' equity (deficit).. (17,873) 39,304 36,446
-------- -------- --------
Total liabilities and shareholders' equity
(deficit).................................. $142,799 $554,820 $722,930
======== ======== ========
</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>
Six Months Ended
-----------------------
March 26, March 25,
September 26, September 25, September 24, 1998 1999
1996 1997 1998 (Unaudited) (Unaudited)
------------- ------------- ------------- ----------- -----------
(52 weeks) (52 weeks) (52 weeks) (26 weeks) (26 weeks)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $188,091 $202,440 $460,798 $193,765 $303,962
Gasoline sales........ 192,737 220,166 509,958 215,718 360,917
Commissions........... 3,979 4,787 14,128 6,358 10,520
-------- -------- -------- -------- --------
Total revenues....... 384,807 427,393 984,884 415,841 675,399
-------- -------- -------- -------- --------
Cost of sales:
Merchandise........... 125,979 132,846 303,968 126,865 204,825
Gasoline.............. 167,610 197,268 447,565 190,324 314,633
-------- -------- -------- -------- --------
Total cost of sales.. 293,589 330,114 751,533 317,189 519,458
-------- -------- -------- -------- --------
Gross Profit............ 91,218 97,279 233,351 98,652 155,941
-------- -------- -------- -------- --------
Operating Expenses:
Store expenses........ 57,841 60,208 140,089 61,853 95,215
General and
administrative
expenses............. 17,751 16,796 32,761 15,532 22,356
Merger integration
costs (Note 2)....... -- -- 1,016 -- --
Restructuring charges
(Note 11)............ 1,560 -- -- -- --
Impairment of long-
lived assets
(Note 10)............ 3,034 -- -- -- --
Depreciation and
amortization......... 9,158 9,504 27,642 11,775 17,830
-------- -------- -------- -------- --------
Total operating
expenses............ 89,344 86,508 201,508 89,160 135,401
-------- -------- -------- -------- --------
Income from operations.. 1,874 10,771 31,843 9,492 20,540
-------- -------- -------- -------- --------
Other Income (Expense):
Interest expense...... (11,992) (13,039) (28,946) (12,851) (18,873)
Miscellaneous......... (660) 1,293 1,776 774 128
-------- -------- -------- -------- --------
Total other expense.. (12,652) (11,746) (27,170) (12,077) (18,745)
-------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary loss..... (10,778) (975) 4,673 (2,585) 1,795
Income tax benefits
(expense) (Note 6)..... 2,664 -- -- 916 (718)
-------- -------- -------- -------- --------
Income (loss) before
extraordinary loss..... (8,114) (975) 4,673 (1,669) 1,077
Extraordinary loss (Note
5)..................... -- -- (7,998) (6,800) (3,557)
-------- -------- -------- -------- --------
Net loss................ (8,114) (975) (3,325) (8,469) (2,480)
Preferred dividends..... (2,654) (5,304) (2,942) (1,586) (1,446)
-------- -------- -------- -------- --------
Net loss applicable to
common shareholders.... $(10,768) $ (6,279) $ (6,267) $(10,055) $ (3,926)
======== ======== ======== ======== ========
Earnings per share (Note
16):
Basic:
Income (loss) before
extraordinary loss.. $ (1.89) $ (1.08) $ 0.18 $ (0.36) $ (0.03)
Extraordinary loss... $ -- $ -- $ (0.82) $ (0.77) $ (0.30)
Net income (loss).... $ (1.89) $ (1.08) $ (0.64) $ (1.13) $ (0.33)
Diluted:
Income (loss) before
extraordinary loss.. $ (1.89) $ (1.08) $ 0.16 $ (0.36) $ (0.03)
Extraordinary loss... $ -- $ -- $ (0.73) $ (0.77) $ (0.30)
Net income (loss).... $ (1.89) $ (1.08) $ (0.57) $ (1.13) $ (0.33)
</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 Six Months Ended March 25, 1999 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................... -- $ -- 5,100,000 $ 51 $ 6,948
Net loss................ -- -- -- -- --
Issuances of common and
preferred stock........ 25,999 -- 715,479 7 (453)
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ---------- -------- --------
Balance, September 26,
1996................... 25,999 -- 5,815,479 58 6,495
Net loss................ -- -- -- -- --
Net proceeds from stock
issue.................. 17,500 -- -- -- 15,953
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ---------- -------- --------
Balance, September 25,
1997................... 43,499 -- 5,815,479 58 22,448
-------- -------- ---------- -------- --------
Net loss................ -- -- -- -- --
Issuances of common
stock.................. -- -- 5,889,378 59 57,092
Contribution of Series A
Preferred Stock and
related dividends to
Additional Paid in
Capital................ (25,999) -- -- -- 6,508
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ---------- -------- --------
Balance, September 24,
1998................... 17,500 -- 11,704,857 117 86,048
Net income.............. -- -- -- -- --
Issuances of common
stock.................. -- -- 156,621 2 1,788
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ---------- -------- --------
Balance, March 25,
1999................... 17,500 $ -- 11,861,478 $ 119 $ 87,836
======== ======== ========== ======== ========
<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) $(10,161) $ -- $ (6,223) $(16,333)
Net loss................ -- -- -- (8,114) (8,114)
Issuances of common and
preferred stock........ -- (453) -- -- (446)
Dividends on preferred
stock.................. -- -- -- (2,654) (2,654)
-------- -------- ---------- -------- --------
Balance, September 26,
1996................... (17,109) (10,614) -- (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) 5,339 -- (23,270) (17,873)
-------- -------- ---------- -------- --------
Net loss................ -- -- -- (3,325) (3,325)
Issuances of common
stock.................. -- 57,092 (215) -- 56,936
Contribution of Series A
Preferred Stock and
related dividends to
Additional Paid in
Capital................ -- 6,508 -- -- 6,508
Dividends on preferred
stock.................. -- -- -- (2,942) (2,942)
-------- -------- ---------- -------- --------
Balance, September 24.
1998................... (17,109) 68,939 (215) (29,537) 39,304
-------- -------- ---------- -------- --------
Net loss................ -- -- -- (2,480) (2,480)
Issuances of common
stock.................. -- 1,788 (722) -- 1,068
Dividends on preferred
stock.................. -- -- -- (1,446) (1,446)
-------- -------- ---------- -------- --------
Balance, March 25,
1999................... $(17,109) $ 70,727 $ (937) $(33,463) $ 36,446
======== ======== ========== ======== ========
</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 Six Months Ended
----------------------------------------- -----------------------
March 26, March 25,
September 26, September 25, September 24, 1998 1999
1996 1997 1998 (Unaudited) (Unaudited)
------------- ------------- ------------- ----------- -----------
(52 weeks) (52 weeks) (52 weeks) (26 weeks) (26 weeks)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss................ $(8,114) $ (975) $ (3,325) $ (8,469) $ (2,480)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Extraordinary loss..... -- -- 2,006 6,800 3,405
Impairment of long-
lived assets.......... 3,034 -- -- -- --
Depreciation and
amortization.......... 9,158 9,504 27,642 11,775 17,830
Provision for deferred
income taxes.......... (1,558) 371 138 (1,415) 120
(Gain) loss on sale of
property and
equipment............. 470 (1,054) 531 209 (410)
Provision for
environmental
expenses.............. 512 1,574 6,181 57 48
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) (3,758) (948)
Inventories............ (937) (2,273) (4,518) (781) (4,628)
Prepaid expenses....... 20 (429) 390 879 (18)
Other non-current
assets................ 432 (4,295) 5,111 5,366 (2,216)
Accounts payable....... 2,104 603 13,896 1,397 7,911
Other current
liabilities and
accrued expenses...... (639) 3,393 2,241 1,559 (5,686)
Employment
obligations........... (255) (698) (407) (185) (185)
Other noncurrent
liabilities........... 886 2,155 6,608 4,218 662
------- -------- --------- --------- ---------
Net cash provided by
operating activities... 5,415 7,338 48,032 17,652 13,405
------- -------- --------- --------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale.......... (4,050) (1,828) (5,203) (2,648) (93)
Additions to property
and equipment.......... (7,084) (14,749) (43,153) (17,814) (26,414)
Proceeds from sale of
property held for
sale................... 2,462 1,345 4,807 2,025 4,743
Proceeds from sale of
property and
equipment.............. 1,468 2,315 7,648 682 376
Acquisitions of related
businesses, net of cash
acquired............... -- (12,162) (250,592) (145,398) (129,900)
------- -------- --------- --------- ---------
Net cash used in
investing activities... (7,204) (25,079) (286,493) (163,153) (151,288)
------- -------- --------- --------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases... (347) (303) (1,424) (577) (631)
Proceeds from issuance
of capital leases...... -- -- 1,086 -- --
Principal repayments of
long-term debt......... (20) (26) (51,543) (57,009) (143,999)
Net proceeds from
issuance of long-term
debt................... -- 200 278,508 209,022 275,000
Net proceeds from equity
issues................. -- 15,953 56,935 31,936 1,068
Other financing costs... (3,505) (74) (14,044) (12,674) (2,960)
------- -------- --------- --------- ---------
Net cash provided by
(used in) financing
activities............. (3,872) 15,750 269,518 170,698 128,478
------- -------- --------- --------- ---------
Net increase (decrease)
in cash................ (5,661) (1,991) 31,057 25,197 (9,405)
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 $ 28,544 $ 24,999
======= ======== ========= ========= =========
</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 Six Months Ended
----------------------------------------- ---------------------------
March 26, March 25,
September 26, September 25, September 24, 1998 1999
1996 1997 1998 (unaudited) (unaudited)
------------- ------------- ------------- ----------- -----------
(26 weeks) (26 weeks)
<S> <C> <C> <C> <C> <C> <C>
Cash paid (refunded)
during the year:
Interest.............. $12,719 $12,863 $21,826 $6,570 $19,791
======= ======= ======= ====== =======
Taxes................. $ (403) $ (917) $ 784 $ 670 $ 302
======= ======= ======= ====== =======
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1997 and 1998, The Pantry entered into several business
acquisitions and divestitures (see Note 2--Business Acquisitions and Note 12--
Common Stock). In connection with the Lil' Champ acquisition, the holders of
The Pantry'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 Pantry, resulting in an increase in paid in capital of $6,508.
F-9
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as to March 26, 1998 and March 25, 1999 information)
NOTE 1--HISTORY OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Pantry
The consolidated financial statements include the accounts of The Pantry,
Inc. and its wholly-owned subsidiaries, Sandhills, Inc., Lil' Champ Food
Stores, Inc., and its wholly-owned subsidiary, Miller Enterprises Inc., Global
Communications, Inc., PH Holding Corporation and PH Holding'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 1,149 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, an entity formed to affect the 1987
leveraged buy-out of The Pantry. On November 2, 1993, The Pantry was merged
into Montrose and Montrose's name was changed to The Pantry. Montrose 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., and FS Equity Partners International,
L.P., acquired a 39.9% interest in The Pantry and Chase Manhattan Capital
Corporation acquired a 12.0% interest in The Pantry 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
Freeman Spogli entities and Chase Capital 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 Freeman Spogli entities purchased additional
preferred stock of The Pantry.
On October 23, 1997, The Pantry acquired 100% of the outstanding common
stock of Lil' Champ from Docks U.S.A., Inc. Also during fiscal 1998, The Pantry
acquired several smaller convenience store chains (see discussion of 1998
acquisitions at Note 2--Business Acquisitions). As of September 24, 1998, The
Pantry was owned 76.4% and 17.0% by the Freeman Spogli entities and Chase
Capital, respectively.
Unaudited Financial Statements--In the opinion of management, the
unaudited consolidated balance sheet at March 25, 1999, and the unaudited
consolidated statements of operations, shareholders' equity, and cash flows for
the six months ended March 26, 1998 and March 25, 1999 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.
The results of operations for the six months ended March 25, 1999 and
March 26, 1998 are not necessarily indicative of results to be expected for the
full fiscal years. The results of operations and comparisons with prior and
subsequent interim periods are materially impacted by the results of operations
of businesses acquired since September 25, 1997. These acquisitions have been
accounted for under the purchase method see "Note 2--Businesses Acquisitions").
Furthermore, the
F-10
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
convenience store industry in the Company's marketing areas experiences higher
levels of revenues and profit margins during the summer months than during the
winter months. Historically, the Company has achieved revenues and earnings in
its third and fourth quarters.
Acquisition Accounting
Montrose acquired all of The Pantry's common stock in a leveraged buy-out
as of August 13, 1987. Certain individuals and entities which held an ownership
interest in The Pantry retained approximately 45% of ownership interest after
the August 13, 1987 transaction. A new basis of accounting was established as a
result of the acquisition to the extent of the "new" equity interests (partial
step-up). The original basis of accounting was retained for those shareholders
that retained an equity interest in Montrose 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.
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 Pantry's fiscal
years contained 52 weeks.
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.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out method, except for gasoline inventories maintained
by Lil' Champ, for which cost is determined using the first-in, first-out
method.
Property Held for Sale
Certain property is classified as current assets when management's intent
is to sell these assets in the ensuing fiscal year, and is recorded at the
lower of cost or fair value less cost to sell.
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.
F-11
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
Estimated useful lives for financial statement purposes are as follows:
<TABLE>
<S> <C>
Buildings............................................. 20 to 33 1/2 years
Gasoline equipment.................................... 7 to 10 years
Other equipment, furniture and fixtures............... 3 to 10 years
Automobiles........................................... 3 to 5 years
</TABLE>
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,
Accounting for Leases, 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.
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 Pantry 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.
Long-Lived Assets
In 1996, The Pantry early-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 (SFAS No. 121.) 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).
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.
Deferred Financing Cost
Deferred financing cost represents expenses related to issuing The
Pantry'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-12
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
Vendor Allowances, Rebates and Other Vendor Payments
The Company receives payments for vendor allowances, volume rebates and
other supply arrangements in connection with various programs. The Company
records these payments a reduction to cost of sales or expenses to which the
particular vendor payment relates. For unearned payments, the Company records
deferred income and amortizes the balance, as earned, over the term of the
respective agreement.
Environmental Costs
The Company accounts for the cost incurred to comply with federal and
state environmental regulations as follows:
The environmental reserve reflected in the financial statements is based
on internal and external estimates of the costs to remediate sites
relating to the operation of underground storage tanks. Factors
considered in the estimates of the reserve are (i) the expected cost to
remediate each contaminated site, (ii) the estimated length of time to
remediate each site and (iii) the cash flows associated with these
estimates are discounted at a ten percent rate.
Amounts expected to be reimbursed under state trust fund programs or
third party insurers are recognized as receivables. These receivables
exclude all deductibles and an estimate for uncollectible
reimbursements. The Company's reimbursement experience exceeds a 95%
collection rate. The adequacy of the liability and uncollectible
receivable reserve is evaluated at least annually and adjustments are
made based on updated experience and changes in governmental policy.
Annual fees for tank registration and environmental compliance testing
are expensed as incurred.
Expenditures for upgrading tank systems including corrosion protection,
installation of leak detectors and overfill/spill devices are
capitalized and depreciated over the remaining useful life of the asset
or the respective lease term, whichever is less.
The tank removal costs associated with locations which the Company plans
to sell or dispose of in the near future are estimated annually and a
liability is established through a charge to expense. The costs to
remove tanks at active locations are expensed as incurred.
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.
F-13
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
Excise and Use Taxes
The Pantry collects and remits various federal and state excise taxes on
petroleum products. Sales and cost of sales included approximately $52,676,000,
$61,192,000, and $154,954,000 for 1996, 1997, and 1998, respectively.
Sales and cost of sales included $61,129,000 and $130,219,000 of such
taxes for the six months ended March 26, 1998 and March 25, 1999, respectively
(unaudited).
Advertising costs
Advertising costs are expensed as incurred. Advertising expense was
approximately $1,047,000, $581,000 and $1,019,000 for fiscal 1996, 1997 and
1998, respectively.
Stock Based Compensation
The Pantry's stock option plan is accounted for in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. The Pantry follows the disclosure requirements of SFAS No. 123,
Accounting for Stock Based Compensation.
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.
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
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
Pantry'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
F-14
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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 Pantry's net income or stockholder's equity as The Pantry 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 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
Pantry has not determined the effect of SFAS No. 133 on its consolidated
financial statements.
NOTE 2--BUSINESS ACQUISITIONS:
Fiscal 1998 Acquisitions:
During fiscal 1998, The Pantry 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
for $136.4 million (including direct acquisition costs, 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 488 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, principal amount of senior subordinated notes due 2007, cash on
hand and the purchase by existing stockholders and management of The
Pantry of an additional $32.4 million of The Pantry's capital stock.
. The March 19, 1998 acquisition of the operating assets of Wooten Oil
Company, Inc., located in eastern North Carolina, for approximately $9.0
million, which was financed primarily from The Pantry's 1998 bank credit
facility and cash on hand.
. The April and May 1998 acquisition of 12 convenience stores from United
Fuels Corporation, Inc. and two other entities for approximately $20.3
million. These stores are located in the
F-15
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
Gainesville, Florida area and were financed primarily from The Pantry's
1998 bank credit Facility and cash on hand.
. The July 2, 1998 acquisition of certain assets of Quick Stop Food Mart,
Inc. including, but not limited to, 75 convenience stores located
throughout North Carolina and South Carolina. Total consideration paid
was approximately $56.0 million, and was funded by proceeds of $25.0
million from 1998 bank credit facility, an equity investment of $25.0
million by existing shareholders of The Pantry, and cash on hand.
. The July 15, 1998 acquisition of certain assets of Stallings Oil Company,
Inc. including, but not limited to, 42 convenience stores located
throughout North Carolina and Virginia. Total consideration paid was
approximately $29.3 million. The Stallings acquisition was financed by
proceeds of $25.0 million from The Pantry's acquisition facility and cash
on hand.
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, internal estimates and certain
assumptions management believes are reasonable. Accordingly, the purchase price
allocations are subject to finalization pending the completion of internal and
external appraisals of assets acquired. 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.
F-16
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
Fiscal 1999 Acquisitions (Unaudited):
Subsequent to September 24, 1998, The Pantry acquired the businesses
described below, which were accounted for by the purchase method of accounting:
. The October 22, 1998 acquisition of certain assets of A.G. Lee Oil
Company, Inc., located in eastern and central North Carolina, for $3.8
million, financed by cash on hand.
. The November 5, 1998 acquisition of certain assets of Express Stop,
Inc. including, but not limited to, 22 convenience stores located
throughout North and South Carolina. Total consideration paid was
approximately $21.8 million, and was financed by proceeds of $16.0
million from The Pantry's 1998 bank credit facility and cash on hand.
. The January 28, 1999 acquisition of all of the outstanding common
stock of Miller Enterprises, Inc. and certain real estate assets of
certain affiliates of Miller Enterprises. Miller Enterprises is a
leading operator of convenience stores, operating 121 stores located
in central Florida and operated under the name "Handy Way." Total
consideration paid was $95.1 million and was financed with proceeds
from The Pantry's 1999 bank credit facility and cash on hand.
. The February 25, 1999 acquisition of certain assets of 60 convenience
stores of Taylor Oil Company. The stores are located throughout North
Carolina and Virginia and are operated under the name "ETNA." Total
consideration was approximately $23.3 million and was financed by
proceeds of $19.0 million from The Pantry's 1999 bank credit facility
and cash on hand.
The purchase price of the Miller Enterprises and affiliates acquisition is
subject to certain working capital and capital expenditure adjustments pending
the completion of a closing balance-sheet audit of Miller Enterprises as of
January 28, 1999. $2.5 million of the purchase price of the Express Stop, Inc.
acquisition was subject to an escrow agreement until March 1999, and was to be
forfeited upon the occurrence of specific events or conditions relating to the
operations of video poker machines in the State of South Carolina. The events
or conditions specified in the purchase agreement did not occur, and the $2.5
million held in escrow was paid to Express Stop, Inc. in March 1999.
Goodwill associated with the 1999 acquisitions is being amortized over 30
years using the straight-line method.
The following unaudited pro forma information presents a summary of
consolidated results of operations of The Pantry and acquired businesses as if
the 1998 and 1999 transactions occurred at the beginning of the fiscal year for
each of the periods presented (amounts in thousands):
<TABLE>
<CAPTION>
Six Months Ended
--------------------
March 26, March 25,
1997 1998 1998 1999
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues................... $1,716,779 $1,658,157 $827,185 $805,923
Income (loss) before
extraordinary loss.............. $ (9,220) $ 3,514 $ 1,207 $ (1,050)
Net loss......................... $ (9,220) $ (3,286) $ (5,593) $ (4,607)
</TABLE>
F-17
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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.
In connection with the Lil' champ acquisition, The Pantry recorded an
integration charge of approximately $1.0 million for costs of combining its
existing businesses with the acquired businesses of Lil' Champ. The charge
includes $.3 million for relocation costs, $.6 million for elimination of
duplicated contractual services for which there is no future economic benefit,
and $.1 million for other consolidation and related expenses. The Pantry's
integration plan includes the (1) relocation of approximately 11 employees, (2)
elimination of duplicate contractual services, (3) conforming Lil' Champ's
corporate and field operations to The Pantry's policies and procedures, and (4)
disposal of unprofitable and unstrategic locations and operations. The
integration plan is substantially complete as of September 24, 1998.
During fiscal 1997, The Pantry 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-18
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 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, September 24, 1998 and March 25, 1999, long-term
debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
March
1997 1998 25, 1999
-------- -------- --------
<S> <C> <C> <C>
Senior notes payable; due November 15, 2000;
interest payable semi-annually at 12%....... $ 99,995 $ 48,995 $ --
Senior subordinated notes payable; due
October 15, 2007; interest payable semi-
annually at 10.25%.......................... -- 200,000 200,000
Term loan facility--Tranche A; interest
payable monthly at LIBOR (4.94 at March 25,
1999) plus 3.0%; principal due in quarterly
installments beginning April 30, 1999
through April 30, 2003...................... -- -- 79,086
Term loan facility--Tranche B; interest
payable monthly at LIBOR (4.94 at March 25,
1999) plus 3.5%; principal due in quarterly
installments beginning April 30, 1999
through April 30, 2004...................... -- -- 159,939
Acquisition facility; interest payable
monthly at LIBOR (4.94% at March 25, 1999)
plus 2.5%; principal due in quarterly
installments through October 31, 2002....... -- 78,000 19,000
Notes payable to McLane Company, Inc.; zero
(0.0%) interest, with principal due in
annual installments through February 26,
2003........................................ -- -- 1,380
Other notes payable; various interest rates
and maturity dates.......................... 343 319 303
-------- -------- --------
100,338 327,314 459,708
Less--current maturities..................... (33) (45) (5,431)
-------- -------- --------
$100,305 $327,269 $454,277
======== ======== ========
</TABLE>
F-19
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
While the senior notes are unsecured, the terms of the senior notes
contain certain covenants restricting (1) the use of proceeds from the
offering; (2) the placing of liens on properties; (3) certain "restricted
payments" as defined in the agreement; (4) the incurrance of additional debt;
(5) the sale of assets; (6) any merger, consolidation or change in control; (7)
lines of business and (8) transactions with affiliates. In addition, the
indenture requires certain positive covenants including the maintenance of a
consolidated fixed charge ratio of greater than 1.69 to 1.0. On January 28,
1999, The Pantry redeemed $49.0 million in principal of Senior Notes (see
discussion below).
On October 23, 1997 in connection with the Lil' Champ acquisition, The
Pantry 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 Pantry'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 Pantry 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 17--
Supplemental Guarantors Information). 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
transactions 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.
On October 23, 1997 in connection with the Lil' Champ acquisition, The
Pantry entered into the 1998 bank credit facility consisting of a $45.0 million
revolving credit facility and a $30 million acquisition facility.
Under the terms of the1998 bank credit facility, the acquisition facility
is available to finance acquisition of related businesses with certain
restrictions (see Note 2--Business Acquisitions). The 1998 bank credit facility
contains covenants restricting the ability of The Pantry and any of its
subsidiaries 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. The Pantry is also required to
comply with financial covenants with respect to (a) a minimum coverage ratio,
(b) a minimum pro forma cash flow, (c) a maximum pro forma leverage ratio, and
(d) a maximum capital expenditure allowance.
During fiscal 1998, the 1998 bank credit facility was amended to increase
the amount available to The Pantry for acquisitions from $30.0 million to $85.0
million. In addition, amendments were made to certain of The Pantry's financial
covenants under the bank credit facility, including (a) the minimum coverage
ratio, (b) the minimum pro forma cash flow, (c) the maximum pro forma
F-20
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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 Pantry had outstanding letters of credit of $13,545,000 at September
24, 1998, issued under the revolving credit facility.
On January 28, 1999, The Pantry entered into the 1999 bank credit
facility, replacing the 1998 bank credit facility, consisting 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; (2) a $50.0 million acquisition facility available to finance
acquisition of related businesses and (3) term loan facilities with outstanding
borrowings of $240.0 million.
The 1999 bank credit facility contains covenants restricting the ability
of The Pantry and any of its subsidiaries 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. The Pantry is
also required to comply with financial covenants with respect to (a) a minimum
coverage ratio, (b) a minimum pro forma cash flow, as defined in the 1999 bank
credit facility, (c) a maximum pro forma leverage ratio, and (d) a maximum
capital expenditure allowance.
The Pantry 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 (described below), (ii) repay $94.0
million outstanding under the prior bank credit facility, and replace
outstanding letters of credit (iii) redeem its outstanding senior notes in the
aggregate principal amount of $49.0 million and (iv) pay related transaction
costs.
On January 28, 1999, The Pantry 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 Pantry's term loan
facilities, and a draw under its revolving credit facility.
The Pantry 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 bank credit facility, and the write-off of
deferred financing costs related to our repayment of our former credit
facility.
As of September 24, 1998 and March 25, 1999, The Pantry was in compliance
with all covenants and restrictions relating to all its outstanding borrowings.
As of September 24, 1998 and March 25, 1999, substantially all of The
Pantry's and its subsidiaries' net assets are restricted as to payment of
dividends and other distributions.
F-21
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The annual maturities of notes payable at September 24, 1999 are as
follows (in thousands):
<TABLE>
<S> <C>
Year Ending September:
1999............................................................ $ 67
2000............................................................ 39
2001............................................................ 49,038
2002............................................................ 47
2003............................................................ 78,049
Thereafter...................................................... 200,074
--------
Total........................................................... $327,314
========
</TABLE>
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>
F-22
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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>
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>
F-23
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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 for a portion of the net operating losses and credits
which The Pantry believes may expire unused, as deferred tax assets. 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,
primarily to provide for operating loss carryforwards and available tax credits
that more likely than not will not be realized, based on estimates of future
earnings and expected timing of reversals of temporary differences. 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 Pantry, with additional taxes plus
penalties and accrued interest totaling approximately $5 million, for the
periods February 1, 1992 to September 26, 1996. The Pantry reached a
preliminary settlement with the State of North Carolina, which is pending final
approval by the State. Under the proposed settlement, The Pantry 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
of approximately $1.2 million, which is fully offset by a corresponding
reduction to the valuation allowance. The Pantry is contesting the Tennessee
assessment and believes that, in the event of a mutual settlement, the
assessment amount and related penalties (approximately $250,000) would be
substantially reduced. Based on this, The Pantry believes the outcome of the
audits will not have a material adverse effect on The Pantry'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>
F-24
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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.
Certain of our leases require contingent rental payments; such amounts are not
material for the fiscal years presented.
NOTE 8--COMMITMENTS AND CONTINGENCIES:
As of September 24, 1998, The Pantry was contingently liable for
outstanding letters of credit in the amount of $13,545,000 related primarily to
several areas in which The Pantry is self-insured. The letters of credit are
not to be drawn against unless The Pantry defaults on the timely payment of
related liabilities.
The Pantry is involved in certain legal actions arising in the normal
course of business. In the opinion of management, based on a review of such
legal proceedings, the ultimate outcome of these actions will not have a
material effect on the consolidated financial statements.
Unamortized Liabilities Associated with Vendor Payments
McLane Company, Inc.--The Pantry purchases over 50% of our general
merchandise from a single wholesaler, McLane. The Pantry's arrangement with
McLane is governed by a five-year distribution service agreement under which
McLane supplies general merchandise, including tobacco products, grocery items,
health and beauty aids and other products. The Pantry receives annual service
allowances based on the number of stores operating on each contract anniversary
date. If The Pantry were to default under the contract or terminate the
distribution service agreement prior to March 28, 2003, The Pantry must
reimburse McLane the unearned, unamortized portion of the
F-25
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
service allowance payments received to date. In accordance with the terms of
the distribution service agreement and in accordance with generally accepted
accounting practices, the original service allowances received and all future
service allowances are amortized to cost of goods sold on a straight-line
method over the life of the agreement.
Major Oil Companies--The Pantry has entered into product purchase
agreements with numerous oil companies to buy specified quantities of gasoline
at market prices. The length of these contracts range from seven to thirteen
years and in some cases include minimum annual purchase requirements. In
connection with these agreements, The Pantry may receive upfront vendor
allowances, volume incentive payments and other vendor assistance payments. If
The Pantry were to default under the terms of any contract or terminate the
supply agreement prior to the end of the initial term, The Pantry must
reimburse the respective oil company for the unearned, unamortized portion of
the payments received to date. In accordance with generally accepted accounting
principles, these payments are amortized using the specific amortization
periods in accordance with the terms of each agreement , either using the
straight-line method or based on gasoline volume purchased. The Pantry has
exceeded the minimum required annual purchases each year and expects to exceed
the minimum required annual purchase levels in future years.
Environmental Liabilities and Contingencies
The Pantry is subject to various federal, state and local environmental
laws and regulations governing underground petroleum storage tanks that require
The Pantry 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 underground storage tanks. Regulations
enacted by the EPA in 1988 established requirements for (i) installing
underground storage tank systems; (ii) upgrading underground storage tank
systems; (iii) taking corrective action in response to releases; (iv) closing
underground storage tank 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 1988 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 underground storage tanks. All
underground storage tanks were required to comply with leak detection
requirements by December 22, 1993. The Pantry utilizes several approved
leak detection methods for all Company-owned underground storage tank
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 underground storage tank system and
highlights discrepancies. The Pantry believes it is in full or
substantial compliance with the leak detection requirements applicable to
underground storage tanks.
F-26
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
. Corrosion Protection: The 1988 EPA regulations require that all
underground storage tank systems have corrosion protection by December
22, 1998. All of The Pantry's underground storage tanks have been
protected from corrosion either through the installation of fiberglass
tanks or upgrading steel underground storage tanks with interior
fiberglass lining and the installation of cathodic protection.
. Overfill/Spill Prevention: The 1988 EPA regulations require that all
sites have overfill/spill prevention devices by December 22, 1998. The
Pantry has installed spill/overfill equipment on all company-owned
underground storage tank 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 underground storage tank systems. In order to comply with this
requirement, The Pantry maintains surety bonds in the aggregate amount of
approximately $900,000 in favor of state environmental enforcement agencies in
the states of North Carolina, Virginia and South Carolina and a letter of
credit in the aggregate amount of approximately $1.1 million issued by a
commercial bank in favor of state environmental enforcement agencies in the
states of Florida, Tennessee, Indiana and Kentucky and relies on reimbursements
from applicable state trust funds. In Florida, The Pantry meets such financial
responsibility requirements by state trust fund coverage through December 31,
1998 and will meet such requirements thereafter through private commercial
liability insurance. The Pantry 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 underground
storage tank systems have established trust funds for the sharing, recovering,
and reimbursing of certain cleanup costs and liabilities incurred as a result
of releases from underground storage tank systems. These trust funds, which
essentially provide insurance coverage for the cleanup of environmental damages
caused by the operation of underground storage tank systems, are funded by a
underground storage tank registration fee and a tax on the wholesale purchase
of motor fuels within each state. The Pantry has paid underground storage tank
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 from $150,000 to $1.0 million per site or occurrence for the cleanup
of environmental contamination, and most provide coverage for third party
liabilities.
Costs for which The Pantry does not receive reimbursement include but are
not limited to, the per-site deductible, costs incurred in connection with
releases occurring or reported to trust funds prior to their inception, removal
and disposal of underground storage tank systems, and costs incurred in
connection with sites otherwise ineligible for reimbursement from the trust
funds. The trust funds require The Pantry to pay deductibles ranging from
$10,000 to $100,000 per occurrence depending on the upgrade status of its
underground storage tank 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 Pantry will
meet Florida financial
F-27
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
responsibility requirements for remediation and third party claims arising out
of releases reported after December 31, 1998 through a combination of private
insurance and a letter of credit. In addition to material amounts to be spent
by The Pantry, a substantial amount will be expended for remediation on behalf
of The Pantry by state trust funds established in The Pantry'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 Pantry, The
Pantry will be obligated to make such payments, which could materially
adversely affect The Pantry'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 $17.2 million as of September
24, 1998 and March 25, 1999, respectively, represent estimates for future
expenditures for remediation, tank removal and litigation associated with 205
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 Pantry 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 March 25, 1999,
these anticipated reimbursements of $13.2 million and $12.7 million,
respectively, are recorded as long-term environmental receivables. In Florida,
remediation of such contamination reported before January 1, 1999 will be
performed by the state and substantially all of the costs will be paid by the
state trust fund. The Pantry will perform remediation in other states through
independent contractor firms engaged by The Pantry. 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. 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 expenditures,
some or all of which may not be eligible for reimbursement from state trust
funds.
The Pantry 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 Pantry from responsibility related to
known contamination at those sites.
F-28
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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 Pantry early-adopted SFAS No. 121, which
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 Pantry 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 Pantry 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 related to stores that will continue to be operated and consisted of
the following assets (in thousands):
<TABLE>
<S> <C>
Property, plant and equipment.................................... $ 415
Goodwill......................................................... 2,619
------
Total............................................................ $3,034
======
</TABLE>
NOTE 11--RESTRUCTURING CHARGES:
As a result of the change in ownership that occurred during fiscal 1996,
The Pantry restructured its corporate offices. These charges include $0.8
million for involuntary termination benefits paid to 58 employees and $0.8
million for the termination of the former Chairman and Chief Executive
Officer's employment agreement, including related expenses. These amounts were
expended during 1996.
NOTE 12--COMMON STOCK:
The Pantry has filed a Form S-1, amended May 6, 1999, for the sale of
6,250,000 shares of stock in an initial public offering. In connection with the
planned IPO, The Pantry intends to effect a 51-for-1 stock split of its common
stock. The accompanying financial statements reflect The Pantry's anticipated
51-for-1 stock split, retroactively applied to all periods presented.
F-29
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
In connection with the Lil' Champ acquisition and related transactions,
The Pantry issued 3,672,000 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 Pantry'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
Pantry. As a result, preferred stock and accrued dividends were reduced by $260
and $6,508,000 respectively, and additional paid in capital was increased by
$6,508,260.
On July 2, 1998 in connection with two acquisitions completed in July
1998, The Pantry issued 2,217,378 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 Pantry'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 Pantry 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 the
Freeman Spogli entities. The Pantry is limited from paying dividends under the
terms and conditions of the senior notes indenture, senior subordinated notes
indenture and the certificate of designation for the Series B preferred stock.
In addition, the certificate of designation for the Series B preferred
stock, 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: (1) the issuance of any securities with equal or superior rights
with respect to dividends or liquidation preferences, (2) the repurchase of any
shares of, making of any dividend or distribution to, or any reclassification
with respect to, any of The Pantry's outstanding shares of capital stock, (3)
amendment or modification of The Pantry'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 (4) amendment
of the related paragraph regarding restrictions and limitations in the
certificate of designation for the Series B preferred stock.
At all meetings of the stockholders of The Pantry 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 of common stock
as a single class. The holders of Series B preferred stock are entitled to
cumulative dividends from The Pantry 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 Pantry 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 Pantry's and
its subsidiaries' net assets are restricted as to payment of dividends and
other distributions.
F-30
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
Upon the dissolution, liquidation or winding up of The Pantry, 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 Pantry
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 Pantry'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 Pantry,
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 Pantry 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 Pantry adopted an incentive and non-qualified
stock option plan. Pursuant to the provisions of the plan, options may be
granted to officers, key employees and consultants of The Pantry or any of its
subsidiaries and certain members of the board of directors to purchase up to
1,275,000 shares of The Pantry's common stock. The plan is administered by the
board of directors or a committee of the board of directors. Options are
granted at prices determined by the board of directors and may be exercisable
in one or more installments. Additionally, the terms and conditions of awards
under the plan may differ from one grant to another. Under the 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. Fair values are based on the most recent common stock sales.
During 1998, options to acquire 576,861 shares of common stock were granted
under the plan with exercise prices ranging from $8.82-$11.27 per share
(weighted-average exercise price of $9.39 per share).
The following table summarizes information about stock options
outstanding at September 24, 1998:
<TABLE>
<CAPTION>
Number
Outstanding at Weighted-Average
Date September 24, Remaining Weighted-Average
Exercise Prices Issued 1998 Contractual Life Exercise Price
--------------- ------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
$8.82.............. 1/1/98 443,751 9 years $ 8.82
$11.27............. 8/25/98 133,110 9 years $11.27
-------
Total............ 576,861
</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 plan been determined consistent with
SFAS 123, The Pantry's pro-forma net loss for 1998 would have been
approximately $3,395,000.
F-31
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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................................ $9.39
Weighted-average expected lives (years)............................... 2.33
Risk-free interest rate............................................... 5.5%
Dividend yield........................................................ 0.00%
</TABLE>
On August 31, 1998, The Pantry adopted a stock subscription plan. The
subscription plan allows The Pantry to offer to certain employees the right to
purchase shares of 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 Pantry
and all of its subsidiaries terminates for any reason, The Pantry 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
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 Pantry registered under the Securities Act (other than
an offering registered on Form S-4 or Form S-8) resulting in gross proceeds to
The Pantry 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 Pantry's
right of first refusal with respect to such sale. Finally, under certain
circumstances, a purchaser of shares under the subscription plan may be forced
to sell all or part of the shares purchased under such plan if any members of
the Freeman Spogli find a third-party buyer for all or part of the shares of
Company common stock held by the Freeman Spogli. No issuances of shares under
the subscription plan had been made at September 24, 1998. On September 25,
1998 and November 30, 1999, 134,436 shares, net of subsequent repurchases of
6,273 shares, were sold under the subscription plan. These shares were sold at
fair value ($11.27), as determined by the most recent equity investment (July
1998). In connection with these sales, The Pantry received $722,000 of secured
promissory notes receivable, bearing an interest rate of 8.5%, due August 31,
2003.
In December 1996, in connection with its purchase of $17,500 shares of
Series B preferred stock, Freeman Spogli acquired warrants to purchase
2,346,000 shares of common stock. The warrants are exercisable at $7.45 per
share until December 30, 2006, and contain adjustment provisions in the event
The Pantry declares dividends or distributions, makes stock splits, or engages
in mergers, reorganizations or reclassifications. None of these warrants had
been exercised at March 25, 1999.
F-32
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
NOTE 15--RELATED PARTIES:
Leases
Certain of our leases are with partnerships and corporations controlled
by individuals who were shareholders, officers and directors of The Pantry
during 1996. Rents under these leases were approximately $1,274,000 for fiscal
year 1996. Such leases expire at various intervals over the next twenty years.
Such individuals were no longer related parties subsequent to 1996.
Transactions With Affiliates
Stock Issuances
In November 1995, Freeman Spogli purchased 2,320,551 shares of our common
stock and 10,374.228 shares of our Series A preferred stock for an aggregate
purchase price of approximately $17.2 million and Chase Capital purchased
698,700 shares of our common stock and 3,123.6 shares of our Series A preferred
stock for an aggregate purchase price of approximately $5.2 million. The
purchase price for the common stock was $2.98 per share and the purchase price
for the Series A preferred stock was $1,000.00 per share. A portion of these
shares were purchased from us and the rest from existing stockholders. In
connection with these transactions, total costs incurred by The Pantry exceeded
the net proceeds received from the sale of new shares by $447,000, which
resulted in a charge to equity.
In August 1996, Freeman Spogli and Chase Capital purchased the
outstanding common stock and Series A preferred stock held by other
stockholders. Freeman Spogli purchased 2,152,812 shares of common stock and
9,624.336 shares of Series A preferred stock for an aggregate purchase
price of approximately $16.0 million and Chase Capital purchased 643,416 shares
of common stock and 2,876.448 shares of Series A preferred stock for an
aggregate purchase price of approximately $4.8 million. The purchase price for
the common stock was $2.98 per share and the purchase price for the Series A
preferred stock was $1,000.00 per share.
In December 1996, Freeman Spogli purchased 17,500 shares of our series B
preferred stock and warrants to purchase 2,346,000 shares of common stock for
approximately $17.5 million. The purchase price for the Series B preferred
stock was $1,000.00 per share and the purchase price for the warrants was
$1.00. The warrants are exercisable at $7.45 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, in connection with the Lil' Champ acquisition, Freeman
Spogli purchased 3,030,471 shares of common stock and Chase Capital purchased
596,190 shares of common stock for an aggregate purchase price of approximately
$32.0 million. Peter J. Sodini, The Pantry's Chief Executive Officer, purchased
45,339 shares of common stock for an aggregate purchase price of $400,050,
payable $185,000 in cash and $215,050 in the form of a secured promissory note
in our favor. The purchase price for the common stock was $8.82 per share. All
of the outstanding Series A preferred stock was contributed back to The Pantry
and cancelled at this time.
F-33
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
In July 1998, in connection with the acquisition of Quick Stop and the
acquisition of Stallings, Freeman Spogli purchased 1,845,690 shares of common
stock and Chase Capital purchased 371,688 shares of common stock for an
aggregate purchase price of $25.0 million. The purchase price for the common
stock was $11.27 per share.
In November 1998, Peter Starrett, a director of The Pantry, purchased
22,185 shares of common stock for a purchase price of $250,125. Freeman Spogli
has the right to require the sale of Mr. Starrett's shares in the event it
sells all of its holdings of common stock. In addition, we have the right to
repurchase Mr. Starrett's shares in the event he ceases to serve as a director.
This right terminates on the first anniversary of the purchase date.
Payments to Freeman Spogli
Transaction fees of $1.0 million, $1.5 million and $3.0 million, for the
fiscal years ended September 26, 1996, September 25, 1997 and September 24,
1998, respectively, were paid to Freeman Spogli in connection with previous
investments and assistance with analyzing acquisition candidates and obtaining
financing.
Stockholders' Agreement
The Pantry has a stockholders' agreement, as amended July 1998, with
Freeman Spogli, Chase Capital and Peter J. Sodini in which:
. Freeman Spogli has a right of first offer enabling it to purchase
shares held by Chase Capital or Mr. Sodini prior to transfers of
shares of common stock to non-affiliates
. Freeman Spogli has the right 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 if Freeman Spogli is selling all of its
shares
. Freeman Spogli, Chase Capital and Sodini have rights to be included
in sales of common stock by the other stockholders
. Freeman Spogli has agreed, as long as Chase Capital holds 10% of The
Pantry's common stock, to vote for a director nominated by Chase
Capital
. Transactions with affiliates will be on terms no less favorable to
The Pantry than would be obtained in an arms length transaction and
to limit the fees payable to Freeman Spogli
. Chase Capital has the right to exchange shares of voting common stock
for a class of non-voting common stock if required by regulations
applicable to Chase Capital.
F-34
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
NOTE 16--EARNINGS PER SHARE:
The Pantry computes earnings per share data in accordance the
requirements of SFAS No. 128, Earnings per Share. The following table reflects
the calculation of basic and diluted earnings per share. The table also gives
retroactive effect to The Pantry's anticipated 51-for-1 stock split of its
common stock (in thousands):
<TABLE>
<CAPTION>
Year Ended Six Months Ended
-------------------------- ------------------
March, March,
1996 1997 1998 1998 1999
-------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Net loss applicable to common
shareholders:
Income (loss) before
extraordinary loss.......... $ (8,114) $ (975) $ 4,673 $ (1,669) $ 1,077
Dividends on preferred
stock....................... (2,654) (5,304) (2,942) (1,586) (1,446)
-------- ------- ------- --------- -------
Income (loss) applicable to
common shareholders before
extraordinary items......... (10,768) (6,279) 1,731 (3,255) (369)
Extraordinary loss........... -- -- (7,998) (6,800) (3,557)
-------- ------- ------- --------- -------
Net loss applicable to common
shareholders $(10,768) $(6,279) $(6,267) $ (10,055) $(3,926)
======== ======= ======= ========= =======
Earnings per share--basic:
Weighted-average shares
outstanding................. 5,668 5,815 9,732 8,937 11,857
Income (loss) before
extraordinary loss per
share--basic................ $ (1.90) $ (1.08) $ 0.18 $ (0.36) $ (0.03)
Extraordinary loss per
share--basic................ -- -- (0.82) (0.77) (0.30)
-------- ------- ------- --------- -------
Loss per share--basic........ $ (1.90) $ (1.08) $ (0.64) $ (1.13) $ (0.33)
======== ======= ======= ========= =======
Earnings per share--assuming
dilution:
Weighted-average shares
outstanding................. 5,668 5,815 9,732 8,937 11,857
Dilutive impact of options
and warrants outstanding.... -- -- 1,280 -- --
-------- ------- ------- --------- -------
Weighted-average shares and
potential dilutive shares
outstanding................. 5,668 5,815 11,012 8,937 11,857
======== ======= ======= ========= =======
Income (loss) before
extraordinary loss per
share--assuming dilution.... $ (1.90) $ (1.08) $ 0.16 $ (0.36) $ (0.03)
Extraordinary loss per
share--assuming dilution.... -- -- (0.73) (0.77) (0.30)
-------- ------- ------- --------- -------
Net income (loss) per share--
assuming dilution........... $ (1.90) $ (1.08) $ (0.57) $ (1.13) $ (0.33)
======== ======= ======= ========= =======
</TABLE>
Warrants to purchase 2,346,000 shares of common stock at $7.45 per share
were outstanding during 1997 and the six month periods ended March 26, 1998 and
March 25, 1999, but were excluded from the computation of diluted earnings per
share because the impact of their inclusion would be anti-dilutive. Options to
purchase 576,861 shares of common stock at prices from $8.82 to $11.27 per
share were outstanding for the six months ended March 25, 1999, but were also
excluded from the computations of diluted earnings per share for that period as
their inclusion would also be anti-dilutive.
F-35
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
NOTE 17--SUPPLEMENTAL GUARANTORS INFORMATION:
In connection with the Lil' Champ acquisition and commitments under the
Bank Credit Facility, Lil' Champ, Sandhills, Inc. and Global Communications,
Inc. (the "Guarantors") jointly and severally, unconditionally guaranteed, on
an unsecured senior subordinated basis, the full and prompt performance of The
Pantry's obligations under its Senior Subordinated Notes, its Senior Notes
Indenture and its Bank Credit Facility.
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 and Lil Champ, wholly-owned
subsidiaries of The Pantry) and future direct and indirect restricted
subsidiaries. The senior subordinated notes contain covenants that, among other
things, restrict the ability of The Pantry and any restricted subsidiary to:
(1) incur additional indebtedness; (2) pay dividends or make distributions; (3)
issue stock of subsidiaries; (4) make certain investments; (5) repurchase
stock; (6) create liens; (7) enter into transaction with affiliates; (8) enter
into sale-leaseback transactions; (9) merge or consolidate The Pantry or any of
its subsidiaries; and (10) transfer and sell assets.
As of September 24, 1998, substantially all of The Pantry'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 and Lil' Champ as of September 24, 1998 and Miller
Enterprises as of March 25, 1999) 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.
The Company accounts for its wholly-owned subsidiaries on the equity
basis. Certain reclassifications have been made to conform all of the financial
information to the financial presentation on a consolidated basis. The
principal eliminating entries eliminate investments in subsidiaries and
intercompany balances.
F-36
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 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........ 69,605 -- (293) (11,471) 57,841
General and
administrative
expenses............. 17,648 80 23 -- 17,751
Restructuring
charges.............. 1,560 -- -- -- 1,560
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)
Preferred dividends..... (2,654) -- -- -- (2,654)
-------- ------- ----- -------- --------
Net income (loss)
applicable to common
shareholders........... $(10,768) $ -- $ -- $ -- $(10,768)
======== ======= ===== ======== ========
</TABLE>
F-37
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 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-38
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 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-39
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 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 reserve....... 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................. 58 -- -- -- 58
Additional paid-in capital... 5,339 25 5,001 (5,026) 5,339
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-40
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 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........ 73,225 -- (291) (12,726) 60,208
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)
Preferred dividends..... (5,304) -- -- -- (5,304)
Net loss applicable to
common shareholders.... $ (6,279) -- -- -- $ (6,279)
======== ====== ===== ======= ========
</TABLE>
F-41
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 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-42
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 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-43
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 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
reserve.............. 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.......... 117 1 -- (1) 117
Additional paid-in
capital.............. 68,939 6,758 5,001 (11,759) 68,939
Shareholder loan...... (215) -- -- -- (215)
Accumulated earnings
(deficit)............ (29,537) 56,802 (325) (56,477) (29,537)
-------- -------- ------ --------- --------
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-44
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 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)
Preferred dividends..... (2,942) -- -- -- (2,942)
Net loss applicable to
common shareholders.... $ (6,267) $ -- $ -- $ -- $ (6,267)
======== ======== ===== ======== ========
</TABLE>
F-45
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 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-46
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Six Months Ended March 26, 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..... $ 99,613 $ 94,152 $ -- $ -- $193,765
Gasoline sales........ 105,466 110,252 -- -- 215,718
Commissions........... 2,915 3,443 -- -- 6,358
-------- -------- ----- ------ --------
Total revenues...... 207,994 207,847 -- -- 415,841
-------- -------- ----- ------ --------
Cost of sales:
Merchandise........... 64,374 62,491 -- -- 126,865
Gasoline.............. 93,984 96,340 -- -- 190,324
-------- -------- ----- ------ --------
Total cost of
sales.............. 158,358 158,831 -- -- 317,189
-------- -------- ----- ------ --------
Gross profit............ 49,636 49,016 -- -- 98,652
-------- -------- ----- ------ --------
Operating expenses:
Store expenses........ 37,962 30,212 (119) (6,202) 61,853
General and
administrative
expenses............. 8,481 7,039 12 -- 15,532
Depreciation and
amortization......... 6,187 5,585 3 -- 11,775
-------- -------- ----- ------ --------
Total operating
expenses........... 52,630 42,836 (104) (6,202) 89,160
-------- -------- ----- ------ --------
Income from operations.. (2,994) 6,180 104 6,202 9,492
-------- -------- ----- ------ --------
Equity in earnings of
subsidiaries........... 8,071 -- -- (8,071) --
-------- -------- ----- ------ --------
Other income (expense):
Interest expense...... (8,125) (6,785) (6) 2,065 (12,851)
Miscellaneous......... 463 8,562 15 (8,266) 774
-------- -------- ----- ------ --------
Total other
expense............ (7,662) 1,777 9 (6,201) (12,077)
-------- -------- ----- ------ --------
Income (loss) before
income taxes and
extraordinary loss..... (2,585) 7,957 113 (8,070) (2,585)
Income tax benefit
(expense).............. 916 (2,755) (132) 2,887 916
-------- -------- ----- ------ --------
Income (loss) before
extraordinary loss..... (1,669) 5,202 (19) (5,183) (1,669)
Extraordinary loss, net
of taxes............... (6,800) -- -- -- (6,800)
-------- -------- ----- ------ --------
Net income (loss)....... (8,469) 5,202 (19) (5,183) (8,469)
Preferred dividends..... (1,586) -- -- -- (1,586)
-------- -------- ----- ------ --------
Net loss applicable to
common shareholders.... $(10,055) $ -- $ -- $ -- $(10,055)
======== ======== ===== ====== ========
</TABLE>
F-47
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Six Months Ended March 26, 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)....... $ (8,469) $ 5,202 $(19) $(5,183) $ (8,469)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Extraordinary loss.... 6,800 -- -- -- 6,800
Depreciation and
amortization......... 6,193 5,580 2 -- 11,775
Provision for deferred
income taxes......... (1,398) -- (17) -- (1,415)
(Gain) loss on sale of
property and
equipment............ 100 109 -- -- 209
Reserves for
environmental
issues............... 57 -- -- -- 57
Equity earnings of
affiliates........... (5,183) -- -- 5,183 --
Changes in operating
assets and liabilities,
net:
Receivables........... (3,068) (6,891) 26 6,175 (3,758)
Inventories........... 1,501 (2,282) -- -- (781)
Prepaid expenses...... 423 462 (6) -- 879
Other noncurrent
assets............... (15) (386) -- 5,767 5,366
Accounts payable...... (661) 2,056 -- 2 1,397
Other current
liabilities and
accrued expenses..... 5,883 3,462 136 (7,922) 1,559
Employment
obligations.......... (185) -- -- -- (185)
Other noncurrent
liabilities.......... 2,675 1,543 -- -- 4,218
-------- --------- ---- ------- ---------
Net cash provided by
operating activities... 4,653 8,855 122 4,022 17,652
-------- --------- ---- ------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale.......... (2,648) -- -- -- (2,648)
Additions to property
and equipment.......... (11,324) (6,490) -- -- (17,814)
Proceeds from sale of
property held for
sale................... 2,025 -- -- -- 2,025
Proceeds from sale of
property and
equipment.............. 316 366 -- -- 682
Intercompany notes
receivable (payable)... 4,048 -- (26) (4,022) --
Acquisitions of related
businesses, net of cash
acquired of $10,487.... (9,500) (135,898) -- -- (145,398)
-------- --------- ---- ------- ---------
Net cash used in
investing activities... (17,083) (142,022) (26) (4,022) (163,153)
-------- --------- ---- ------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases... (151) (426) -- -- (577)
Principal repayments of
long-term debt......... (57,000) -- (9) -- (57,009)
Proceeds from issuance
of long-term debt...... 63,267 145,755 -- -- 209,022
Net proceeds from equity
issue.................. 31,936 -- -- -- 31,936
Other financing costs... (12,674) -- -- -- (12,674)
-------- --------- ---- ------- ---------
Net cash provided by
(used in) financing
activities............. 25,378 145,329 (9) -- 170,698
-------- --------- ---- ------- ---------
NET INCREASE IN CASH.... 12,948 12,162 87 -- 25,197
CASH & CASH EQUIVALENTS,
BEGINNING OF YEAR...... 2,247 279 821 -- 3,347
-------- --------- ---- ------- ---------
CASH & CASH EQUIVALENTS,
END OF QUARTER......... $ 15,195 $ 12,441 $908 $ -- $ 28,544
======== ========= ==== ======= =========
</TABLE>
F-48
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Balance Sheets
March 25, 1999
(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........... $ 9,686 $ 11,089 $4,224 $ -- $ 24,999
Receivables, net....... 19,281 25,878 1,030 (31,360) 14,829
Inventories............ 32,163 29,215 -- -- 61,378
Income taxes
receivable
(payable)............. 1,883 (2,634) (551) 5,883 4,581
Prepaid expenses....... 1,297 1,329 8 -- 2,634
Property held for
sale.................. 82 -- -- -- 82
Deferred income
taxes................. 1,366 2,767 -- -- 4,133
-------- -------- ------ --------- --------
Total current
assets............ 65,758 67,644 4,711 (25,477) 112,636
-------- -------- ------ --------- --------
Investment in
subsidiaries........... 77,188 968 -- (78,156) --
-------- -------- ------ --------- --------
Property and equipment,
net.................... 147,662 257,728 337 -- 405,727
-------- -------- ------ --------- --------
Other assets:
Goodwill, net.......... 97,555 71,876 -- -- 169,431
Deferred lease cost,
net................... 247 -- -- -- 247
Deferred financing
cost, net............. 13,130 -- -- -- 13,130
Environmental
receivables, net...... 11,566 1,166 -- -- 12,732
Intercompany note
receivable............ 257,465 49,705 -- (307,170) --
Other.................. 3,214 4,845 -- 968 9,027
-------- -------- ------ --------- --------
Total other
assets............ 383,177 127,592 -- (306,202) 204,567
-------- -------- ------ --------- --------
Total assets....... $673,785 $453,932 $5,048 $(409,835) $722,930
======== ======== ====== ========= ========
</TABLE>
F-49
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Balance Sheets--(Continued)
March 25, 1999
(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.................. $ 5,117 $ 296 $ 18 $ -- $ 5,431
Current maturities of
capital lease
obligations................ 213 1,027 -- -- 1,240
Short-term debt............. -- -- -- -- --
Accounts payable:
Trade..................... 35,009 31,297 -- (26) 66,280
Money orders.............. 4,620 3,345 -- -- 7,965
Accrued interest............ 14,373 -- 1 (3,580) 10,794
Accrued compensation and
related taxes.............. 4,019 3,842 1 -- 7,862
Income taxes payable........ -- -- -- -- --
Other accrued taxes......... 2,529 6,009 -- -- 8,538
Accrued insurance........... 3,825 4,676 -- -- 8,501
Other accrued liabilities... 24,634 23,464 121 (17,358) 30,861
-------- -------- ------ --------- --------
Total current
liabilities............ 94,339 73,956 141 (20,964) 147,472
-------- -------- ------ --------- --------
Long-term debt............... 453,072 1,097 108 -- 454,277
-------- -------- ------ --------- --------
Other noncurrent liabilities:
Environmental reserves...... 13,566 3,619 -- -- 17,185
Deferred income taxes....... (1,667) 25,081 -- -- 23,414
Capital lease obligations... 1,413 10,085 -- -- 11,498
Employment obligations...... 749 -- -- -- 749
Accrued dividends on
preferred stock............ 5,837 -- -- -- 5,837
Intercompany note payable... 51,705 259,961 -- (311,666) --
Other....................... 18,325 7,690 37 -- 26,052
-------- -------- ------ --------- --------
Total other noncurrent
liabilities............ 89,928 306,436 37 (311,666) 84,735
-------- -------- ------ --------- --------
SHAREHOLDERS' EQUITY
(DEFICIT):
Preferred stock.............. -- -- -- -- --
Common stock................. 119 1 5,001 (5,002) 119
Additional paid-in capital... 70,727 6,882 -- (6,882) 70,727
Shareholder loans............ (937) -- -- -- (937)
Accumulated earnings
(deficit)................... (33,463) 65,560 (239) (65,321) (33,463)
-------- -------- ------ --------- --------
Total shareholders'
equity (deficit)....... 36,446 72,443 4,762 (77,205) 36,446
-------- -------- ------ --------- --------
Total liabilities and
shareholders' equity
(deficit).............. $673,785 $453,932 $5,048 $(409,835) $722,930
======== ======== ====== ========= ========
</TABLE>
F-50
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Six Months Ended March 25, 1999
(Unaudited)
<TABLE>
<CAPTION>
Total
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $170,297 $133,655 $ -- $ -- $303,962
Gasoline sales........ 212,186 148,731 -- -- 360,917
Commissions........... 6,294 4,226 -- -- 10,520
-------- -------- ----- -------- --------
Total revenues...... 388,777 286,622 -- -- 675,399
-------- -------- ----- -------- --------
Cost of sales:
Merchandise........... 115,711 89,114 -- -- 204,825
Gasoline.............. 186,555 128,078 -- -- 314,633
-------- -------- ----- -------- --------
Total cost of
sales.............. 302,266 217,192 -- -- 519,458
-------- -------- ----- -------- --------
Gross profit............ 86,511 69,430 -- -- 155,941
-------- -------- ----- -------- --------
Operating expenses:
Store expenses........ 65,635 41,158 (121) (11,457) 95,215
General and
administrative
expenses............. 11,849 10,496 11 -- 22,356
Depreciation and
amortization......... 9,119 8,708 3 -- 17,830
-------- -------- ----- -------- --------
Total operating
expenses........... 86,603 60,362 (107) (11,457) 135,401
-------- -------- ----- -------- --------
Income (loss) from
operations............. (92) 9,068 107 11,457 20,540
-------- -------- ----- -------- --------
Equity in earnings of
subsidiaries........... 13,677 16 -- (13,693) --
-------- -------- ----- -------- --------
Other income (expense):
Interest expense...... (11,564) (9,819) (5) 2,515 (18,873)
Miscellaneous......... (226) 14,237 72 (13,955) 128
-------- -------- ----- -------- --------
Total other
expense............ (11,790) 4,418 67 (11,440) (18,745)
-------- -------- ----- -------- --------
Income (loss) before
income taxes and
extraordinary loss..... 1,795 13,502 174 (13,676) 1,795
Income tax benefit
(expense).............. (718) (4,717) (89) 4,806 (718)
-------- -------- ----- -------- --------
Net income (loss) before
extraordinary item..... 1,077 8,785 85 (8,870) 1,077
Extraordinary loss...... (3,557) -- -- -- (3,557)
-------- -------- ----- -------- --------
Net income (loss)....... (2,480) 8,785 85 (8,870) (2,480)
Preferred dividends..... (1,446) -- -- -- (1,446)
-------- -------- ----- -------- --------
Net loss applicable to
common shareholders.... $ (3,926) $ -- $ -- $ -- $ (3,926)
======== ======== ===== ======== ========
</TABLE>
F-51
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Six Months Ended March 25, 1999
(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)....... $ (2,480) $ 8,785 $ 85 $ (8,870) $ (2,480)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Extraordinary loss..... 3,405 -- -- -- 3,405
Depreciation and
amortization.......... 9,119 8,708 3 -- 17,830
Change in deferred
income taxes.......... (136) 256 -- -- 120
(Gain) loss on sale of
property and
equipment............. (741) 344 -- (13) (410)
Reserves for
environmental issues.. 79 (31) -- -- 48
Equity earnings of
affiliates............ (8,950) -- -- 8,950 --
Changes in operating
assets and liabilities,
net:
Receivables............ (9,311) (7,685) 569 15,479 (948)
Inventories............ (3,668) (960) -- -- (4,628)
Prepaid expenses....... (44) 31 (5) -- (18)
Other noncurrent
assets................ (218) (2,011) -- 13 (2,216)
Accounts payable....... 6,914 997 -- -- 7,911
Other current
liabilities and
accrued expenses...... 16,036 (9,863) (490) (11,369) (5,686)
Employment
obligations........... (185) -- -- -- (185)
Other noncurrent
liabilities........... 2,999 (1,703) (1) (633) 662
--------- ------- ------ -------- ---------
Net cash provided by
(used in) operating
activities............. 12,819 (3,132) 161 3,557 13,405
--------- ------- ------ -------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (93) -- -- -- (93)
Additions to property
and equipment......... (15,507) (10,907) -- -- (26,414)
Proceeds from sale of
property held for
sale.................. 4,743 -- -- -- 4,743
Proceeds from sale of
property and
equipment............. 376 -- -- -- 376
Intercompany notes
receivable (payable).. (2,081) 100,139 -- (98,058) --
Acquisitions of related
businesses, net of
cash acquired ........ (143,610) (80,791) -- 94,501 (129,900)
--------- ------- ------ -------- ---------
Net cash provided by
(used in) investing
activities............. (156,172) 8,441 -- (3,557) (151,288)
--------- ------- ------ -------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases.. (121) (510) -- -- (631)
Principal repayments of
long-term debt........ (143,979) (10) (10) -- (143,999)
Proceeds from issuance
of long-term debt..... 275,000 -- -- -- 275,000
Net proceeds from
equity issues......... 1,068 -- -- -- 1,068
Other financing costs.. (2,960) -- -- -- (2,960)
--------- ------- ------ -------- ---------
Net cash provided by
(used in) financing
activities............. 129,008 (520) (10) -- 128,478
--------- ------- ------ -------- ---------
NET INCREASE (DECREASE)
IN CASH................ (14,345) 4,789 151 -- (9,405)
CASH & CASH EQUIVALENTS,
BEGINNING OF YEAR...... 24,031 6,300 4,073 -- 34,404
--------- ------- ------ -------- ---------
CASH & CASH EQUIVALENTS,
END OF YEAR............ $ 9,686 $11,089 $4,224 $ -- $ 24,999
========= ======= ====== ======== =========
</TABLE>
F-52
<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 Lil' Champ'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-53
<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-54
<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-55
<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-56
<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-57
<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. is a convenience store chain operating in
central and northern Florida and southeastern Georgia.
2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year--Lil' Champ 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 September 27, 1997, 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--Lil' Champ 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-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)
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--At December 30, 1995 and December 28,
1996, Lil' Champ owned less than 15% of the outstanding common stock of The
Eli Witt Company, formerly known as Certified Grocers of Florida, Inc. Lil'
Champ also did not have the ability to exert significant influence over the
operations of Eli Witt. As a result, Lil' Champ accounted for its investment
in Eli Witt under the cost method of accounting of accounting for investments.
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.
Advertising Costs--Lil' Champ expenses advertising costs as incurred. For
the years ended December 30, 1995 and December 28, 1996, advertising expense
totaled approximately $490,000 and $454,000, respectively. There were no
advertising costs reported as assets at December 30, 1995 or December 28,
1996.
Leasing Arrangements--A substantial portion of Lil' Champ'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 Lil' Champ 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--Lil' Champ self-insures its
exposure to workers' compensation claims up to certain limits. Lil' Champ
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--Lil' Champ 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--Lil' Champ's parent files consolidated Federal income tax
returns. For financial statement purposes, Lil' Champ determines its income
tax liability and provisions using the separate return method.
F-59
<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)
Deferred income taxes are provided on temporary differences between the
financial reporting and the tax basis of Lil' Champ'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.
Excise and Use taxes--Lil' Champ collects and remits various federal and
state excise taxes on petroleum products. Sales and cost of sales included
approximately $62,708,000 and $65,375,000 for the years ended December 30, 1995
and December 28, 1996, respectively.
Sales and cost of sales included $49,495,000 and $48,099,000 of such taxes
for the nine-months ended September 28, 1996 and September 27, 1997,
respectively (unaudited).
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>
F-60
<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)
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>
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>
F-61
<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)
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 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 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 New York
interbank eurodollar market rate 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 Lil' Champ to obtain consent
from Credit Lyonnais before paying any dividends.
Because Lil' Champ 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>
F-62
<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)
6--RELATED PARTY TRANSACTIONS
Lil' Champ is a wholly-owned subsidiary of Docks U.S.A., Inc., and is an
affiliate of Docks de France, S.A., the parent company of Docks U.S.A. Certain
premises used by Lil' Champ in its operations are leased under arrangements
with related parties. The related parties include Julian Jackson, a former
owner and a director of Lil' Champ, L.L. and W.T. Huntley, former owners and
consultants to Lil' Champ trusts controlled by Julian Jackson, Robert Jackson
and Lester Jackson, brothers of an officer of Lil' Champ, Robert Duss, an
attorney for Lil' Champ, and James Crowell, former Controller of Lil' Champ.
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, furnishes
certain supplies to Lil' Champ. 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, 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.
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.
Lil' Champ 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, Lil' Champ entered into five sale-leaseback transactions
with Julian Jackson whereby buildings with a net book value of approximately
$4,022,000 were sold to Mr. Jackson for $4,176,000. This same property was then
leased back to Lil' Champ. The leases were classified as capital leases,
therefore the underlying property was capitalized and the obligation
recognized. Lil' Champ recognized a gain of approximately $155,000 on the sale,
$143,000 of which is deferred and is being amortized over the 15 year term of
the capital lease.
F-63
<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)
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-64
<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
Lil' Champ 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 Lil' Champ'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
Lil' Champ 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. Lil' Champ 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-65
<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, Lil' Champ 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. As a result, Lil' Champ has recorded
receivables for such reimbursements totaling $6,697,000 and $4,454,000 at
December 30, 1995 and December 28, 1996 and $4,100,000 at September 27, 1997.
Lil' Champ 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 Lil' Champ has not recorded a receivable for
such amounts. Lil' Champ 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 as of September 27, 1997. This allowance is an estimate of amounts
that Lil' Champ has incurred that may not be reimbursed by the state of Florida
and outside engineering firms and is based on historical experience of
reimbursement from these entities. Amounts due from the State of Florida trust
funds are expected to be collected by December 31, 1999. Amounts due from the
State of Georgia are expected to be collected over the next two to four years.
In prior years, Lil' Champ entered into agreements with outside
engineering firms to assume the clean-up of contamination sites in Florida.
Under these arrangements Lil' Champ was still responsible for the clean-up of
the sites but Lil' Champ did not incur significant expenditures to complete the
clean-up of existing sites. Lil' Champ 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 Lil'
Champ.
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
Lil' Champ sites in Georgia qualify for coverage from this fund. Lil' Champ
does not currently expect remediation at any of its sites to exceed $1,000,000
of coverage.
F-66
<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)
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 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. Lil' Champ is responsible for all costs in excess of the
state limits. Notwithstanding this schedule of limits, certain of the Lil'
Champ sites are covered under the other Florida "trust fund" programs pursuant
to which the state will pay all required costs.
During 1997, in response to recent changes to State of Florida laws which
limited the maximum coverage amounts of the Florida state trust funds,
management of Lil' Champ engaged an independent environmental consulting firm
to perform a comprehensive review of the status of its stores as it relates to
environmental remediation. As a result, Lil' Champ recorded an environmental
contamination charge of approximately $3,381,000. This charge relates to 50
stores and consists of trust fund and private insurance deductibles of $600,000
and clean-up costs for known and future discharges in excess of reimbursement
limits set by state trust funds and private insurers of approximately
$2,781,000. The charge was established on an undiscounted basis and has been
reflected in the accompanying statement of operations for the nine-month period
ended September 27, 1997 as a change in estimate. Costs relating to this charge
are expected to be incurred over a one to five year period.
In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
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. Lil' Champ's management does not believe the adoption of
this statement will have a material impact on Lil' Champ's financial
statements.
F-67
<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)
12--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each class
of financial instrument of Lil' Champ are as follows:
. Long-term debt--The carrying amount of Lil' Champ's borrowings
approximate fair value because the interest rates are based on
floating rates identified by reference to market rates.
. Due to Docks de France, S.A.--The fair values of Lil' Champ's account
payable to Docks de France, S.A. are estimated based on current rates
offered to the Company for debt of the same remaining maturities:
The carrying amounts and fair values of long-term debt and Due to
Docks de France at December 31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------- -------
<S> <C> <C>
Long-term debt......................................... $27,050 $27,050
Due to Docks de France, S. A. ......................... $ 6,000 $ 5,662
</TABLE>
13--SUBSEQUENT EVENT (UNAUDITED)
On October 23, 1997, The Pantry, Inc. purchased all of the capital stock
of Lil' Champ for $132.7 million in cash and repaid all outstanding
indebtedness of Lil' Champ.
F-68
<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
Quick Stop Food Mart'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-69
<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-70
<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>
Revenues:
Merchandise sales..... $ 54,465,453 $ 55,590,572 $ 62,411,823 $29,491,717 $30,036,745
Gasoline sales ....... 79,150,257 86,041,854 99,372,689 47,635,887 44,527,464
Commissions........... 268,186 263,966 274,251 134,167 135,549
Sundry income......... 1,583,258 1,672,132 2,444,771 960,360 1,223,067
------------ ------------ ------------ ----------- -----------
Total revenues........ 135,467,154 143,568,524 164,503,534 78,222,131 75,922,825
------------ ------------ ------------ ----------- -----------
Cost of goods sold:
Merchandise........... 41,089,562 41,726,964 47,124,314 22,197,881 22,796,664
Gasoline.............. 69,970,070 78,161,250 89,978,556 43,747,671 40,494,066
------------ ------------ ------------ ----------- -----------
Total 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-71
<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-72
<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> <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-73
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Quick Stop Food Mart, Inc. 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, Quick Stop 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. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings..................................................... 7-25 years
Store and office equipment.................................... 3-10 years
Transportation equipment...................................... 5 years
Leasehold improvements........................................ 5-30 years
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1996, and
1997 and for the 6-month periods ended June 30, 1997 and 1998, was $1,767,540,
$1,869,819, $2,503,455, $1,079,072 and $1,461,222, respectively.
F-74
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
Excise and Use Taxes
Quick Stop collects and remits various federal and state excise taxes on
petroleum products. Sales and cost of sales included $24,910,081, $25,142,217,
and $31,721,206 for the years ended December 31, 1995, 1996, and 1997,
respectively.
Sales and cost of sales included $15,148,212 and $14,052,868 of such
taxes for the six-months ended June 30, 1997 and 1998, respectively
(unaudited).
Advertising
Quick Stop 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
Quick Stop 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, Quick Stop 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 Quick Stop's
taxable income.
Profit-Sharing Plan
Quick Stop 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
Quick Stop 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 estimated. At December 31, 1996 and 1997
and June 30, 1998, Quick Stop was not aware of any liability for environmental
remediation costs nor was it aware of any environmental loss contingencies
requiring accrual in accordance with Statement of Financial Accounting
Standards No. 5 or Statement of Position 96-1. Therefore, no accruals were
established.
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.
F-75
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 2--CASH AND CASH EQUIVALENTS
Quick Stop 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, Quick Stop's uninsured bank balances
totalled approximately $1,339,000 and $760,000, respectively.
NOTE 3--LINES OF CREDIT
Quick Stop 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.
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>
F-76
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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, Quick Stop 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.
F-77
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 8--SALE TO RELATED PARTY
During 1997, Quick Stop sold land and buildings with a book value of
approximately $1,697,000 to a company owned by the majority shareholders of
Quick Stop, realizing a gain of approximately $5,000.
NOTE 9--COMMITMENTS AND CONTINGENT LIABILITIES
Lessee Arrangements
Quick Stop conducts substantially all of its operations utilizing leased
facilities. Some of the operating leases provide that Quick Stop 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.
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 Quick Stop 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.
F-78
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Lessor Arrangements
Quick Stop 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>
Quick Stop 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 Quick Stop. At December 31,
1997 and June 30, 1998 such guarantees totalled approximately $3,300,000 and
$3,150,000, respectively.
At December 31, 1997 and June 30, 1998 Quick Stop 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 Quick Stop had contracted with
outside parties for approximately $800,000 for various construction projects.
Quick Stop 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 Quick Stop.
Quick Stop 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 Quick Stop.
NOTE 10--SUBSEQUENT EVENT--SALE OF ASSETS AND CORPORATE DISSOLUTION
Effective July 2, 1998, Quick Stop sold certain assets to The Pantry,
Inc., including the operating assets of Quick Stop'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. Quick Stop retained primarily cash
and cash equivalents, real estate and debt associated with the real estate.
In connection with the acquisition, Quick Stop changed its name from
"Quick Stop Food Mart, Inc." to "Southern Carolina Property, Inc." paid off all
line of credit balances and equipment
F-79
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 Quick Stop 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
Quick Stop and distribute all remaining assets and liabilities to the
shareholders. Quick Stop is currently redeeding real estate and renegotiating
mortgages associated with the real estate.
F-80
<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 Express Stop'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-81
<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-82
<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-83
<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-84
<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-85
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
Express Stop, Inc.'s operations consist primarily of the operation of
convenience stores located in North and South Carolina.
A summary of Express Stop'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, Express Stop 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:
Express Stop 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-86
<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 Express Stop's share of income, and has been reduced
to reflect Express Stop's share of losses and cash distributions.
Advertising:
Express Stop expenses advertising as incurred. Advertising expense was
$57,000 for the year ended December, 31, 1997.
Income taxes:
Express Stop, 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 Express Stop'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
Express Stop 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-87
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 4--INVESTMENT IN PARTNERSHIP
Express Stop owns a 50% interest in a general partnership (Mexican
Express) which sells branded food items in two of Express Stop's store
locations. Express Stop 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
Express Stop, 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-88
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of September 30, 1998, Express Stop 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
Express Stop 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.
Sales and cost of sales included approximately $7,200,000 and $6,500,000
of such taxes, respectively, for the nine months ended September 30, 1997 and
1998. (Unaudited)
NOTE 7--DEFERRED INCOME
Express Stop has received funds from a major oil company in conjunction
with a modernization assistance program (MAP) to help pay for new or newly
modernized retail outlets. Express Stop opened one such outlet in 1994, two in
1996, and one in 1997. Amounts received are amortized over the terms of the MAP
amortization and/or loan agreements, which range from 10 to 15 years. The
unamortized amount is refundable to the oil company if Express Stop
discontinues marketing the major brand of fuel or ceases to be an approved
distributor for the major oil company. 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
Express Stop 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
Express Stop leases store buildings, land, store equipment and office
facilities under operating leases. The real estate leases require the payment
by Express Stop 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.
F-89
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
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 Express Stop 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 Express Stop's stores because of an alleged violation of the South
Carolina Video Games Machine Act. Express Stop 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 Express
Stop 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 Express Stop 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 Express Stop intends to vigorously contest this matter if
it is asserted in the future. Express Stop 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.
Express Stop 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.
F-90
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Express Stop is subject to Federal and state environmental laws and
regulations governing the use and maintenance of underground storage tanks.
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. Express Stop
anticipates that it will meet the 1998 deadline for all of its underground
storage tanks.
North and South Carolina have established trust funds for the sharing,
recovery, and reimbursement of costs incurred as a result of releases from
underground storage tanks. The Company participates in these programs by virtue
of the payment of registration fees on each underground storage tank and taxes
on the purchase 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
underground storage tanks.
As of December 31, 1997, Express Stop is responsible for the remediation
of contamination at six sites. $1,100,000 has been accrued for these estimated
future remediation costs, which includes the costs of remediation, tank removal
(2 sites) and potential litigation (1 site). The cost estimate is predicated on
management's evaluation of the effect of presently enacted laws and
regulations, cleanup and removal technology which is currently in existence,
and currently available facts. The costs accrued and the related receivable are
undiscounted because the timing and amounts of future payments and receipts are
uncertain. Based on presently enacted laws and regulations, the current
classification and priority of the contaminated sites, and management's
evaluation of the financial viability of its insurance carriers, Express Stop
expects to be able to recoup all of these estimated expenditures from either
trust funds ($750,000) or insurance carriers ($350,000), should they be
incurred.
Although Express Stop 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, Express Stop 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. Express Stop 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, Express Stop 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-91
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Miller Enterprises, Inc. and
Peninsular Petroleum Company:
We have audited the accompanying combined balance sheets of Miller
Enterprises, Inc. and Peninsular Petroleum Company, (Florida corporations) as
of April 2, 1997 and April 1, 1998 and the related combined statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended April 1, 1998. These financial statements are the responsibility
of Miller Enterprises' and Peninsular Petroleum'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 Miller Enterprises, Inc.
and Peninsular Petroleum Company as of April 2, 1997 and April 1, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended April 1, 1998 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Jacksonville, Florida
February 18, 1999
F-92
<PAGE>
MILLER ENTERPRISES, INC. AND
PENINSULAR PETROLEUM COMPANY
COMBINED BALANCE SHEETS
APRIL 2, 1997, APRIL 1, 1998, AND DECEMBER 30, 1998
<TABLE>
<CAPTION>
April 2, April 1, December 30,
1997 1998 1998
------------ ------------ ------------
(Unaudited)
ASSETS
------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents......... $ 13,905,044 $ 12,282,797 $ 10,648,576
Accounts and notes receivable..... 3,846,452 4,878,095 5,507,034
Inventories....................... 7,401,844 4,659,131 5,862,141
Prepaid expenses and other........ 1,383,597 1,605,777 1,854,862
------------ ------------ ------------
Total current assets............ 26,536,937 23,425,800 23,872,613
------------ ------------ ------------
Property and equipment.............. 42,230,649 44,624,853 52,203,049
Less accumulated depreciation..... (23,183,642) (19,728,258) (21,393,897)
------------ ------------ ------------
Property and equipment, net....... 19,047,007 24,896,595 30,809,152
------------ ------------ ------------
Other assets:
Receivables due from
stockholders..................... 4,513,171 4,669,053 4,784,387
Note receivable from related
party............................ -- -- 1,272,595
Other assets...................... 438,181 172,985 2,161,993
------------ ------------ ------------
Total other assets.............. 4,951,352 4,842,038 8,218,975
------------ ------------ ------------
Total assets.................... $ 50,535,296 $ 53,164,433 $ 62,900,740
============ ============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY
-----------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable.................. $ 13,341,528 $ 10,205,305 $ 12,542,871
Income taxes payable.............. 3,409,519 3,461,841 3,069,184
Accrued payroll expenses.......... 872,192 680,124 853,973
Accrued self-insurance reserves... 1,613,670 1,564,454 1,026,754
Other accrued expenses and
liabilities...................... 3,084,949 2,330,980 3,134,328
Current portion of long-term
debt............................. 1,071,270 1,238,976 1,530,675
------------ ------------ ------------
Total current liabilities....... 23,393,128 19,481,680 22,157,785
Long-term debt, less current
portion............................ 7,645,975 6,602,138 9,762,094
Other noncurrent liabilities........ 1,507,965 2,270,353 5,426,394
------------ ------------ ------------
Total liabilities............... 32,547,068 28,354,171 37,346,273
------------ ------------ ------------
Commitments and contingencies (Notes
1, 7, 8, 9, 10, and 12)
Stockholders' equity:
Capital stock..................... 6,877,922 6,163,314 6,163,314
Additional paid-in capital........ 749,577 1,019,663 1,019,663
Retained earnings................. 10,360,729 17,627,285 18,371,490
------------ ------------ ------------
Total stockholders' equity...... 17,988,228 24,810,262 25,554,467
------------ ------------ ------------
Total liabilities and stockholders'
equity............................. $ 50,535,296 $ 53,164,433 $ 62,900,740
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-93
<PAGE>
MILLER ENTERPRISES, INC. AND
PENINSULAR PETROLEUM COMPANY
COMBINED STATEMENTS OF INCOME
For the Years Ended March 27, 1996, April 2, 1997, and April 1, 1998
and For the Nine Months Ended December 25, 1997 and December 30, 1998
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
---------------------------------------- --------------------------
March 27, April 2, April 1, December 25, December 30,
1996 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $136,626,214 $148,222,390 $122,554,607 $ 97,853,788 $ 80,886,319
Gasoline sales........ 113,623,513 139,233,090 145,186,322 108,962,544 106,293,593
Commissions........... 2,843,857 2,740,526 2,720,675 2,027,707 1,609,443
Other................. 99,110 139,981 138,745 130,073 151,792
------------ ------------ ------------ ------------ ------------
Total revenues...... 253,192,694 290,335,987 270,600,349 208,974,112 188,941,147
------------ ------------ ------------ ------------ ------------
Cost of sales:
Merchandise........... 93,672,065 100,427,933 79,136,610 65,137,202 50,700,620
Gasoline.............. 98,232,796 122,936,536 126,285,061 94,925,918 91,656,914
------------ ------------ ------------ ------------ ------------
Total cost of
sales.............. 191,904,861 223,364,469 205,421,671 160,063,120 142,357,534
------------ ------------ ------------ ------------ ------------
Gross Profit............ 61,287,833 66,971,518 65,178,678 48,910,992 46,583,613
------------ ------------ ------------ ------------ ------------
Operating Expenses:
Store expenses........ 41,483,791 44,727,224 42,205,094 33,468,781 31,760,582
General and
administrative
expenses............. 13,044,366 14,739,025 15,540,929 9,755,926 10,772,133
Depreciation and
amortization......... 3,327,063 3,276,034 3,153,420 2,284,203 2,552,342
------------ ------------ ------------ ------------ ------------
Total operating
expenses........... 57,855,220 62,742,283 60,899,443 45,508,910 45,085,057
------------ ------------ ------------ ------------ ------------
Income from operations.. 3,432,613 4,229,235 4,279,235 3,402,082 1,498,556
Other Income (Expenses):
Interest income....... 12,456 78,312 267,129 127,395 92,975
Interest expense...... (517,408) (457,480) (389,641) (295,641) (223,091)
Gain on sale of fixed
assets............... 425,219 97,229 10,639,819 10,639,819 --
Other (expense)
income............... 30,874 129,991 (237,274) (149,081) 66,138
------------ ------------ ------------ ------------ ------------
Total other
(expense) income... (48,859) (151,948) 10,280,033 10,322,492 (63,978)
------------ ------------ ------------ ------------ ------------
Income before income
taxes.................. 3,383,754 4,077,287 14,559,268 13,724,574 1,434,578
Income tax expense...... 1,186,206 1,463,472 5,472,857 5,340,591 425,322
------------ ------------ ------------ ------------ ------------
Net income.............. $ 2,197,548 $ 2,613,815 $ 9,086,411 $ 8,383,983 $ 1,009,256
============ ============ ============ ============ ============
Pro forma tax adjustment
on
S Corporation income... 103,739 108,100 150,330 60,863 126,990
------------ ------------ ------------ ------------ ------------
Pro forma net income.... $ 2,093,809 $ 2,505,715 $ 8,936,081 $ 8,323,120 $ 882,266
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-94
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended March 27, 1996, April 2, 1997, and April 1, 1998
<TABLE>
<CAPTION>
Miller Enterprises, Inc.
--------------------------------------------------------------
Class A Class B Peninsular
Preferred Stock Common Stock Common Stock Additional Common Stock
------------------- --------------- ------------- Paid-In -------------- Retained
Shares Amount Shares Amount Shares Amount Capital Shares Amount Earnings Total
------- ---------- ------- ------ ------ ------ ---------- ------ ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March
29, 1995......... 695,860 $6,958,620 277,938 $2,779 16,251 $163 $ 464,295 10,000 $10,000 $ 6,250,133 $13,685,990
Net income........ -- -- -- -- -- -- -- -- -- 2,197,548 2,197,548
Shareholder
distributions.... -- -- -- -- -- -- -- -- -- (105,000) (105,000)
Purchase and
retirement of
stock............ (3,955) (39,550) (1,541) (15) -- -- -- -- -- (56,450) (96,015)
Issuance of common
stock............ -- -- -- -- 2,032 20 105,293 -- -- -- 105,313
------- ---------- ------- ------ ------ ---- ---------- ------ ------- ----------- -----------
Balance at March
27, 1996......... 691,905 6,919,070 276,397 2,764 18,283 183 569,588 10,000 10,000 8,286,231 15,787,836
Net income........ -- -- -- -- -- -- -- -- -- 2,613,815 2,613,815
Shareholder
distributions.... -- -- -- -- -- -- -- -- -- (450,000) (450,000)
Purchase and
retirement of
stock............ (5,412) (54,120) (1,581) (16) -- -- -- -- -- (89,317) (143,453)
Issuance of common
stock............ -- -- -- -- 4,092 41 179,989 -- -- -- 180,030
------- ---------- ------- ------ ------ ---- ---------- ------ ------- ----------- -----------
Balance at April
2, 1997.......... 686,493 6,864,950 274,816 2,748 22,375 224 749,577 10,000 10,000 10,360,729 17,988,228
Net income........ -- -- -- -- -- -- -- -- -- 9,086,411 9,086,411
Shareholder
distributions.... -- -- -- -- -- -- -- -- -- (650,000) (650,000)
Purchase and
retirement of
stock............ (71,441) (714,410) (23,668) (237) -- -- -- -- -- (1,169,855) (1,884,502)
Issuance of common
stock............ -- -- -- -- 3,972 39 270,086 -- -- -- 270,125
------- ---------- ------- ------ ------ ---- ---------- ------ ------- ----------- -----------
Balance at April
1, 1998.......... 615,052 $6,150,540 251,148 $2,511 26,347 $263 $1,019,663 10,000 $10,000 $17,627,285 $24,810,262
======= ========== ======= ====== ====== ==== ========== ====== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-95
<PAGE>
MILLER ENTERPRISES, INC. AND
PENINSULAR PETROLEUM COMPANY
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 27, 1996, APRIL 2, 1997, AND APRIL 1, 1998,
AND FOR THE NINE MONTHS ENDED DECEMBER 25, 1997, AND DECEMBER 30, 1998
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
-------------------------------------- --------------------------
March 27, April 2, April 1, December 25, December 30,
1996 1997 1998 1997 1998
----------- ----------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............. $ 2,197,548 $ 2,613,815 $ 9,086,411 $ 8,383,983 $ 1,009,256
----------- ----------- ------------ ------------ -----------
Adjustments to
reconcile net income
to net cash provided
by (used in )
operating activities:
Depreciation and
amortization........ 3,327,063 3,276,034 3,153,420 2,284,203 2,552,342
Deferred income tax
(benefit)
provision........... (622,904) (169,655) 1,119,392 1,475,811 543,451
Gain on sales of
assets.............. (425,219) (97,229) (10,639,819) (10,639,819) --
Loss on investment in
Eli Witt Company.... -- 743,757 -- -- --
Stock issued as
compensation........ 105,313 180,030 270,125 -- --
Changes in assets and
liabilities:
Accounts and notes
receivable........ 269,538 (1,462,545) (1,031,643) 1,289,534 (628,939)
Inventories........ (616,684) (402,283) 417,273 227,096 (1,203,010)
Prepaid expenses
and other assets.. (546,022) 223,858 (406,329) (1,387,618) (2,525,463)
Accounts payable... 847,906 2,029,929 (3,136,223) (4,415,711) 2,337,566
Accrued expenses
and other
liabilities....... 2,128,656 (830,598) (691,580) (466,093) 2,941,115
----------- ----------- ------------ ------------ -----------
Total
adjustments...... 4,467,647 3,491,298 (10,945,384) (11,632,597) 4,017,062
----------- ----------- ------------ ------------ -----------
Net cash provided
by (used in)
operating
activities....... 6,665,195 6,105,113 (1,858,973) (3,248,614) 5,026,318
----------- ----------- ------------ ------------ -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Proceeds from sales of
assets................ 1,161,579 768,010 15,225,292 15,018,477 11,833
Purchases of property
and equipment......... (6,497,411) (2,332,016) (11,382,933) (6,492,767) (9,749,027)
Proceeds from sale of
investment in Eli Witt
Company............... -- 750,000 -- -- --
----------- ----------- ------------ ------------ -----------
Net cash (used in)
provided by
investing
activities....... (5,335,832) (814,006) 3,842,359 8,525,710 (9,737,194)
----------- ----------- ------------ ------------ -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal payments on
long-term debt........ (3,517,902) (2,552,850) (1,071,131) (6,013,846) (119,379)
Borrowings on long-term
debt.................. 3,738,944 2,382,978 -- -- 3,571,034
Shareholder
distributions......... (105,000) (450,000) (650,000) (650,000) (375,000)
Purchase and retirement
of stock.............. (96,015) (143,453) (1,884,502) (1,884,502) --
----------- ----------- ------------ ------------ -----------
Net cash provided
by (used in)
financing
activities....... 20,027 (763,325) (3,605,633) (8,548,348) 3,076,655
----------- ----------- ------------ ------------ -----------
NET INCREASE (DECREASE)
IN CASH................ 1,349,390 4,527,782 (1,622,247) (3,271,252) (1,634,221)
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 8,027,872 9,377,262 13,905,044 13,905,044 12,282,797
----------- ----------- ------------ ------------ -----------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 9,377,262 $13,905,044 $ 12,282,797 $ 10,633,792 $10,648,576
=========== =========== ============ ============ ===========
SUPPLEMENTAL
DISCLOSURES:
Income taxes paid...... $ 990,219 $ 2,446,000 $ 4,815,500 $ 3,165,500 $ 1,424,000
=========== =========== ============ ============ ===========
Interest paid.......... $ 490,067 $ 403,499 $ 392,714 $ 295,941 $ 222,563
=========== =========== ============ ============ ===========
NONCASH INVESTING
ACTIVITY:
Purchase of property
and equipment for note
payable............... $ -- $ -- $ 195,000 $ 195,000 $ --
=========== =========== ============ ============ ===========
Sale of property and
equipment for note
receivable............ $ 108,028 $ -- $ -- $ -- $ 1,272,595
=========== =========== ============ ============ ===========
</TABLE>
F-96
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
March 27, 1996, April 2, 1997, and April 1, 1998
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description and Principles of Combination
These financial statements are the combined financial statements of
Miller Enterprises, Inc. and Peninsular Petroleum Company (an S corporation).
These entities are combined as they are under common control by a group of
related parties. Miller Enterprises, Inc. currently owns and operates
convenience stores throughout central Florida. Peninsular Petroleum Company
operates a petroleum-shipping business, where approximately 95% of its shipping
is derived from the convenience stores owned by Miller Enterprises. All
intercompany transactions are eliminated in the combination. On January 28,
1999, the shareholders of Miller Enterprises and Peninsular Petroleum sold the
stock of Miller Enterprises and Peninsular Petroleum and certain real property
owned by other related entities to Lil' Champ Food Stores, Inc., a subsidiary
of The Pantry, a convenience store company headquartered in Sanford, North
Carolina (Note 11).
Fiscal Year-Ends and Combined Periods
Miller Enterprises operates under a 52- to 53-week fiscal year. The
fiscal years ended March 27, 1996, April 2, 1997, and April 1, 1998 were
comprised of 52 weeks, 53 weeks, and 52 weeks, respectively. Peninsular
operates on a calendar year basis. For purposes of the combination, the
calendar years ended December 31, 1995, 1996, and 1997 were combined with
Miller Enterprises's fiscal years ended March 27, 1996, April 2, 1997, and
April 1, 1998, respectively.
Unaudited Financial Statements
In the opinion of management, the unaudited statements of income and cash
flows for the nine months ended December 25, 1997 and December 30, 1998 and the
unaudited balance sheet as of December 30, 1998 include all adjustments (which
include only normal recurring adjustments) necessary to present the financial
position and results of operations and cash flows for those periods in
accordance with generally accepted accounting principles.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities 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.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash held at banks and
money market instruments with original maturity dates of less than three
months.
F-97
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
Inventories
Inventories are stated at the lower of cost or market, which is defined
as net realizable value. Cost is determined using the last-in, first-out
("LIFO") method for merchandise inventories and the first-in, first-out
("FIFO") method for gasoline and other inventories. Such inventory value is
approximately $4,800,000 and $2,596,000 for merchandise inventories and
$2,602,000 and $2,063,000 for gasoline and other inventories as of April 2,
1997 and April 1, 1998, respectively. Merchandise inventories would have been
$3,442,000 and $2,254,000 higher if the FIFO method was used in 1997 and 1998
respectively. Net income of approximately $814,000, was recorded in fiscal 1998
as a result of the liquidation of LIFO inventory quantities.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on the following useful lives:
<TABLE>
<S> <C>
Buildings............................... 15-30 years
Furniture and equipment................. 7-10 years
Leasehold improvements, equipment under Shorter of initial lease term or
lease.................................. estimated useful life of asset
</TABLE>
The cost and accumulated depreciation of assets sold or retired are
removed from the respective accounts, and any gain or loss from sale or
retirement of property and equipment is recognized in the accompanying
statements of income. Maintenance and repair costs are charged to expense as
incurred, and major renewals and betterments are capitalized.
Property and equipment and other long-lived assets are evaluated
periodically for other than temporary impairment. If circumstances suggest that
their values may be impaired and the related write-downs would be material, an
assessment of recoverability is performed prior to any write-down of the asset.
Investment in Eli Witt Company
Miller Enterprises owned 193,393 shares of Series A preferred stock and
139,393 shares of Series C preferred stock of Eli Witt Company, a subsidiary of
Culbro Corporation. This investment was carried at cost as a market value was
not readily determinable, which management had estimated approximated fair
value. During the fiscal year ended April 2, 1997 Miller Enterprises sold
75,272 shares of the Series A preferred stock to a third party for $750,000,
resulting in a gain of $45,755. Later that year Eli Witt filed for bankruptcy
and the remaining investment was written off resulting in a loss of $743,757.
Income Taxes
Miller records deferred tax assets and liabilities based on the
differences between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes, referred to as temporary differences.
Deferred tax assets or liabilities at the end of each period are determined
using the currently enacted tax rates to apply to taxable income in the periods
in which the particular deferred tax asset or liability is expected to be
settled or realized.
F-98
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
Peninsular Petroleum is an S corporation, and accordingly, does not
provide for federal or state income taxes. Each shareholder in this entity
reports their share of the profits and losses, and federal and state income
taxes are computed on each shareholders' total income from all sources.
Pro forma income tax expense is disclosed on the combined income statement
assuming the same effective rate as Miller Enterprises.
Excise and Use Taxes
Miller Enterprises collects and remits various federal, state and county
excise and use taxes on petroleum products. Sales and cost of sales included
approximately $40,880,000, $45,700,000 and $50,490,000 for the years ended
March 27, 1996, April 3, 1997 and April 1, 1998, respectively. Sales and cost
of sales included approximately $37,030,000 and $43,610,000 of such taxes
respectively, for the nine months ended December 25, 1997 and December 30,
1998.
Self-Insurance Reserves
Miller Enterprises is partially self-insured for workers' compensation
and has included reserves estimated by a third-party administrator and a
third-party actuary, in current and other noncurrent liabilities in the
accompanying combined balance sheets of approximately $1,981,000, and
$1,637,000 for 1997 and 1998, respectively. Miller Enterprises also has
related receivables, included in accounts and notes receivable in the
accompanying combined balance sheets, from the State of Florida Disability
Fund in the amounts of approximately $647,000 and $818,000 for 1997 and 1998,
respectively.
Advertising Costs
Miller Enterprises expenses all advertising costs as incurred.
Advertising costs expensed for the three fiscal years ended March 27, 1996,
April 2, 1997 and April 1, 1998 were approximately $590,000, $700,000 and
$590,000 respectively.
Fair Market Value of Financial Instruments
The carrying amounts of Miller Enterprises' financial instruments,
including cash, investments and long term debt approximate their fair values.
Reclassifications
Certain 1996 and 1997 amounts have been reclassified to conform with the
1998 presentation.
F-99
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of April 2, 1997 and
April 1, 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Land.............................................. $ 1,616,671 $ 4,521,630
Buildings......................................... 535,950 523,455
Equipment and fixtures............................ 22,902,401 21,619,208
Construction in progress.......................... 1,591,983 2,662,241
Leasehold improvements............................ 15,583,644 15,298,319
----------- -----------
42,230,649 44,624,853
Less accumulated depreciation and amortization.... (23,183,642) (19,728,258)
----------- -----------
$19,047,007 $24,896,595
=========== ===========
</TABLE>
3. RECEIVABLES DUE FROM STOCKHOLDERS AND NOTE RECEIVABLE FROM RELATED PARTY
The receivables due from stockholders relate to advances to pay life
insurance premiums for stockholders that are collateralized by assignments of
the related life insurance policies, which had a face value of $20,000,000.
These policies were purchased to ensure business continuity by providing
funding for obligations arising from stock buy-sell agreements among
stockholders. No interest was charged on these receivables, which are due on
demand and are classified as non-current assets as repayment is not expected
within 12 months.
The note receivable from related party was a note for certain real
estate assets sold at book value which management estimates to be fair value
to a real estate partnership in which the selling shareholders are Partners.
The note calls for full payment of the principal balance on September 30, 1999
and charges interest to the partnership of 5.35% per annum.
4.LONG-TERM DEBT
At April 2, 1997 and April 1, 1998, long-term debt consisted of the
following (the prime rate at April 1, 1998 was 8.5%):
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Revolving line of credit payable to bank with
interest at prime, providing borrowings up to
$5,000,000, maturing April 30, 1999, unsecured..... $5,000,000 $5,000,000
Notes payable to a bank in equal monthly
installments aggregating $66,223, including
interest ranging from the prime rate to the prime
rate plus .75%, collateralized by equipment........ 2,298,544 1,618,322
Other notes, generally due in monthly installments
of principal plus variable interest rates ranging
from the prime rate to the prime rate plus .5% or a
fixed interest rate of 8.75%....................... 1,418,701 1,222,792
---------- ----------
8,717,245 7,841,114
Less current maturities............................. (1,071,270) (1,238,976)
---------- ----------
$7,645,975 $6,602,138
========== ==========
</TABLE>
F-100
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
Peninsular Petroleum has an unsecured line of credit of $500,000.
Interest on the unpaid balance accrues at the bank's prime rate and is paid
monthly. No amount was outstanding at April 1, 1998 and April 2, 1997.
Certain of Miller Enterprises' and Peninsular Petroleum's debt agreements
contain restrictive financial covenants, including minimum current ratio,
tangible net worth, debt to net worth, and debt service coverage, all as
defined in the agreements.
The scheduled annual maturities of long-term debt are as follows as of
April 1, 1998:
<TABLE>
<S> <C>
1999.......................................................... $1,238,976
2000.......................................................... 5,820,805
2001.......................................................... 494,481
2002.......................................................... 105,072
2003.......................................................... 79,273
Thereafter.................................................... 102,507
----------
Total....................................................... $7,841,114
==========
</TABLE>
5.STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
At April 2, 1997 and April 1, 1998, individual equity and capital
accounts of Miller Enterprises and Peninsular Petroleum were as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Miller Enterprises, Inc.:
Preferred stock, $10 par value; 760,000 shares
authorized, 686,493 and 615,052 shares issued and
outstanding in 1997 and 1998, respectively.......... $ 6,864,950 $ 6,150,540
Class A common stock, $.01 par value; 2,500,000
shares authorized, 274,816 and 251,148 shares issued
and outstanding in 1997 and 1998, respectively...... 2,748 2,511
Class B common stock, $.01 par value; 2,500,000
shares authorized, and 22,375 and 26,347 shares
issued and outstanding in 1997 and 1998,
respectively........................................ 224 263
Additional paid-in capital........................... 749,577 1,019,663
Retained earnings.................................... 9,819,653 17,345,741
----------- -----------
$17,437,152 $24,518,718
=========== ===========
Peninsular Petroleum Company:
Common stock, $1 par value; 10,000 shares authorized,
issued and outstanding.............................. $ 10,000 $ 10,000
Retained earnings.................................... 541,076 281,544
----------- -----------
$ 551,076 $ 291,544
=========== ===========
Total combined stockholders' equity................ $17,988,228 $24,810,262
=========== ===========
</TABLE>
F-101
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
6.INCOME TAXES
The components of income tax expense (benefit) for the years ended March
27, 1996, April 2, 1997, and April 1, 1998 are summarized below:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................. $1,544,691 $1,394,429 $3,720,658
State................................... 264,419 238,698 632,807
---------- ---------- ----------
1,809,110 1,633,127 4,353,465
---------- ---------- ----------
Deferred:
Federal................................. (531,718) (144,858) 966,463
State................................... (91,186) (24,797) 152,929
---------- ---------- ----------
(622,904) (169,655) 1,119,392
---------- ---------- ----------
$1,186,206 $1,463,472 $5,472,857
========== ========== ==========
</TABLE>
As of April 2, 1997 and April 1, 1998, deferred tax (liabilities) assets
are comprised of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Depreciation...................................... $ (736,986) $ (986,025)
Deferred gain on sale of assets................... -- (961,060)
Other............................................. (343,079) (204,839)
----------- -----------
Deferred tax liabilities........................ (1,080,065) (2,151,924)
----------- -----------
Accrued compensation.............................. 376,645 469,445
Insurance reserves................................ 626,667 422,226
Environmental expenses............................ 59,856 113,857
Other............................................. 60,456 70,563
----------- -----------
Deferred tax assets............................. 1,123,624 1,076,091
----------- -----------
$ 43,559 $(1,075,833)
=========== ===========
</TABLE>
As of April 2, 1997 and April 1, 1998, net current deferred income tax
assets totaled $700,963 and $490,686, respectively, and net noncurrent deferred
income tax liabilities totaled $(657,404) and $(1,566,519), respectively. All
deferred tax assets are considered to be realizable due to projected future
taxable income; thus, no valuation allowance has been recorded.
F-102
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
Reconciliation of income taxes at the federal statutory rate (34%) to
actual taxes for the years ended March 27, 1996, April 2, 1997 and April 1,
1998 provided are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Tax provision at federal statutory
rate.................................. $1,150,476 $1,386,277 5,095,744
Tax provision at state rate, net of
federal income tax benefit............ 122,830 148,006 492,467
Effect of S corporation income......... (103,739) (108,100) (150,330)
Permanent differences:
Other................................ 16,637 37,289 34,976
---------- ---------- ----------
$1,186,206 $1,463,472 $5,472,857
========== ========== ==========
</TABLE>
7.OPERATING LEASES
Miller Enterprises leases all of its convenience stores, of which
approximately 60% are leased from related parties. Lease terms generally range
up to 15 years, with options to renew for additional 5-year periods. Certain of
the leases provide for contingent rentals based on sales in excess of
stipulated amounts or based on increases in the costs of insurance or taxes.
Future minimum rental commitments under noncancelable operating leases as
of April 1, 1998 are as follows:
<TABLE>
<CAPTION>
Total Lease Net Lease
Obligations Subleases Obligations
----------- ---------- -----------
<S> <C> <C> <C>
1999...................................... $ 7,788,946 $ 340,463 $ 7,448,483
2000...................................... 8,008,866 266,023 7,742,843
2001...................................... 6,231,174 250,023 5,981,151
2002...................................... 5,540,094 246,526 5,293,568
Thereafter................................ 27,251,519 806,290 26,445,229
----------- ---------- -----------
$54,820,599 $1,909,325 $52,911,274
=========== ========== ===========
</TABLE>
For the fiscal years ended March 27, 1996, April 2, 1997, and April 1,
1998, total rental expense included in store expenses was approximately
$6,711,636, $7,970,000, and $8,666,000, respectively. Rental expense paid to
related parties and stockholders was approximately $3,050,000, $4,480,000, and
$4,872,000 in 1996, 1997, and 1998, respectively.
8.EMPLOYEE BENEFIT PLANS
Retirement Plans
Miller Enterprises sponsors a 401(k) and profit-sharing plan and an
employee stock ownership plan covering eligible employees. With respect to
employer contributions, participants in the plans vest after five years of
service. On December 18, 1997, the trustees approved the termination and
liquidation of the employee stock ownership plan and the purchase by Miller
Enterprises of all capital stock owned by the employee stock ownership plan at
its fair value. Miller Enterprises purchased 71,441 shares of its preferred
stock and 23,668 shares of its Class A common
F-103
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
stock in connection with the termination and liquidation of the ESOP. Miller
Enterprises purchased the preferred stock and the Class A common stock based on
fair value as determined by independent appraisal. The amount of the repurchase
price of the shares in excess of par value was recorded as a reduction of
retained earnings. Miller matches 50% of employee contributions to the 401(k)
up to 6% of the employee's salary. Miller Enterprises contributed approximately
$208,000, $252,000, and $271,000 for the years ended March 27, 1996, April 2,
1997, and April 1, 1998, respectively. Peninsular Petroleum also sponsors a
401(k) plan covering eligible employees. Matching contributions to this plan
were not significant.
Incentive Cash/Restricted Stock Bonus Plan
Miller Enterprises sponsors an annual achievement based incentive
cash/restricted stock bonus plan whereby Miller Enterprises may award cash or
Class B (restricted voting rights) common stock to key employees based on a
percentage of earnings each year, as defined in the bonus plan. Miller
Enterprises applies the provisions of Accounting Principles Board Opinion No.
25, Accounting for Stock issued to Employees, in accounting for its stock based
awards. Accordingly, for the three years ended March 27, 1996, April 2, 1997
and April 1, 1998, Miller Enterprises issued 2,633, 4,092 and 3,972 shares of
Class B common stock under the provisions of this plan at no cost to the
employees and recorded expense for all shares issued of approximately $105,000,
$180,000, and $270,000, based on fair value of the stock as valued by
independent appraisal of $40, $44 and $68 per share at March 27, 1996, April 2,
1997 and April 1, 1998, respectively. As of the years ended April 2, 1997 and
April 1, 1998, Miller Enterprises had awarded 22,375 and 26,347 shares of
Class B stock under the provisions of this plan. On January 26, 1999 all shares
in this plan were repurchased at fair value as determined by the purchase price
of Miller Enterprises by Lil' Champ Food Stores, Inc. (See Note 12) and
retired.
9.ENVIRONMENTAL COMPLIANCE
The ownership and/or operation of underground gasoline storage tanks is
subject to federal, state, and local laws and regulations.
Miller Enterprises meets federal and state financial responsibility
requirements through the retention of third-party insurance coverage. In
addition, Miller Enterprises' facilities are generally covered under the State
of Florida's superfund. Miller Enterprises has an agreement with an
environmental consulting and engineering firm whereby the firm will make
contamination assessments, prepare contamination reports, and manage site
remediation activities and required agency coordination for the Miller
Enterprises' properties. The Firm will provide all labor, materials, supplies,
equipment, transportation, and supervision required to perform the
rehabilitation services. Under the terms of the agreement, the firm is paid
solely by reimbursement from the State of Florida's superfund.
For situations not covered by this agreement, Miller Enterprises
determines its liability on a site by site basis and records a liability at the
time when it is probable and can be reasonably estimated. The estimated
liability is not discounted. As of March 27, 1996, April 2, 1997 and April 1,
1998, Miller Enterprises had recorded liabilities of approximately $394,000,
$460,000 and $300,000 that are included in other accrued expenses and
liabilities on the balance sheet.
F-104
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
10. LITIGATION
In the normal course of conducting business, Miller Enterprises and
Peninsular Petroleum are involved in various routine claims, disputes, and
litigation. In the opinion of management, the resolution of these claims,
disputes, and litigation as of period-end will not have a material adverse
effect on the financial position, results of operations, or liquidity of Miller
Enterprises and Peninsular Petroleum.
11. GAIN ON SALE OF ASSETS
On September 24, 1997, Miller Enterprises sold certain assets, consisting
primarily of inventory and fixed assets to SuperValu Operations, Inc. for net
cash proceeds of $15.1 million, resulting in a pre-tax gain of approximately
$10.5 million.
12. SUBSEQUENT EVENT
On January 28, 1999, the shareholders of Miller Enterprises and
Peninsular Petroleum sold the stock of Miller Enterprises and Peninsular
Petroleum and certain real property owned by other related entities to Lil'
Champ Food Stores, Inc., a subsidiary of The Pantry, a convenience store
company headquartered in Sanford, North Carolina, for $82,000,000, subject to
adjustment in accordance with the terms of the purchase agreement. Per the
purchase agreement, certain assets amounting to approximately $7,700,000 were
distributed to the shareholders of Miller Enterprises prior to the transaction
and all of the outstanding debt of Miller Enterprises and the debt related to
the real property purchased from the other related entities was repaid. The
assets distributed to the shareholders of Miller Enterprises prior to the sale
of the stock of Miller Enterprises to Lil' Champ Food Stores consisted of
receivables due from stockholders, life insurance policies and the note
receivable from a related real estate partnership.
F-105
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
The Pantry, Inc.
Sanford, North Carolina
We have audited the accompanying statement of net assets acquired from
Miller Brothers and Circle Investments, Ltd. as of Janaury 28, 1999, by The
Pantry, Inc. This statement is the responsibility of The Pantry, Inc.'s
management. Our responsibility is to express an opinion on the statement based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the accompanying statement of net assets acquired
presents fairly, in all material respects, the net assets acquired as of
January 28, 1999 by The Pantry, Inc. from Miller Brothers and Circle
Investments, Ltd., in conformity with generally accepted principles.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
March 30, 1999
F-106
<PAGE>
THE PANTRY, INC.
STATEMENT OF NET ASSETS ACQUIRED FROM
MILLER BROTHERS AND CIRCLE INVESTMENTS, LTD.
As of January 28, 1999
(in thousands)
<TABLE>
<S> <C>
Assets acquired:
Land................................................................. $19,608
Buildings............................................................ 29,060
--------
Total assets acquired.................................................. 48,668
Deferred income taxes.................................................. 2,218
--------
Net assets acquired.................................................... $ 46,450
========
</TABLE>
See accompanying notes to statement of assets acquired.
F-107
<PAGE>
THE PANTRY, INC.
NOTES TO STATEMENT OF NET ASSETS ACQUIRED
As of January 28, 1999
1. Background
On January 28, 1999, The Pantry, Inc. acquired the real estate assets of
Miller Brothers and Circle Investments, Ltd., in connection with the
acquisition of 100% of the outstanding capital stock of Miller Enterprises,
Inc. Miller Enterprises, Inc. is a leading operator of convenience stores,
operating 121 stores located in central Florida and operated under the name
"Handy Way". The assets acquired from Miller Brothers and Circle Investments,
Ltd., represent real estate, including land and buildings, leased to and used
in the convenience store operations of Miller Enterprises, Inc.
The accompanying statement relates solely to the net assets acquired by
The Pantry and is not intended to represent the complete financial position of
Miller Brothers and Circle Investments.
2. Summary of Significant Accounting Policies
The Miller acquisition, including the net assets acquired from Miller
Brothers and Circle Investments, has been accounted for using purchase
accounting. In accordance with Accounting Principles Board Opinion No. 16,
Business Combinations ("APB 16"), the acquired assets have been recorded at
their fair values at the date of acquisition, utilizing internal and third-
party appraisals.
Deferred income taxes have been provided for the difference between the
tax basis of the assets ($43,124,000, as established in the acquisition
agreement) and the fair value of the assets determined in accordance with APB
16.
The preliminary purchase price allocation for the Miller acquisition
results in estimated goodwill of $19,760,000. Such estimate is subject to
change pending completion of appraisals and other final allocations related to
Miller Enterprises, Inc. For purposes of the accompanying statement of net
assets acquired, no goodwill has been allocated, pending the finalization of
the fair values of the assets and liabilities acquired of Miller Enterprises,
Inc.
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 financial statements.
Actual amounts could differ from these estimates.
F-108
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Taylor Oil Company
We have audited the accompanying statement of assets sold of Taylor Oil
Company as of December 31, 1998 and the related statements of income from
retail operations and cash flows from retail operations for the three years
ended December 31, 1998. These statements are the responsibility of Taylor Oil
Company. Our responsibility is to express an opinion on these 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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying statements were prepared to present the assets of Taylor
Oil Company as of December 31, 1998 which were sold to The Pantry, Inc. on
February 25, 1999, pursuant to the purchase agreement described in Note 4, and
the income and cash flows from the retail operations of Taylor Oil Company for
the three years ended December 31, 1998. These statements are not intended to
be a complete presentation of the financial position, results of operations and
cash flows of Taylor Oil Company.
In our opinion, the accompanying statement of assets sold presents
fairly, in all material respects, the assets of Taylor Oil Company as of
December 31, 1998 which were sold to The Pantry, Inc. on February 25, 1999, and
the income and cash flows from retail operations 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-109
<PAGE>
TAYLOR OIL COMPANY
STATEMENT OF ASSETS SOLD
December 31, 1998
<TABLE>
<S> <C>
Current assets:
Cash............................................................... $ 70,350
Receivables........................................................ 702,068
Inventories (Note 2)............................................... 2,706,987
Prepaid expenses................................................... 60,676
----------
Total current assets............................................. 3,540,081
----------
Equipment, net (Note 3).............................................. 5,398,019
----------
Total assets sold.................................................... $8,938,100
==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-110
<PAGE>
TAYLOR OIL COMPANY
STATEMENTS OF INCOME FROM RETAIL OPERATIONS
<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........................ 104,428,629 96,059,829 83,054,192
Commissions............................ 137,711 142,569 267,518
------------ ------------ ------------
Total revenues....................... 127,273,437 118,864,266 108,908,455
------------ ------------ ------------
Cost of sales
Merchandise............................ 15,874,846 15,453,283 17,022,253
Petroleum.............................. 94,458,961 85,047,451 72,855,822
------------ ------------ ------------
Total cost of sales.................. 110,333,807 100,500,734 89,878,075
------------ ------------ ------------
Gross profit............................. 16,939,630 18,363,532 19,030,380
------------ ------------ ------------
Operating expenses
Store expenses......................... 11,142,200 9,777,086 9,946,725
Store expenses--related parties........ 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 -- 187,761
Depreciation........................... 1,139,265 1,365,436 1,399,534
------------ ------------ ------------
Total operating expenses............. 15,627,407 14,262,165 14,649,518
------------ ------------ ------------
Net income from retail operations........ $ 1,312,223 $ 4,101,367 $ 4,380,862
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-111
<PAGE>
TAYLOR OIL COMPANY
STATEMENTS OF CASH FLOWS FROM RETAIL OPERATIONS
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 from retail operations........ $1,312,223 $ 4,101,367 $4,380,862
Adjustments to reconcile net income to
net cash provided by retail operations
Impairment of long-lived assets......... 261,319 -- 187,761
Depreciation............................ 1,139,265 1,365,436 1,399,534
(Gain) loss on sale of equipment........ (23,799) 34,848 7,283
Provision for environmental expenses.... 65,708 2,415 42,803
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 retail operations... $2,122,617 $ 5,867,929 $6,054,408
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-112
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation:
The balance sheet as presented includes only the assets of Taylor Oil as
of December 31, 1998, which were sold to The Pantry, Inc. on February 25, 1999
(see Note 4). The accompanying statements of income and cash flows include only
items applicable to the retail operations which were sold. Because not all of
Taylor Oil's assets, liabilities, income, expenses and sources and uses of cash
are included, these statements are not intended to be a complete presentation
of the financial position, results of operations and cash flows of Taylor Oil
in accordance with generally accepted accounting principles.
Organization:
Taylor Oil Company is engaged primarily in retail sales of petroleum
products and convenience items through stores located in North Carolina and
Virginia.
Cash equivalents:
Taylor Oil 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 five to seven years.
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
Taylor Oil 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:
Taylor Oil 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.
F-113
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
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--INVENTORIES
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Inventories at FIFO cost
Merchandise................................................. $2,171,856
Petroleum products.......................................... 1,218,674
----------
3,390,530
Less adjustment to LIFO cost
Merchandise................................................. (229,360)
Petroleum products.......................................... (454,183)
----------
Inventories at LIFO cost...................................... $2,706,987
==========
</TABLE>
NOTE 3--EQUIPMENT SOLD
<TABLE>
<CAPTION>
December
31, 1998
-----------
<S> <C>
Original cost................................................. $16,519,068
Less accumulated depreciation................................. 11,121,049
-----------
$ 5,398,019
===========
</TABLE>
NOTE 4--SUBSEQUENT EVENT
On February 25, 1999, Taylor Oil sold its retail operation to The Pantry,
Inc. The specific assets and the prices for which they were sold are as
follows:
<TABLE>
<S> <C>
Cash (change fund)............................................ $ 69,600
Receivables................................................... 551,949
Inventories................................................... 3,173,811
Prepaid expenses.............................................. 47,296
Property and equipment........................................ 4,750,000
Goodwill...................................................... 13,300,000
Non-compete agreement......................................... 950,000
-----------
$22,842,656
===========
</TABLE>
F-114
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,250,000 Shares
The Pantry, Inc.
Common Stock
----------------
PROSPECTUS
----------------
Merrill Lynch & Co.
Goldman, Sachs & 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 Pantry 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.............................. 95,000
Accounting fees and expenses.................................... 280,000
Legal fees and expenses......................................... 350,000
Printing expenses............................................... 200,000
Registrar and Transfer Agent's fees............................. 15,000
Miscellaneous fees and expenses................................. 21,700
----------
Total......................................................... $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law, we may
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act. Prior to the
consummation of the offering, our directors and officers have been indemnified
to the full extent permitted by Delaware law under our certificate of
incorporation and bylaws. Upon consummation of the offering our bylaws will
provide that The Pantry may indemnify its directors and officers and we intend
to enter into agreements to indemnify our directors to the full extent
permitted by law. These agreements, among other things, will indemnify our
directors for 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 or officers 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
the event that a claim for indemnification against such liabilities, other than
the payment by The Pantry of expenses incurred or paid by a director or officer
of The Pantry in the successful defense of any action, suit or proceeding, is
asserted by such director or officer in connection with the securities being
registered, The Pantry will, unless in the opinion of our counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by us is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-1
<PAGE>
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.
The Purchase Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of The Pantry, and its directors and officers, severally but not
jointly, and by The Pantry 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 Pantry sold (i) 16,779 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) 698,700 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 Pantry sold 17,500 shares of its Series B preferred
stock and warrants to purchase 2,346,000 shares of common stock to Freeman
Spogli in consideration of an aggregate of $17,500,002 in cash.
In October 1997, The Pantry sold (i) 3,030,471 shares of its common stock
to Freeman Spogli in consideration of $26,739,450 in cash, (ii) 596,190 shares
of its common stock to Chase in consideration of $5,260,500 in cash, and (iii)
45,339 shares of its common stock to Peter J. Sodini in consideration of (x)
$185,000 in cash and (y) $215,050 in the form of a secured promissory note to
the Company. Also in October 1997, all of The Pantry's issued and outstanding
Series A preferred stock was contributed back to The Pantry and cancelled.
In July 1998, The Pantry sold (i) 1,845,690 shares of its common stock to
Freeman Spogli in consideration of $20,809,250 in cash and (ii) 371,688 shares
of its common stock to Chase in consideration of $4,190,600 in cash.
In November 1998, The Pantry sold 22,185 shares of its common stock to a
director under its stock subscription plan in consideration of $250,125 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
these transactions were institutional investors and the chief executive officer
and a director of The Pantry. The Pantry did not engage in any general
solicitation in connection with these shares. 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 Pantry. No underwriter was employed with respect to any such sales.
II-2
<PAGE>
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 Pantry.
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 Pantry.
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(12) 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.
3.3 Form of Amended and Restated Certificate of Incorporation of The
Pantry (to be effective upon consummation of the offering).
3.4 Amended and Restated Bylaws of The Pantry (to be effective upon
consummation of the offering).
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.
5.1 Opinion of Riordan & McKinzie as to the legality of the securities
registered hereunder.
10.1(6)(7) The Pantry, Inc. 1998 Stock Option Plan.
10.2* Form of Incentive Stock Option Agreement.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
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.
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.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
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).
10.29 Form of Indemnification Agreement.
10.30 Common Stock Purchase Warrant dated December 30, 1996.
10.31 Common Stock Purchase Warrant dated December 30, 1996.
10.32 Form of 1999 Stock Option Plan.
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.
23.6 Consent of Edwards, Falls & Renegar, P.L.L.C.
23.7 Consent of Arthur Andersen LLP.
23.8 Consent of Deloitte & Touche LLP.
23.9 Consent of the National Association of Convenience Stores.
24.1* Powers of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
(1) Incorporated by reference to the exhibit designated by the same number in
The Pantry'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 Pantry'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 Pantry'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 Pantry'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 Pantry's Form S-4.
(6) Incorporated by reference to the exhibit designated by the same number in
The Pantry'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 Pantry'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
Pantry's Current Report on Form 8-K dated February 5, 1999.
II-5
<PAGE>
(10) Incorporated by reference to the exhibit designated by exhibit 10.1 in The
Pantry'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 Pantry's Annual Report on Form 10-K for the year ended September 28,
1995.
(12) Incorporated by reference to the exhibit designated by exhibit number 2.1
in The Pantry's Current Report on Form 8-K dated March 12, 1999.
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
Schedule
--------
<C> <S>
Schedule II Valuation and Qualifying Accounts
</TABLE>
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
Pantry pursuant to the foregoing provisions, or otherwise, The Pantry 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 Pantry of expenses
incurred or paid by a director, officer or controlling person of The Pantry 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 Pantry 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.
The undersigned 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 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 Amendment No. 2 to the 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 6 day of May, 1999.
THE PANTRY, INC.
/s/ William T. Flyg
By: _________________________________
William T. Flyg
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to the 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>
* President, Chief Executive May 6, 1999
____________________________________ Officer and Director
Peter J. Sodini (Principal Executive
Officer)
/s/ William T. Flyg Senior Vice President and May 6, 1999
____________________________________ Chief Financial Officer
William T. Flyg (Principal Financial
Officer)
* Vice President and Corporate May 6, 1999
____________________________________ Controller (Principal
Joseph J. Duncan Accounting Officer)
* Director May 6, 1999
____________________________________
William M. Wardlaw
* Director May 6, 1999
____________________________________
Charles P. Rullman
* Director May 6, 1999
____________________________________
Jon D. Ralph
* Director May 6, 1999
____________________________________
Todd W. Halloran
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director May 6, 1999
____________________________________
Christopher C. Behrens
* Director May 6, 1999
____________________________________
Peter M. Starrett
</TABLE>
/s/ William T. Flyg
*By: __________________________
William T. Flyg
Attorney-in-Fact
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 Pantry.
2.4(3) Asset Purchase Agreement dated July 6, 1998 between Stallings Oil
Company and The Pantry.
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 Pantry.
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(12) 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.
3.3 Form of Amended and Restated Certificate of Incorporation of The
Pantry (to be effective upon consummation of the offering).
3.4 Amended and Restated Bylaws of The Pantry (to be effective upon
consummation of the offering).
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.
5.1 Opinion of Riordan & McKinzie as to the legality of the securities
registered hereunder.
10.1(6)(7) The Pantry, Inc. 1998 Stock Option Plan.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
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.
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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
-------- -----------------------
<C> <S>
10.29 Form of Indemnification Agreement.
10.30 Common Stock Purchase Warrant dated December 26, 1996.
10.31 Common Stock Purchase Warrant dated December 26, 1996.
10.32(7) Form of 1999 Stock Option Plan.
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.
23.6 Consent of Edwards, Falls & Renegar, P.L.L.C.
23.7 Consent of Arthur Andersen LLP.
23.8 Consent of Deloitte & Touche LLP.
23.9 Consent of the National Association of Convenience Stores.
24.1* Powers of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment
(1) Incorporated by reference to the exhibit designated by the same number in
The Pantry'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 Pantry'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 Pantry'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 Pantry'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 Pantry's Form S-4.
(6) Incorporated by reference to the exhibit designated by the same number in
The Pantry'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 Pantry'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
Pantry'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
Pantry'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 Pantry's Annual Report on Form 10-K for the year ended September 28,
1995.
(12) Incorporated by reference to the exhibit designated by exhibit number 2.1
in The Pantry's Current Report on Form 8-K dated March 12, 1999.
<PAGE>
EXHIBIT 1.1
_____________________________________________________________________________
_____________________________________________________________________________
Draft 5/5/99
THE PANTRY, INC.
(a Delaware corporation)
__________ Shares of Common Stock
PURCHASE AGREEMENT
------------------
Dated: _____________, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
PURCHASE AGREEMENT...................................................... 1
SECTION 1. Representations and Warranties............................... 3
(a) Representations and Warranties by the Company...................... 3
(i) Compliance with Registration Requirements..................... 3
(ii) Independent Accountants....................................... 4
(iii) Financial Statements.......................................... 4
(iv) No Material Adverse Change in Business........................ 5
(v) Good Standing of the Company.................................. 5
(vi) Good Standing of Subsidiaries................................. 5
(vii) Capitalization................................................ 6
(viii) Authorization of Agreement.................................... 6
(ix) Authorization and Description of Securities................... 6
(x) Absence of Defaults and Conflicts............................. 6
(xi) Absence of Labor Disputes..................................... 7
(xii) Absence of Proceedings........................................ 7
(xiii) Accuracy of Exhibits.......................................... 7
(xiv) Possession of Intellectual Property........................... 7
(xv) Absence of Further Requirements............................... 8
(xvi) Possession of Licenses and Permits............................ 8
(xvii) Title to Property............................................. 8
(xviii)Investment Company Act........................................ 9
(xix) Environmental Laws............................................ 9
(xx) Registration Rights........................................... 9
(xxi) Stabilization or Manipulation................................. 9
(xxii) Accounting Controls........................................... 10
(xxiii)Tax Returns................................................... 10
(xxiv) Year 2000 Disclosures......................................... 10
(b) Officer's Certificates............................................. 10
SECTION 2. Sale and Delivery to Underwriters; Closing.................... 10
(a) Initial Securities................................................. 10
(b) Option Securities.................................................. 11
(c) Payment............................................................ 11
(d) Denominations; Registration........................................ 12
(e) Appointment of Qualified Independent Underwriter................... 12
SECTION 3. Covenants of the Company...................................... 12
(a) Compliance with Securities Regulations and Commission Requests..... 13
(b) Filing of Amendments............................................... 13
(c) Delivery of Registration Statements................................ 13
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
(d) Delivery of Prospectuses........................................... 13
(e) Continued Compliance with Securities Laws.......................... 13
(f) Blue Sky Qualifications............................................ 14
(g) Rule 158........................................................... 14
(h) Use of Proceeds.................................................... 14
(i) Listing............................................................ 14
(j) Restriction on Sale of Securities.................................. 14
(k) Reporting Requirements............................................. 15
(l) Compliance with NASD Rules......................................... 15
(m) Compliance with Rule 463........................................... 15
SECTION 4. Payment of Expenses........................................... 15
(a) Expenses........................................................... 15
(b) Termination of Agreement........................................... 16
SECTION 5. Conditions of Underwriters' Obligations....................... 16
(a) Effectiveness of Registration Statement............................ 16
(b) Opinion of Counsel for Company..................................... 16
(c) Opinion of Counsel for Underwriters................................ 16
(d) Officer's Certificates............................................. 17
(e) Accountants' Comfort Letters....................................... 17
(f) Bring-down Comfort Letters......................................... 18
(g) Approval of Listing................................................ 18
(h) No Objection....................................................... 18
(i) Lock-up Agreements................................................. 18
(j) Consents........................................................... 18
(k) Conditions to Purchase of Option Securities........................ 18
(l) Additional Documents............................................... 19
(m) Termination of Agreement........................................... 19
SECTION 6. Indemnification............................................... 20
(a) Indemnification of Underwriters.................................... 20
(b) Indemnification of Company, Directors and Officers................. 21
(c) Actions against Parties; Notification.............................. 22
(d) Settlement without Consent if Failure to Reimburse................. 22
(e) Indemnification for Reserved Securities............................ 23
SECTION 7. Contribution.................................................. 23
SECTION 8. Representations, Warranties and Agreements to Survive Delivery 24
SECTION 9. Termination of Agreement...................................... 25
(a) Termination; General............................................... 25
(b) Liabilities........................................................ 25
SECTION 10. Default by One or More of the Underwriters................... 25
SECTION 11. Notices...................................................... 26
SECTION 12. Parties...................................................... 26
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
SECTION 13. Governing Law and Time....................................... 26
SECTION 14. Effect of Headings........................................... 26
SCHEDULES
Schedule A - List of Underwriters................................... Sch A-1
Schedule B - Pricing Information.................................... Sch B-1
Schedule C - List of Persons Subject to Lock-up..................... Sch C-1
EXHIBITS
Exhibit A-1 Form of Opinion of Riordan & McKinzie................... A-1
Exhibit A-2 Form of Opinion of Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan................................................ A-7
Exhibit A-2 Form of Opinion of Leath, Bouch & Crawford, LLP........ A-9
Exhibit A-2 Form of Opinion of Smith Hulsey & Busey................ A-11
Exhibit B - Form of Lock-up Letter................................. B-1
ANNEXES
Annex A-1 - Form of Comfort Letter of Deloitte & Touche LLP
Annex A-2 - Form of Comfort Letter of Cherry, Bekaert & Holland, L.L.P.
Annex A-3 - Form of Comfort Letter of Griffin, Maxwell & Frazelle, P.A.
Annex A-4 - Form of Comfort Letter of Edwards, Falls & Renegar, P.L.L.C.
Annex A-5 - Form of Comfort Letter of Arthur Andersen LLP
</TABLE>
-iii-
<PAGE>
THE PANTRY, INC.
(a Delaware corporation)
__________ Shares of Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
------------------
________________, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Goldman, Sachs & Co.
NationsBanc Montgomery Securities LLC
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
The Pantry, Inc., a Delaware corporation (the "Company"), confirms its
agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other Underwriters named in
Schedule A hereto (collectively, the "Underwriters", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Goldman, Sachs & Co. and NationsBanc Montgomery
Securities LLC are acting as representatives (in such capacity, the
"Representatives"), with respect to the issue and sale by the Company and the
purchase by the Underwriters, acting severally and not jointly, of the
respective numbers of shares of Common Stock, par value $.01 per share, of the
Company ("Common Stock") set forth in said Schedule A, and with respect to the
grant by the Company to the Underwriters, acting severally and not jointly, of
the option described in Section 2(b) hereof to purchase all or any part of
__________ additional shares of Common Stock to cover over-allotments, if any.
The aforesaid __________ shares of Common Stock (the "Initial Securities") to be
purchased by the Underwriters and all or any part of the
-1-
<PAGE>
__________ shares of Common Stock subject to the option described in Section
2(b) hereof (the "Option Securities") are hereinafter called, collectively, the
"Securities".
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
The Company and the Underwriters agree that up to _______ shares of the
Securities to be purchased by the Underwriters (the "Reserved Securities") shall
be reserved for sale by the Underwriters to certain eligible employees and
persons having business relationships with the Company, as part of the
distribution of the Securities by the Underwriters, subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association of Securities Dealers, Inc. and all other applicable laws, rules and
regulations. To the extent that such Reserved Securities are not orally
confirmed for purchase by such eligible employees and persons having business
relationships with the Company by the end of the first business day after the
date of this Agreement, such Reserved Securities may be offered to the public as
part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-74221) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will
prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations. The information included in such prospectus that was
omitted from such registration statement at the time it became effective but
that is deemed to be part of such registration statement at the time it became
effective pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A
Information." Each prospectus used before such registration statement became
effective, and any prospectus that omitted the Rule 430A Information, that was
used after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. The final prospectus in
the form first furnished to the Underwriters for use in connection with the
offering of the Securities is herein called the "Prospectus." For purposes of
this Agreement, all references to the Registration Statement, any preliminary
prospectus or the Prospectus or any amendment or supplement to any of the
foregoing shall be deemed to include the copy filed with the Commission pursuant
to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
-2-
<PAGE>
SECTION 1. Representations and Warranties.
------------------------------
(a) Representations and Warranties by the Company. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each Underwriter,
as follows:
(i) Compliance with Registration Requirements. Each of the
-----------------------------------------
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with. At the
respective times the Registration Statement, any Rule 462(b) Registration
Statement and any post-effective amendments thereto became effective and at
the Closing Time (and, if any Option Securities are purchased, at the Date
of Delivery), the Registration Statement, the Rule 462(b) Registration
Statement and any amendments and supplements thereto complied and will
comply in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, and the Prospectus, any preliminary prospectus and any
supplement thereto or prospectus wrapper prepared in connection therewith,
at their respective times of issuance and at the Closing Time, complied and
will comply in all material respects with any applicable laws or
regulations of foreign jurisdictions in which the Prospectus and such
preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the offer and sale of Reserved Securities.
Neither the Prospectus nor any amendments or supplements thereto (including
any prospectus wrapper), at the time the Prospectus or any such amendment
or supplement was issued and at the Closing Time (and, if any Option
Securities are purchased, at the Date of Delivery), included or will
include an untrue statement of a material fact or omitted or will omit to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
The representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or Prospectus
made in reliance upon and in conformity with information furnished to the
Company in writing by any Underwriter through Merrill Lynch expressly for
use in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectus delivered to the Underwriters for
use in connection with this offering was identical to the
-3-
<PAGE>
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
-----------------------
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(iii) Financial Statements. The historical financial statements
--------------------
included in the Registration Statement and the Prospectus, together with
the related schedules and notes, present fairly the financial position of
the Company and its consolidated subsidiaries at the dates indicated and
the statements of operations, shareholders' equity and cash flows of the
Company and its consolidated subsidiaries for the periods specified; said
financial statements have been prepared in conformity with United States
generally accepted accounting principles ("GAAP") applied on a consistent
basis throughout the periods involved. The historical financial statements,
together with the related schedules and notes, included in the Registration
Statement and the Prospectus present fairly the financial position of the
entities covered thereby at the dates indicated and the statements of
operations, stockholders' equity and cash flows of the entities covered
thereby for the periods specified; said financial statements have been
prepared in conformity with United States GAAP applied on a consistent
basis throughout the periods involved.
The financial statements of each of Wooten Oil Company, United Fuels
Corporation and A.G. Lee Oil Company, Inc., provided to the
Representatives, together with the related schedules and notes, present
fairly the financial position of each company and its consolidated
subsidiaries at the dates indicated and the statements of operations,
shareholders' equity and cash flows of the each company and its
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with United States GAAP applied
on a consistent basis throughout the periods involved. The assets, revenues
and earnings before interest, taxes, deprecation and amortization
attributable to the assets acquired in the Wooten Oil Company, United Fuels
Corporation and A.G. Lee Oil Company, Inc. transactions in the aggregate
constitute less than five percent of the assets, revenues and earnings
before interest, taxes, depreciation and amortization, respectively, of the
Company on a pro forma basis for each of the pro forma periods presented in
the Registration Statement and Prospectus.
The selected historical financial data and the summary historical
financial information included in the Registration Statement and the
Prospectus present fairly the information shown therein and have been
compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement and the Prospectus. The
pro forma financial statements and pro forma financial information of the
Company, its subsidiaries and entities acquired and to be acquired by the
Company or its subsidiaries and the related notes thereto included in the
Registration Statement and the Prospectus present fairly the information
shown therein, have been prepared in accordance with the Commission's rules
and guidelines with respect to pro forma
-4-
<PAGE>
financial statements and pro forma financial information and have been
properly compiled on the bases described therein, and the Company believes
that the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
and circumstances referred to therein. All financial statements and pro
forma financial statements required to be included in the Registration
Statement and the Prospectus pursuant to the 1933 Act, the 1933 Act
Regulations and Regulation S-X have been included in the Registration
Statement and the Prospectus.
(iv) No Material Adverse Change in Business. Since the
--------------------------------------
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A) there
has been no material adverse change in the condition (financial or
otherwise), earnings, business affairs or business prospects of the Company
and its subsidiaries considered as one enterprise, whether or not arising
in the ordinary course of business (a "Material Adverse Effect"), (B) there
have been no transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of business, which
are material with respect to the Company and its subsidiaries considered as
one enterprise, and (C) there has been no dividend or distribution of any
kind declared, paid or made by the Company on any class of its capital
stock.
(v) Good Standing of the Company. The Company has been duly
----------------------------
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its obligations
under this Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect.
(vi) Good Standing of Subsidiaries. Each subsidiary of the
-----------------------------
Company (each a "Subsidiary" and, collectively, the "Subsidiaries") has
been duly organized and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, has
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectus and is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good standing
would not result in a Material Adverse Effect; except as otherwise
disclosed in the Registration Statement, all of the issued and outstanding
capital stock of each such Subsidiary has been duly authorized and validly
issued, is fully paid and non-assessable and is owned by the Company,
directly or through subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity (except for
restrictions on transfer imposed by federal or state securities laws); none
of the outstanding
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<PAGE>
shares of capital stock of any Subsidiary was issued in violation of the
preemptive rights of any securityholder of such Subsidiary. The only
subsidiaries of the Company are the subsidiaries listed on Exhibit 21 to
the Registration Statement.
(vii) Capitalization. The authorized, issued and outstanding
--------------
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities, warrants
or options referred to in the Prospectus). The shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company was issued in violation
of the preemptive or other similar rights of any securityholder of the
Company.
(viii) Authorization of Agreement. This Agreement has been duly
--------------------------
authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The Securities to
----------------- -------------------------
be purchased by the Underwriters from the Company have been duly authorized
for issuance and sale to the Underwriters pursuant to this Agreement and,
when issued and delivered by the Company pursuant to this Agreement against
payment of the consideration set forth herein, will be validly issued and
fully paid and non-assessable; the Common Stock conforms to all statements
relating thereto contained in the Prospectus and such description conforms
to the rights set forth in the instruments defining the same; no holder of
the Securities will be subject to personal liability solely by reason of
being such a holder; and the issuance of the Securities is not subject to
the preemptive rights of any securityholder of the Company.
(x) Absence of Defaults and Conflicts. Neither the Company nor
---------------------------------
any of its subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, deed
of trust, loan or credit agreement, note, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of them may be bound, or to which any of the property or
assets of the Company or any subsidiary is subject (collectively,
"Agreements and Instruments") except for such violations or defaults that
would not result in a Material Adverse Effect; and the execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated herein and in the Registration Statement (including the
issuance and sale of the Securities and the use of the proceeds from the
sale of the Securities as described in the Prospectus under the caption
"Use of Proceeds") and compliance by the Company with its obligations
hereunder have been duly authorized by all necessary corporate action and
do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any
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<PAGE>
lien, charge or encumbrance ("Lien") upon any property or assets of the
Company or any subsidiary pursuant to, the Agreements and Instruments,
except for such breaches, defaults, Repayment Events or Liens that would
not result in a Material Adverse Effect, nor will such action result in any
violation of the provisions of the charter or by-laws of the Company or any
subsidiary or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any
subsidiary or any of their assets, properties or operations. As used
herein, a "Repayment Event" means any event or condition which gives the
holder of any note, debenture or other evidence of indebtedness (or any
person acting on such holder's behalf) the right to require the repurchase,
redemption or repayment of all or a portion of such indebtedness by the
Company or any subsidiary.
(xi) Absence of Labor Disputes. No labor dispute with the
-------------------------
employees of the Company or any subsidiary exists or, to the knowledge of
the Company, is imminent, and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its or any
subsidiary's principal suppliers or vendors, which, in either case, may
reasonably be expected to result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit,
----------------------
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company or
any subsidiary, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably
be expected to materially and adversely affect the consummation of the
transactions contemplated in this Agreement or the performance by the
Company of its obligations hereunder; the aggregate of all pending legal or
governmental proceedings to which the Company or any subsidiary is a party
or of which any of their respective property or assets is the subject which
are not described in the Registration Statement, including ordinary routine
litigation incidental to the business, could not reasonably be expected to
result in a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
--------------------
which are required under the 1933 Act to be described in the Registration
Statement or the Prospectus or to be filed as exhibits thereto which have
not been so described and filed as required.
(xiv) Possession of Intellectual Property. The Company and its
-----------------------------------
subsidiaries own or possess, have the right to use or can acquire adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, except where the failure to own, possess, have the
right to use or have the ability to
-7-
<PAGE>
acquire any such intellectual property would not have a Material Adverse
Effect; and neither the Company nor any of its subsidiaries has received
any notice or is otherwise aware of any infringement of or conflict with
asserted rights of others with respect to any Intellectual Property or of
any facts or circumstances which would render any Intellectual Property
invalid or inadequate to protect the interest of the Company or any of its
subsidiaries therein, and which infringement or conflict (if the subject of
any unfavorable decision, ruling or finding) or invalidity or inadequacy,
singly or in the aggregate, would result in a Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except such as have been already
obtained under the 1933 Act or the 1933 Act Regulations or state securities
laws and Florida state law.
(xvi) Possession of Licenses and Permits. The Company and its
----------------------------------
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them, except where the
failure to possess such Governmental Licenses would not have a Material
Adverse Effect; the Company and its subsidiaries are in compliance with the
terms and conditions of all such Governmental Licenses, except where the
failure so to comply would not, singly or in the aggregate, have a Material
Adverse Effect; all of the Governmental Licenses are valid and in full
force and effect, except when the invalidity of such Governmental Licenses
or the failure of such Governmental Licenses to be in full force and effect
would not have a Material Adverse Effect; and neither the Company nor any
of its subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a Material Adverse Effect.
(xvii) Title to Property. The Company and its subsidiaries have
-----------------
good and marketable title to all real property owned by the Company and its
subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as (a) are
described in the Prospectus or (b) do not, singly or in the aggregate,
affect the value of such property and do not interfere with the use made
and proposed to be made of such property by the Company or any of its
subsidiaries and would not reasonably be expected to, individually or in
the aggregate, result in a Material Adverse Effect; and all of the leases
and subleases material to the business of the Company and its subsidiaries,
considered as one enterprise, and under which the Company or any of its
subsidiaries holds properties described in the Prospectus, are in full
force and effect, and neither the
-8-
<PAGE>
Company nor any subsidiary has any notice of any claim of any sort that has
been asserted by anyone adverse to the rights of the Company or any
subsidiary under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or such subsidiary to
the continued possession of the leased or subleased premises under any such
lease or sublease, except for such claims which would not, singly or in the
aggregate, result in a Material Adverse Effect.
(xviii) Investment Company Act. The Company is not, and upon the
----------------------
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xix) Environmental Laws. Except as described in the
------------------
Registration Statement and except as would not, singly or in the aggregate,
result in a Material Adverse Effect, (A) neither the Company nor any of its
subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land surface
or subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or to
the manufacture, processing, distribution, use, treatment,
storage,disposal, transport or handling of Hazardous Materials
(collectively, "Environmental Laws"), (B) the Company and its subsidiaries
have all permits, licenses, authorizations and approvals required under any
applicable Environmental Laws and are each in compliance with their
requirements, (C) there are no pending or to the Company's knowledge
threatened administrative, regulatory or judicial actions, suits, demands,
demand letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against the
Company or any of its subsidiaries and (D) there are no events, facts or
circumstances that might reasonably be expected to form the basis of any
liability or obligation of the Company or any of its subsidiaries,
including, without limitation, any order, decree, plan or agreement
requiring clean-up or remediation, or any action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company or any of its subsidiaries relating to any Hazardous Materials or
any Environmental Laws.
(xx) Registration Rights. There are no persons with registration
-------------------
rights or other similar rights to have any securities registered pursuant
to the Registration Statement or, except as described in the Prospectus,
otherwise registered by the Company under the 1933 Act.
(xxi) Stabilization or Manipulation. Neither the Company nor any of
-----------------------------
its officers, directors or controlling persons has taken, directly or
indirectly, any action designed to cause or to result in, or that has
constituted or which might reasonably be
-9-
<PAGE>
expected to constitute, the stabilization or manipulation of the price of
any security of the Company to facilitate the sale of the Securities.
(xxii) Accounting Controls. The Company and its subsidiaries
-------------------
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that (A) transactions are executed in accordance with
management's general or specific authorization; (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain accountability for assets; (C) access
to assets is permitted only in accordance with management's general or
specific authorization; and (D) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xxiii) Tax Returns. The Company and its subsidiaries have filed all
-----------
federal, state, local and foreign tax returns that are required to have
been filed by them pursuant to applicable foreign, federal, state, local or
other law or have duly requested extensions thereof, except insofar as the
failure to file such returns or request such extensions would not
reasonably be expected to result in a Material Adverse Effect, and has paid
all taxes due pursuant to such returns or pursuant to any assessment
received by the Company and its Subsidiaries, except for such taxes or
assessments, if any, as are being contested in good faith and as to which
adequate reserves have been provided or where the failure to pay would not
reasonably be expected to result in a Material Adverse Effect. The
charges, accruals and reserves on the books of the Company in respect of
any income and corporation tax liability of the Company and each subsidiary
for any years not finally determined are adequate to meet any assessments
or re-assessments for additional income tax for any years not finally
determined, except to the extent of any inadequacy that would not
reasonably be expected to result in a Material Adverse Effect.
(xxiv) Year 2000 Disclosures. All disclosure regarding year 2000
---------------------
compliance that is required to be described under the 1933 Act and the 1933
Act Regulations (including disclosures required by Staff Legal Bulletin No.
6, SEC Release No. 33-7558 (July 29, 1998) and SEC Release No. 33-7609
(November 9, 1998)) has been included in the Prospectus.
(b) Officer's Certificates. Any certificate signed by any
officer of the Company or any of its subsidiaries delivered to the
Representatives or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
------------------------------------------
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, severally and not
jointly, and each Underwriter, severally and not jointly, agrees to purchase
from the Company, at the price per share set forth in Schedule B, the number
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<PAGE>
of Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase up to an additional
__________ shares of Common Stock at the price per share set forth in Schedule
B, less an amount per share equal to any dividends or distributions declared by
the Company and payable on the Initial Securities but not payable on the Option
Securities. The option hereby granted will expire 30 days after the date hereof
and may be exercised in whole or in part from time to time on one or more
occasions only for the purpose of covering over-allotments which may be made in
connection with the offering and distribution of the Initial Securities upon
notice by the Representatives to the Company setting forth the number of Option
Securities as to which the several Underwriters are then exercising the option
and the time and date of payment and delivery for such Option Securities. Any
such time and date of delivery (a "Date of Delivery") shall be determined by the
Representatives, but shall not be later than seven full business days after the
exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
Option Securities, each of the Underwriters, acting severally and not jointly,
will purchase that proportion of the total number of Option Securities then
being purchased which the number of Initial Securities set forth in Schedule A
opposite the name of such Underwriter bears to the total number of Initial
Securities, subject in each case to such adjustments as the Representatives in
their discretion shall make to eliminate any sales or purchases of fractional
shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Fried,
Frank, Harris, Shriver & Jacobson, One New York Plaza, New York, New York 10004,
or at such other place as shall be agreed upon by the Representatives and the
Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs
after 4:30 P.M. (Eastern Time) on any given day) business day after the date
hereof (unless postponed in accordance with the provisions of Section 10), or
such other time not later than ten business days after such date as shall be
agreed upon by the Representatives and the Company (such time and date of
payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company, on each Date of Delivery as specified in the notice from the
Representatives to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Representatives for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood that
each Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Initial Securities
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<PAGE>
and the Option Securities, if any, which it has agreed to purchase. Merrill
Lynch, individually and not as representative of the Underwriters, may (but
shall not be obligated to) make payment of the purchase price for the Initial
Securities or the Option Securities, if any, to be purchased by any Underwriter
whose funds have not been received by the Closing Time or the relevant Date of
Delivery, as the case may be, but such payment shall not relieve such
Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial Securities
and the Option Securities, if any, shall be in such denominations and registered
in such names as the Representatives may request in writing at least two full
business days before the Closing Time or the relevant Date of Delivery, as the
case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
(e) Appointment of Qualified Independent Underwriter. The Company hereby
confirms its engagement of Merrill Lynch as, and Merrill Lynch hereby confirms
its agreement with the Company to render services as, a "qualified independent
underwriter" within the meaning of Rule 2720 of the Conduct Rules of the
National Association of Securities Dealers, Inc. with respect to the offering
and sale of the Securities. Merrill Lynch, solely in its capacity as qualified
independent underwriter and not otherwise, is referred to herein as the
"Independent Underwriter."
SECTION 3. Covenants of the Company. The Company covenants with each
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 3(b), will comply with the requirements of Rule
430A, and will notify the Representatives immediately, and confirm the notice in
writing, (i) when any post-effective amendment to the Registration Statement
shall become effective, or any supplement to the Prospectus or any amended
Prospectus shall have been filed, (ii) of the receipt of any comments from the
Commission, (iii) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for any of
such purposes. The Company will promptly effect the filings necessary pursuant
to Rule 424(b) and will take such steps as it deems necessary to ascertain
promptly whether the form of prospectus transmitted for filing under Rule 424(b)
was received for filing by the Commission and, in the event that it was not, it
will promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.
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<PAGE>
(b) Filing of Amendments. The Company will give the Representatives
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)) or any amendment, supplement
or revision to either the prospectus included in the Registration Statement at
the time it became effective or to the Prospectus, will furnish the
Representatives with copies of any such documents a reasonable amount of time
prior to such proposed filing or use, as the case may be, and will not file or
use any such document to which the Representatives or counsel for the
Underwriters shall object.
(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the Representatives and counsel for the
Underwriters, without charge, signed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the
Representatives, without charge, a conformed copy of the Registration Statement
as originally filed and of each amendment thereto (without exhibits) for each of
the Underwriters. The copies of the Registration Statement and each amendment
thereto furnished to the Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to
each Underwriter, without charge, as many copies of each preliminary prospectus
as such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of the Prospectus
(as amended or supplemented) as such Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company
will comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement and in the Prospectus. If at any time when a prospectus is required by
the 1933 Act to be delivered in connection with sales of the Securities, any
event shall occur or condition shall exist as a result of which it is necessary,
in the opinion of counsel for the Underwriters or for the Company, to amend the
Registration Statement or amend or supplement the Prospectus in order that the
Prospectus will not include any untrue statements of a material fact or omit to
state a material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement the Prospectus in order to comply with the
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<PAGE>
requirements of the 1933 Act or the 1933 Act Regulations, the Company will
promptly prepare and file with the Commission, subject to Section 3(b), such
amendment or supplement as may be necessary to correct such statement or
omission or to make the Registration Statement or the Prospectus comply with
such requirements, and the Company will furnish to the Underwriters such number
of copies of such amendment or supplement as the Underwriters may reasonably
request.
(f) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the Underwriters, to qualify the Securities for
offering and sale under the applicable securities laws of such states and other
jurisdictions (domestic or foreign) as the Representatives may designate and to
maintain such qualifications in effect for a period of not less than one year
from the later of the effective date of the Registration Statement and any Rule
462(b) Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the Company will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the effective date of the Registration Statement and any Rule
462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally available
to its securityholders as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, the last paragraph of
Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified in the
Prospectus under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect
the quotation of the Common Stock (including the Securities) on the Nasdaq
National Market.
(j) Restriction on Sale of Securities. During a period of
180 days from the date of the Prospectus, the Company will not, without the
prior written consent of Merrill Lynch, (i) 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 to
purchase or otherwise transfer or dispose of any share of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
file any registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be
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<PAGE>
settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Securities to
be sold hereunder, (B) any shares of Common Stock issued by the Company upon
the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof and referred to in the Prospectus, (C) any
shares of Common Stock issued or options to purchase Common Stock granted
pursuant to existing employee benefit plans of the Company referred to in
the Prospectus or (D) any shares of Common Stock issued pursuant to any non-
employee director stock plan or dividend reinvestment plan.
(k) Reporting Requirements. The Company, during the period when
the Prospectus is required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission
pursuant to the 1934 Act within the time periods required by the 1934 Act
and the rules and regulations of the Commission thereunder.
(l) Compliance with NASD Rules. The Company hereby agrees that it
will ensure that the Reserved Securities will be restricted as required by
the National Association of Securities Dealers, Inc. (the "NASD") or the
NASD rules from sale, transfer, assignment, pledge or hypothecation for a
period of three months following the date of this Agreement. The
Underwriters will notify the Company as to which persons will need to be so
restricted. At the request of the Underwriters, the Company will direct
the transfer agent to place a stop transfer restriction upon such
securities for such period of time. Should the Company release, or seek to
release, from such restrictions any of the Reserved Securities, the Company
agrees to reimburse the Underwriters for any reasonable expenses
(including, without limitation, legal expenses) they incur in connection
with such release.
(m) Compliance with Rule 463. The Company will file with the
Commission such information as may be required pursuant to Rule 463 of the
1933 Act Regulations.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay
-------------------
all expenses incident to the performance of its the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery
of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors, (v) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
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preliminary prospectus and of the Prospectus and any amendments or supplements
thereto, (vii) the preparation, printing and delivery to the Underwriters of
copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and
expenses of any transfer agent or registrar for the Securities, (ix) the filing
fees incident to, and the reasonable fees and disbursements of counsel to the
Underwriters in connection with, the review by the NASD of the terms of the sale
of the Securities, (x) the fees and expenses incurred in connection with the
quotation of the Securities on the Nasdaq National Market, (xi) all costs and
expenses of the Underwriters, including the fees and disbursements of counsel
for the Underwriters, in connection with matters related to the Reserved
Securities which are designated by the Company for sale to employees and others
having a business relationship with the Company and (xii) the fees and expenses
of the Independent Underwriter.
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
reasonable out-of-pocket expenses, including the reasonable fees and
disbursements of counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations. The obligations
of the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any subsidiary of the Company
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness
of the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information shall
have been complied with to the reasonable satisfaction of counsel to the
Underwriters. A prospectus containing the Rule 430A Information shall have
been filed with the Commission in accordance with Rule 424(b) (or a post-
effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rule 430A).
(b) Opinion of Counsel for Company. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Riordan & McKinzie, counsel for the Company, Smith,
Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., counsel for the
Company, Leath, Bouch & Crawford, LLP, South Carolina counsel for the
Company, and Smith Hulsey & Busey, Florida counsel for the Company, each
in form and substance satisfactory to counsel for the Underwriters,
together with signed or reproduced copies of such letter for each of the
other Underwriters to the effect set forth in Exhibit A hereto and to such
further effect as counsel to the Underwriters may reasonably request. Such
counsel may state that, insofar as such opinion involves factual matters,
they have relied, to the extent they deem proper,
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<PAGE>
upon certificates of officers of the Company and its subsidiaries and
certificates of public officials.
(c) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Fried, Frank, Harris, Shriver & Jacobson, counsel for the
Underwriters, together with signed or reproduced copies of such letter for
each of the other Underwriters with respect to the matters set forth in
clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar
rights arising by operation of law or under the charter or by-laws of the
Company), (viii) through (x), inclusive, (xi), (xiii) (solely as to the
information in the Prospectus under "Description of Capital Stock--Common
Stock") and the penultimate paragraph of Exhibit A hereto. In giving such
opinion such counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of New York, the federal law
of the United States and the General Corporation Law of the State of
Delaware, upon the opinions of counsel satisfactory to the
Representatives. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of the Company and its subsidiaries
and certificates of public officials.
(d) Officers' Certificates. At Closing Time, there shall not
have been, since the date hereof or since the respective dates as of
which information is given in the Prospectus, any material adverse change
in the condition (financial or otherwise), earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business,
and the Representatives shall have received a certificate of the
President or a Vice President of the Company and of the chief financial
or chief accounting officer of the Company, dated as of Closing Time, to
the effect that (i) there has been no such material adverse change, (ii)
the representations and warranties in Section 1(a) hereof are true and
correct with the same force and effect as though expressly made at and as
of Closing Time, (iii) the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or
prior to Closing Time, and (iv) no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or are
contemplated by the Commission. At the Closing Time, the Representatives
shall have received a certificate from an officer of the Company or from
an official of the Company who has responsibility for financial and
accounting matters, dated as of the Closing Time regarding the financial
data and information relating to each of Wooten Oil Company, United Fuels
Corporation and A.G. Lee Oil Company, Inc. in a form to be agreed upon by
the Company and Merrill Lynch.
(e) Accountants' Comfort Letters. At the time of the execution
of this Agreement, the Representatives shall have received from Deloitte
& Touche LLP, Cherry, Bekaert & Holland, Griffin, Maxwell & Frazelle,
P.A., Edwards, Falls & Renegar, P.L.L.C. and Arthur Andersen LLP, letters
in the form of Annexes A-1, A-2, A-3, A-4 and A-5, respectively, hereto,
in each case dated such date, in form and substance
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<PAGE>
satisfactory to the Representatives, together with signed or reproduced
copies of such letters for each of the other Underwriters containing
statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus.
(f) Bring-down Comfort Letters. At Closing Time, the
Representatives shall have received letters from Deloitte & Touche LLP,
Cherry, Bekaert & Holland, Griffin, Maxwell & Frazelle, P.A., Edwards,
Falls & Renegar, P.L.L.C. and Arthur Andersen LLP, dated as of Closing
Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (e) of this Section, except that the
specified date referred to shall be a date not more than three business
days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Securities shall
have been approved for quotation on the Nasdaq National Market, subject
only to official notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised
any objection with respect to the fairness and reasonableness of
the underwriting terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the
form of Exhibit B hereto signed by the persons listed on Schedule C
hereto.
(j) Consents. Prior to the Closing Time, the Company shall have
obtained all consents required to be obtained under the Amended and
Restated Credit Agreement dated as of January 27, 1999 among the Company,
the financial institutions listed therein, First Union National Bank, as
administrative agent and Canadian Imperial Bank of Commerce, as
syndication agent to consummate the transactions contemplated herein and
in the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectus under the caption "Use of Proceeds").
(k) Conditions to Purchase of Option Securities. In the event
that the Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the Option Securities, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company or any subsidiary
of the Company hereunder shall be true and correct as of each Date of
Delivery and, at the relevant Date of Delivery, the Representatives shall
have received:
(i) Officers' Certificates. A certificate, dated such Date of
----------------------
Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(d) hereof remains true and correct as of
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<PAGE>
such Date of Delivery and a certificate from an officer of the Company
or from an official of the Company who has responsibility for
financial and accounting matters, dated such Date of Delivery,
confirming that the certificate delivered at the Closing Time
regarding the financial data and information relating to each of
Wooten Oil Company, United Fuels Corporation and A.G. Lee Oil Company,
Inc. remains true and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of Riordan
------------------------------
& McKinzie, counsel for the Company, Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P., counsel for the Company, Leath, Bouch &
Crawford, South Carolina counsel for the Company, and Smith Hulsey &
Busey, Florida counsel for the Company, each in form and substance
satisfactory to counsel for the Underwriters, dated such Date of
Delivery, relating to the Option Securities to be purchased on such
Date of Delivery and otherwise to the same effect as the opinion
required by Section 5(b) hereof.
(iii) Opinion of Counsel for Underwriters. The favorable opinion of
-----------------------------------
Fried, Frank, Harris, Shriver & Jacobson, counsel for the
Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from Deloitte & Touche LLP,
-------------------------
Cherry, Bekaert & Holland, Griffin, Maxwell & Frazelle, P.A., Edwards,
Falls & Renegar, P.L.L.C. and Arthur Andersen LLP, in form and
substance satisfactory to the Representatives and dated such Date of
Delivery, substantially in the same form and substance as the letters
furnished to the Representatives pursuant to Section 5(f) hereof,
except that the "specified date" in the letter furnished pursuant to
this paragraph shall be a date not more than five days prior to such
Date of Delivery.
(l) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the Underwriters shall have been furnished with such
documents and opinions as they may require for the purpose of enabling
them to pass upon the issuance and sale of the Securities as herein
contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company in
connection with the issuance and sale of the Securities as herein
contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the Underwriters.
(m) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representatives by notice to the
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<PAGE>
Company at any time at or prior to Closing Time or such Date of Delivery,
as the case may be, and such termination shall be without liability of any
party to any other party except as provided in Section 4 and except that
Sections 1, 6, 7 and 8 shall survive any such termination and remain in
full force and effect.
SECTION 6. Indemnification.
---------------
(a) Indemnification of Underwriters. (1) The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information, or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading
or arising out of any untrue statement or alleged untrue statement of a
material fact included in any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of (A) the violation of any applicable
laws or regulations of foreign jurisdictions where Reserved Securities have
been offered and (B) any untrue statement or alleged untrue statement of a
material fact included in the supplement or prospectus wrapper material
distributed in connection with the reservation and sale of the Reserved
Securities to eligible employees of the Company and other persons or the
omission or alleged omission therefrom of a material fact necessary to make
the statements therein, when considered in conjunction with the Prospectus
or preliminary prospectus, not misleading;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission or in connection with any violation of
the nature referred to in Section 6(a)(ii)(A) hereof, provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the Company; and
(iv) against any and all expense whatsoever, as incurred (including
subject to Section 6(c) the fees and disbursements of counsel chosen by
Merrill Lynch), reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or
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<PAGE>
threatened, or any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission or in connection
with any violation of the nature referred to in Section 6(a)(ii)(A) hereof,
to the extent that any such expense is not paid under (i), (ii) or (iii)
above;
provided, however, that this indemnity agreement shall not apply to any loss,
- -------- -------
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto); provided, further, that
-------- -------
the Company will not be liable to any Underwriter or any person controlling such
Underwriter with respect to any such untrue statement or alleged untrue
statement or omission or alleged omission made in any preliminary prospectus to
the extent that the Company shall sustain the burden of proving that any such
loss, liability, claim, damage or expense resulted from the fact that the
Underwriter sold securities to a person to whom such Underwriter failed to send
or give, at or prior to the written confirmation of the sale of such Securities,
a copy of the Prospectus (as amended or supplemented) if the Company has
previously furnished copies thereof to the Underwriter (sufficiently in advance
of the Closing Time to allow for distribution of the Prospectus in a timely
manner) and complied with their obligations under Sections 3(b), 3(c) and 3(d)
hereof and the loss, liability, claim, damage or expense of the Underwriter
resulted from an untrue statement or omission or alleged untrue statement or
omission of a material fact contained in or omitted from such preliminary
prospectus (as amended or supplemented) which was corrected in the Prospectus
(as amended or supplemented).
(2) In addition to and without limitation of the Company's obligation to
indemnify Merrill Lynch as an Underwriter, the Company also agrees to indemnify
and hold harmless the Independent Underwriter and each person, if any, who
controls the Independent Underwriter within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act, from and against any and all loss,
liability, claim, damage and expense whatsoever, as incurred, incurred as a
result of the Independent Underwriter's participation as a "qualified
independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of
the National Association of Securities Dealers, Inc. in connection with the
offering of the Securities.
(b) Indemnification of Company, Directors and Officers. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection
(a)(1) of this Section, as incurred, but only with respect to untrue statements
or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information, or any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto) in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Merrill Lynch
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<PAGE>
expressly for use in the Registration Statement (or any amendment thereto) or
such preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(c) Actions against Parties; Notification. Each indemnified
party shall give notice as promptly as reasonably practicable to each
indemnifying party of any action commenced against it in respect of which
indemnity may be sought hereunder, but failure to so notify an indemnifying
party shall not relieve such indemnifying party from any liability hereunder to
the extent it is not materially prejudiced as a result thereof and in any event
shall not relieve it from any liability which it may have otherwise than on
account of this indemnity agreement. In the case of parties indemnified pursuant
to Section 6(a)(1) above, counsel to the indemnified parties shall be selected
by Merrill Lynch, and, in the case of parties indemnified pursuant to Section
6(b) above, counsel to the indemnified parties shall be selected by the Company.
An indemnifying party may participate at its own expense in the defense of any
such action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances;
provided, that, if indemnity is sought pursuant to Section 6(a)(2), then, in
addition to the fees and expenses of such counsel for the indemnified parties,
the indemnifying party shall be liable for the reasonable fees and expenses of
not more than one counsel (in addition to any local counsel) separate from its
own counsel and that of the other indemnified parties for the Independent
Underwriter in its capacity as a "qualified independent underwriter" and all
persons, if any, who control the Independent Underwriter within the meaning of
Section 15 of the 1933 Act or Section 20 of 1934 Act in connection with any one
action or separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances if, in the
reasonable judgment of the Independent Underwriter, there may exist a conflict
of interest between the Independent Underwriter and the other indemnified
parties. Any such separate counsel for the Independent Underwriter and such
control persons of the Independent Underwriter shall be designated in writing by
the Independent Underwriter. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at
any time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(1)(iii) effected without its written consent
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<PAGE>
if (i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
(e) Indemnification for Reserved Securities. In connection with the offer
and sale of the Reserved Securities, the Company agrees, promptly upon a request
in writing, to indemnify and hold harmless the Underwriters from and against any
and all losses, liabilities, claims, damages and expenses incurred by them as a
result of the failure of eligible employees of and persons having business
relationships with the Company and its subsidiaries to pay for and accept
delivery of Reserved Securities which, by the end of the first business day
following the date of this Agreement, were subject to a properly confirmed
agreement to purchase.
SECTION 7. Contribution. If the indemnification provided for in
------------
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the offering
of the Securities pursuant to this Agreement or (ii) if the allocation provided
by clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the
Underwriters on the other hand in connection with the statements or omissions,
or in connection with any violation of the nature referred to in Section
6(a)(ii)(A) hereof, which resulted in such losses, liabilities, claims, damages
or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriters, in each case
as set forth on the cover of the Prospectus, bear to the aggregate initial
public offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters on
the other hand shall be determined by reference to, among other things, whether
any such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission or any violation of the nature referred to in Section 6(a)(ii)(A)
hereof.
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<PAGE>
The Company and the Underwriters agree that Merrill Lynch will not receive
any additional benefits hereunder for serving as the Independent Underwriter in
connection with the offering and sale of the Securities.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
-----------------------------------------------------
Delivery. All representations, warranties and agreements contained in this
- --------
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of any
Underwriter or controlling person, or by or on behalf of the Company, and shall
survive delivery of the Securities to the Underwriters.
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<PAGE>
SECTION 9. Termination of Agreement.
------------------------
(a) Termination; General. The Representatives may terminate
this Agreement, by notice to the Company, at any time at or prior to Closing
Time (i) if there has been, since the time of execution of this Agreement or
since the respective dates as of which information is given in the Prospectus,
any material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the
Representatives, impracticable to market the Securities or to enforce contracts
for the sale of the Securities, or (iii) if trading in any securities of the
Company has been suspended or materially limited by the Commission or the Nasdaq
National Market, or if trading generally on the American Stock Exchange or the
New York Stock Exchange or in the Nasdaq National Market has been suspended or
materially limited, or minimum or maximum prices for trading have been fixed, or
maximum ranges for prices have been required, by any of said exchanges or by
such system or by order of the Commission, the National Association of
Securities Dealers, Inc. or any other governmental authority, or (iv) if a
banking moratorium has been declared by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to
this Section, such termination shall be without liability of any party to any
other party except as provided in Section 4 hereof, and provided further that
Sections 1, 6, 7 and 8 shall survive such termination and remain in full force
and effect.
SECTION 10. Default by One or More of the Underwriters. If one or
------------------------------------------
more of the Underwriters shall fail at Closing Time or a Date of Delivery to
purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the Representatives shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting Underwriters, or any other underwriters, to purchase all, but not
less than all, of the Defaulted Securities in such amounts as may be agreed upon
and upon the terms herein set forth; if, however, the Representatives shall not
have completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the non-
defaulting Underwriters shall be obligated, severally and not jointly, to
purchase the full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting obligations of
all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
Securities to be purchased on such date, this Agreement or, with respect to
any Date of Delivery which occurs after the Closing Time, the obligation of
the Underwriters to
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<PAGE>
purchase and of the Company to sell the Option Securities to be purchased
and sold on such Date of Delivery shall terminate without liability on the
part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representatives or the Company shall have the
right to postpone Closing Time or the relevant Date of Delivery, as the case may
be, for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 10.
SECTION 11. Notices. All notices and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of Equity Capital
Markets; with a copy to Fried, Frank, Harris, Shriver & Jacobson, One New York
Plaza, New York, New York 10004, attention of Valerie Ford Jacob, Esq.; and
notices to the Company shall be directed to it at The Pantry, Inc., 1801 Douglas
Drive, Sanford, North Carolina 27330, attention of William T. Flyg, with a copy
to Riordan & McKinzie, 300 South Grand Avenue, Los Angeles, California 90071,
attention of Cynthia M. Dunnett, Esq.
SECTION 12. Parties. This Agreement shall each inure to the
-------
benefit of and be binding upon the Underwriters and the Company and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the Underwriters and the Company and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the Underwriters and the Company and
their respective successors, and said controlling persons and officers and
directors and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of Securities from any
Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE
----------------------
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
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<PAGE>
SECTION 14. Effect of Headings. The Article and Section headings
------------------
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
-27-
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriters and the Company in accordance with its terms.
Very truly yours,
THE PANTRY, INC.
By _________________________________
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
GOLDMAN, SACHS & CO.
NATIONSBANC MONTGOMERY SECURITIES LLC
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By __________________________
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
-28-
<PAGE>
EXHIBIT 3.3
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
THE PANTRY, INC.
The Pantry, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the "GCL"), does
hereby certify:
FIRST: The name of the corporation is The Pantry, Inc. The Pantry,
-----
Inc. was originally incorporated under the name "Montrose Pantry Acquisition
Corporation" and the original Certificate of Incorporation of the corporation
was filed with the Secretary of State of the State of Delaware on July 13, 1987.
SECOND: Pursuant to the General Corporation Law of the State of
------
Delaware, the Certificate of Incorporation of the Corporation, is hereby amended
and restated in its entirety as follows:
ARTICLE I
The name of the corporation is THE PANTRY, INC. (the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, 19801. The name of its registered agent
at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
ARTICLE IV
(a) The total number of shares of all classes of stock which the
Corporation shall have authority to issue is fifty-five million
(55,000,000) shares, of which fifty million (50,000,000) shares shall be
common stock, par value $0.01 per share ("Common Stock"), and five million
(5,000,000) shares shall be preferred stock, par value $0.01 per share (the
"Preferred Stock").
<PAGE>
(b) Shares of Preferred Stock may be issued in one or more series,
from time to time, with each such series to consist of such number of
shares and to have such voting powers, full or limited, or no voting
powers, and such designations, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, as shall be stated in the resolution or resolutions
providing for the issuance of such series adopted by the Board of Directors
of the Corporation (the "Board of Directors"), and the Board of Directors
is hereby expressly vested with authority, to the full extent now or
hereafter provided by law, to adopt any such resolution or resolutions.
The authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the following:
(i) The number of shares constituting that series and the distinctive
designation of that series;
(ii) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that
series;
(iii) Whether that series shall have voting rights, in addition to
the voting rights provided by law, and, if so, the terms of such voting
rights;
(iv) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(v) Whether or not the shares of that series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or
date upon or after which they shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(vi) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of
such sinking fund;
(vii) The rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation, and the relative rights of priority, if any, of payment of
shares of that series; and
(viii) Any other relative rights, preferences and limitations of that
series.
2
<PAGE>
ARTICLE V
Unless and except to the extent that the By-laws of the Corporation
shall so require, the election of directors of the Corporation need not be
by written ballot.
ARTICLE VI
In furtherance and not in limitation of the powers conferred by the
laws of the State of Delaware, the Board of Directors is expressly
authorized to adopt, alter, amend and repeal the By-laws of the
Corporation, subject to the power of the stockholders of the Corporation to
alter or repeal any by-law whether adopted by them or otherwise; provided,
however, that the affirmative vote of 66% of the voting power of the
capital stock of the Corporation entitled to vote thereon shall be required
for stockholders to adopt, amend, alter or repeal any provision of the By-
laws.
ARTICLE VII
A director of the Corporation shall not be liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the General Corporation Law of the State of
Delaware as the same exists or may hereafter be amended. Any amendment,
modification or repeal of the foregoing sentence shall not adversely affect
any right or protection of a director of the Corporation hereunder in
respect of any act or omission occurring prior to the time of such
amendment, modification or repeal.
ARTICLE VIII
(a) Except (i) as otherwise provided for in this Amended and Restated
Certificate of Incorporation and (ii) for any provisions of any shares of
any series of Preferred Stock which may be issued from time to time by the
Corporation, following the first time following the effectiveness of this
Amended and Restated Certificate of Incorporation at which there exists no
person or entity that is the owner of more than 30% of the outstanding
voting stock of the Corporation, no action that is required or permitted to
be taken by the stockholders of the Corporation at any annual or special
meeting of stockholders may be effected by written consent of stockholders
in lieu of a meeting of stockholders, unless the action to be effected by
written consent of stockholders and the taking of such action by such
written consent have expressly been approved in advance by the Board of
Directors of the Corporation.
3
<PAGE>
(b) Special meetings of stockholders may be called only by the Board
of Directors, the Chairman of the Board of Directors or the President, and
may not be called by any other person or persons.
ARTICLE IX
The Corporation shall not be governed by Section 203 of the General
Corporation Law of the State of Delaware ("Section 203"), and the
restrictions contained in Section 203 shall not apply to the Corporation
until such time, if ever, as both of the following conditions exist: (a)
Section 203 by its terms would, but for the provisions of this paragraph,
apply to the Corporation; and (b) there exists no person that is the owner
of more than 40% of the outstanding voting stock of the Corporation. Once
the Corporation shall become governed by Section 203 pursuant to the
preceding sentence the Corporation shall be governed by Section 203 for so
long as Section 203 by its terms shall apply to the Corporation, regardless
of whether any person shall thereafter become the owner of more than 40% of
the outstanding voting stock of the Corporation. For purposes of this
paragraph, the terms "person," "owners" and "voting stock" shall have the
meanings ascribed to them in Section 203, as Section 203 may be amended
from time to time.
ARTICLE X
The Corporation reserves the right at any time, and from time to time,
to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, and other provisions authorized by the laws
of the State of Delaware at the time in force may be added or inserted, in
the manner now or hereafter prescribed by law; and all rights, preferences
and privileges of whatsoever nature conferred upon stockholders, directors
or any other persons whomsoever by and pursuant to this Certificate of
Incorporation in its present form or as hereafter amended are granted
subject to the rights reserved in this article; provided, however, that the
affirmative vote of 66% of the voting power of the capital stock of the
Corporation entitled to vote thereon shall be required to amend, alter or
repeal, or adopt any provision inconsistent with, whether by amendment,
merger or otherwise, the provisions of ARTICLES VI, VII, VIII, IX, AND X.
THIRD: The Board adopted resolutions proposing and declaring
-----
advisable the foregoing amendment and restatement of the Corporation's
Certificate of Incorporation, and such amendment and restatement of the
corporation's Certificate of Incorporation was approved by written consent of a
majority of the stockholders of the Corporation, and notice was provided to the
corporation's stockholders, pursuant to Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware.
4
<PAGE>
IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
has been signed by the President and Secretary of the Corporation this _____ day
of May 1999.
THE PANTRY, INC.,
a Delaware corporation
-----------------------------------------
Peter J. Sodini, President
Attest:
- -------------------------------
William T. Flyg
Secretary
5
<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED
BY-LAWS
OF
THE PANTRY, INC.
______________________________________________________________
ARTICLE I
Meetings of Stockholders
------------------------
Section 1.1. Annual Meetings. The annual meeting of stockholders of
---------------
the corporation shall be held for the election of directors at such date, time
and place, either within or without the State of Delaware, as may be designated
by resolution of the Board of Directors from time to time. Any other proper
business may be transacted at the annual meeting.
Section 1.2. Special Meetings. Special meetings of stockholders for
----------------
any purpose or purposes may be called at any time by the Board of Directors, the
Chairman of the Board of Directors or the President, and such special meetings
may not be called by any other person or persons.
Section 1.3. Notice of Meetings. Whenever stockholders are required
------------------
or permitted to take any action at a meeting, a written notice of the meeting
shall be given that shall state the place, date and hour of the meeting and, in
the case of a special meeting, the purpose or purposes for which the meeting is
called. Unless otherwise provided by law, the certificate of incorporation or
these by-laws, the written notice of any meeting shall be given not less than
ten (10) nor more than sixty (60) days before the date of the meeting to each
stockholder entitled to vote at such meeting. If mailed, such notice shall be
deemed to be given when deposited in the United States mail, postage prepaid,
directed to the stockholder at his address as it appears on the records of the
corporation.
Section 1.4. Adjournments. Any meeting of stockholders, annual or
------------
special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a
<PAGE>
new record date is fixed for the adjourned meeting, notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
Section 1.5. Quorum. Except as otherwise provided by law, the
------
certificate of incorporation or these by-laws, at each meeting of stockholders
the presence in person or by proxy of the holders of a majority in voting power
of the outstanding shares of stock entitled to vote at the meeting shall be
necessary and sufficient to constitute a quorum. In the absence of a quorum,
the stockholders so present may, by a majority in voting power thereof, adjourn
the meeting from time to time in the manner provided in Section 1.4 of these by-
laws until a quorum shall attend. Shares of its own stock belonging to the
corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the corporation, shall neither be entitled to vote nor be counted
for quorum purposes; provided, however, that the foregoing shall not limit the
right of the corporation or any subsidiary of the corporation to vote stock,
including but not limited to its own stock, held by it in a fiduciary capacity.
Section 1.6. Organization. Meetings of stockholders shall be
------------
presided over by the Chairman of the Board, if any, or in his absence by the
Vice Chairman of the Board, if any, or in his absence by the President, or in
his absence by a Vice President, or in the absence of the foregoing persons by a
chairman designated by the Board of Directors, or in the absence of such
designation by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 1.7. Voting; Proxies. Except as otherwise provided by or
---------------
pursuant to the provisions of the certificate of incorporation, each stockholder
entitled to vote at any meeting of stockholders shall be entitled to one vote
for each share of stock held by such stockholder which has voting power upon the
matter in question. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for such
stockholder by proxy, but no such proxy shall be voted or acted upon after three
years from its date, unless the proxy provides for a longer period. A proxy
shall be irrevocable if it states that it is irrevocable and if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A stockholder may revoke any proxy which is not irrevocable
by attending the meeting and voting in person or by filing an instrument in
writing revoking the proxy or by delivering a proxy in accordance with
applicable law bearing a later date to the Secretary of the corporation. Voting
at meetings of stockholders need not be by written ballot. At all meetings of
stockholders for the election of directors a plurality of the votes cast shall
be sufficient to elect. All other elections and questions shall, unless
otherwise provided by the certificate of incorporation, these by-laws, the rules
or regulations of any stock exchange applicable to the corporation, or
applicable law or pursuant to any regulation applicable to the corporation or
its
-2-
<PAGE>
securities, be decided by the affirmative vote of the holders of a majority in
voting power of the shares of stock of the corporation which are present in
person or by proxy and entitled to vote thereon.
Section 1.8. Fixing Date for Determination of Stockholders of Record.
-------------------------------------------------------
In order that the corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date: (1) in the case of determination of
stockholders entitled to vote at any meeting of stockholders or adjournment
thereof, shall, unless otherwise required by law, not be more than sixty (60)
nor less than ten (10) days before the date of such meeting; (2) in the case of
determination of stockholders entitled to express consent to corporate action in
writing without a meeting, shall not be more than ten (10) days from the date
upon which the resolution fixing the record date is adopted by the Board of
Directors; and (3) in the case of any other action, shall not be more than sixty
(60) days prior to such other action. If no record date is fixed: (1) the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; (2) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
of the Board of Directors is required by law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the corporation in accordance with applicable law, or, if prior
action by the Board of Directors is required by law, shall be at the close of
business on the day on which the Board of Directors adopts the resolution taking
such prior action; and (3) the record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 1.9. Notice of Stockholder Business and Nominations.
----------------------------------------------
(A) Annual Meetings of Stockholders. (1) Nominations of persons for
-------------------------------
election to the Board of Directors of the corporation and the proposal of
business to be considered by the stockholders may be made at an annual meeting
of stockholders only (a) pursuant to the corporation's notice of meeting (or any
supplement thereto), (b) by or at the direction of the Board of Directors or (c)
by any stockholder of the corporation who was a stockholder of record of the
corporation at the time the notice provided for in this Section
-3-
<PAGE>
1.9 is delivered to the Secretary of the corporation, who is entitled to vote at
the meeting and who complies with the notice procedures set forth in this
Section 1.9.
(2) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of
this Section 1.9, the stockholder must have given timely notice thereof in
writing to the Secretary of the corporation and any such proposed business other
than the nominations of persons for election to the Board of Directors must
constitute a proper matter for stockholder action. To be timely, a stockholder's
notice shall be delivered to the Secretary at the principal executive offices of
the corporation not later than the close of business on the ninetieth day nor
earlier than the close of business on the one hundred twentieth day prior to the
first anniversary of the preceding year's annual meeting (provided, however,
that in the event that the date of the annual meeting is more than thirty days
before or more than seventy days after such anniversary date, notice by the
stockholder must be so delivered not earlier than the close of business on the
one hundred twentieth day prior to such annual meeting and not later than the
close of business on the later of the ninetieth day prior to such annual meeting
or the tenth day following the day on which public announcement of the date of
such meeting is first made by the corporation). In no event shall the public
announcement of an adjournment or postponement of an annual meeting commence a
new time period (or extend any time period) for the giving of a stockholder's
notice as described above. Such stockholder's notice shall set forth: (a) as to
each person whom the stockholder proposes to nominate for election as a director
all information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder
(and such person's written consent to being named in the proxy statement as a
nominee and to serving as a director if elected); (b) as to any other business
that the stockholder proposes to bring before the meeting, a brief description
of the business desired to be brought before the meeting, the text of the
proposal or business (including the text of any resolutions proposed for
consideration and in the event that such business includes a proposal to amend
the by-laws of the corporation, the language of the proposed amendment), the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such stockholder, as they appear on the
corporation's books, and of such beneficial owner, (ii) the class and number of
shares of capital stock of the corporation which are owned beneficially and of
record by such stockholder and such beneficial owner, (iii) a representation
that the stockholder is a holder of record of stock of the corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting to propose such business or nomination, and (iv) a representation
whether the stockholder or the beneficial owner, if any, intends or is part of a
group which intends (a) to deliver a proxy statement and/or form of proxy to
holders of at least the percentage of the
-4-
<PAGE>
corporation's outstanding capital stock required to approve or adopt the
proposal or elect the nominee and/or (b) otherwise to solicit proxies from
stockholders in support of such proposal or nomination. The corporation may
require any proposed nominee to furnish such other information as it may
reasonably require to determine the eligibility of such proposed nominee to
serve as a director of the corporation.
(3) Notwithstanding anything in the second sentence of paragraph
(A)(2) of this Section 1.9 to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the corporation at an
annual meeting is increased and there is no public announcement by the
corporation naming the nominees for the additional directorships at least one
hundred days prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice required by this Section 1.9 shall also be
considered timely, but only with respect to nominees for the additional
directorships, if it shall be delivered to the Secretary at the principal
executive offices of the corporation not later than the close of business on the
tenth day following the day on which such public announcement is first made by
the corporation.
(B) Special Meetings of Stockholders. Only such business shall be
--------------------------------
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected pursuant to the
corporation's notice of meeting (1) by or at the direction of the Board of
Directors or (2) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
corporation who is a stockholder of record at the time the notice provided for
in this Section 1.9 is delivered to the Secretary of the corporation, who is
entitled to vote at the meeting and upon such election and who complies with the
notice procedures set forth in this Section 1.9. In the event the corporation
calls a special meeting of stockholders for the purpose of electing one or more
directors to the Board of Directors, any such stockholder entitled to vote in
such election of directors may nominate a person or persons (as the case may be)
for election to such position(s) as specified in the corporation's notice of
meeting, if the stockholder's notice required by paragraph (A)(2) of this
Section 1.9 shall be delivered to the Secretary at the principal executive
offices of the corporation not earlier than the close of business on the one
hundred twentieth day prior to such special meeting and not later than the close
of business on the later of the ninetieth day prior to such special meeting or
the tenth day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment or postponement of a special meeting commence a
new time period (or extend any time period) for the giving of a stockholder's
notice as described above.
(C) General. (1) Only such persons who are nominated in accordance with
-------
the procedures set forth in this Section 1.9 shall be eligible to be elected at
an annual
-5-
<PAGE>
or special meeting of stockholders of the corporation to serve as directors and
only such business shall be conducted at a meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this Section 1.9. Except as otherwise provided by law, the chairman of the
meeting shall have the power and duty (a) to determine whether a nomination or
any business proposed to be brought before the meeting was made or proposed, as
the case may be, in accordance with the procedures set forth in this Section 1.9
(including whether the stockholder or beneficial owner, if any, on whose behalf
the nomination or proposal is made solicited (or is part of a group which
solicited) or did not so solicit, as the case may be, proxies in support of such
stockholder's nominee or proposal in compliance with such stockholder's
representation as required by clause (A)(2)(c)(iv) of this Section 1.9) and (b)
if any proposed nomination or business was not made or proposed in compliance
with this Section 1.9, to declare that such nomination shall be disregarded or
that such proposed business shall not be transacted.
(2) For purposes of this Section 1.9, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 1.9, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Section 1.9. Nothing in this Section 1.9 shall be deemed to affect
any rights (a) of stockholders to request inclusion of proposals in the
corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(b) of the holders of any series of Preferred Stock to elect directors pursuant
to any applicable provisions of the certificate of incorporation.
Section 1.10. List of Stockholders Entitled to Vote. The Secretary
-------------------------------------
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof and may be inspected by any stockholder who is
present. Upon the willful neglect or refusal of the directors to produce such a
list at any meeting for the election of directors, they shall be ineligible for
election to any office at such meeting. Except as otherwise provided by law,
the stock ledger shall be the only evidence as to who are the stockholders
entitled to examine the stock ledger,
-6-
<PAGE>
the list of stockholders or the books of the corporation, or to vote in person
or by proxy at any meeting of stockholders
Section 1.11. Action By Written Consent of Stockholders. Unless
-----------------------------------------
otherwise restricted by the certificate of incorporation, any action required or
permitted to be taken at any annual or special meeting of the stockholders may
be taken without a meeting, without prior notice and without a vote, if a
consent or consents in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted and
shall be delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business, or an officer or agent
of the corporation having custody of the book in which minutes of proceedings of
stockholders are recorded. Delivery made to the corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall, to the extent required by law, be given to
those stockholders who have not consented in writing and who, if the action had
been taken at a meeting, would have been entitled to notice of the meeting if
the record date for such meeting had been the date that written consents signed
by a sufficient number of holders to take the action were delivered to the
corporation.
Section 1.12. Inspectors of Election. The corporation may, and shall
----------------------
if required by law, in advance of any meeting of stockholders, appoint one or
more inspectors of election, who may be employees of the corporation, to act at
the meeting or any adjournment thereof and to make a written report thereof.
The corporation may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. In the event that no inspector so
appointed or designated is able to act at a meeting of stockholders, the person
presiding at the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath to execute faithfully the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspector or inspectors so appointed or designated shall (i)
ascertain the number of shares of capital stock of the corporation outstanding
and the voting power of each such share, (ii) determine the shares of capital
stock of the corporation represented at the meeting and the validity of proxies
and ballots, (iii) count all votes and ballots, (iv) determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors, and (v) certify their determination of the
number of shares of capital stock of the corporation represented at the meeting
and such inspectors' count of all votes and ballots. Such certification and
report shall specify such other information as may be required by law. In
determining the validity and counting of proxies and ballots cast at any meeting
of stockholders of the corporation, the inspectors may consider such information
as is permitted by applicable law. No person who is a candidate for an office
at an election may serve as an inspector at such election.
-7-
<PAGE>
Section 1.13. Conduct of Meetings. The date and time of the opening
-------------------
and the closing of the polls for each matter upon which the stockholders will
vote at a meeting shall be announced at the meeting by the person presiding over
the meeting. The Board of Directors may adopt by resolution such rules and
regulations for the conduct of the meeting of stockholders as it shall deem
appropriate. Except to the extent inconsistent with such rules and regulations
as adopted by the Board of Directors, the chairman of any meeting of
stockholders shall have the right and authority to convene and to adjourn the
meeting, to prescribe such rules, regulations and procedures and to do all such
acts as, in the judgment of such chairman, are appropriate for the proper
conduct of the meeting. Such rules, regulations or procedures, whether adopted
by the Board of Directors or prescribed by the chairman of the meeting, may
include, without limitation, the following: (i) the establishment of an agenda
or order of business for the meeting; (ii) rules and procedures for maintaining
order at the meeting and the safety of those present; (iii) limitations on
attendance at or participation in the meeting to stockholders of record of the
corporation, their duly authorized and constituted proxies or such other persons
as the chairman of the meeting shall determine; (iv) restrictions on entry to
the meeting after the time fixed for the commencement thereof; and (v)
limitations on the time allotted to questions or comments by participants.
Unless and to the extent determined by the Board of Directors or the chairman of
the meeting, meetings of stockholders shall not be required to be held in
accordance with the rules of parliamentary procedure.
-8-
<PAGE>
ARTICLE II
Board of Directors
------------------
Section 2.1. Number; Qualifications. The Board of Directors shall
----------------------
consist of such number of directors, not less than three, as shall from time to
time be fixed exclusively by resolution of the Board of Directors. Directors
need not be stockholders.
Section 2.2. Election; Resignation; Vacancies. The Board of
--------------------------------
Directors shall initially consist of the persons named as directors in the
certificate of incorporation or elected by the incorporator of the corporation,
and each director so elected shall hold office until the first annual meeting of
stockholders or until his successor is duly elected and qualified. At the first
annual meeting of stockholders and at each annual meeting there after, the
stockholders shall elect directors each of whom shall hold office for a term of
one year or until his successor is duly elected and qualified, subject to such
director's earlier death, resignation, disqualification or removal. Any
director may resign at any time upon written notice to the corporation. Unless
otherwise provided by law or the certificate of incorporation, any newly created
directorship or any vacancy occurring in the Board of Directors for any cause
shall be filled only by a majority of the remaining members of the Board of
Directors, although such majority is less than a quorum, or by a plurality of
the votes cast at a meeting of stockholders, and each director so elected shall
hold office until the expiration of the term of office of the director whom he
has replaced or until his successor is elected and qualified.
Section 2.3. Regular Meetings. Regular meetings of the Board of
----------------
Directors may be held at such places within or without the State of Delaware and
at such times as the Board of Directors may from time to time determine.
Section 2.4. Special Meetings. Special meetings of the Board of
----------------
Directors may be held at any time or place within or without the State of
Delaware whenever called by the President, any Vice President, the Secretary, or
by any member of the Board of Directors. Notice of a special meeting of the
Board of Directors shall be given by the person or persons calling the meeting
at least twenty-four hours before the special meeting.
Section 2.5. Telephonic Meetings Permitted. Members of the Board of
-----------------------------
Directors, or any committee designated by the Board of Directors, may
participate in a meeting thereof by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this by-
law shall constitute presence in person at such meeting.
Section 2.6. Quorum; Vote Required for Action. At all meetings of
--------------------------------
the Board of Directors a majority of the whole Board of Directors shall
constitute a quorum for
-9-
<PAGE>
the transaction of business. Except in cases in which the certificate of
incorporation, these by-laws or applicable law otherwise provides, the vote of a
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors.
Section 2.7. Organization. Meetings of the Board of Directors shall
------------
be presided over by the Chairman of the Board, if any, or in his absence by the
Vice Chairman of the Board, if any, or in his absence by the President, or in
their absence by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 2.8. Action by Written Consent of Directors. Unless
--------------------------------------
otherwise restricted by the certificate of incorporation or these by-laws, any
action required or permitted to be taken at any meeting of the Board of
Directors, or of any committee thereof, may be taken without a meeting if all
members of the Board of Directors or such committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors or such committee.
-10-
<PAGE>
ARTICLE III
Committees
----------
Section 3.1. Committees. The Board of Directors may designate one or
----------
more committees, each committee to consist of one or more of the directors of
the corpora tion. The Board of Directors may designate one or more directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of the committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in place of any such absent or disqualified
member. Any such committee, to the extent permitted by law and to the extent
provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers which may require it.
Section 3.2. Committee Rules. Unless the Board of Directors
---------------
otherwise provides, each committee designated by the Board of Directors may
make, alter and repeal rules for the conduct of its business. In the absence of
such rules each committee shall conduct its business in the same manner as the
Board of Directors conducts its business pursuant to Article II of these by-
laws.
-11-
<PAGE>
ARTICLE IV
Officers
--------
Section 4.1. Executive Officers; Election; Qualifications; Term of
-----------------------------------------------------
Office; Resignation; Removal; Vacancies. The Board of Directors shall elect a
- ---------------------------------------
President and Secretary, and it may, if it so determines, choose a Chairman of
the Board and a Vice Chairman of the Board from among its members. The Board of
Directors may also choose one or more Vice Presidents, one or more Assistant
Secretaries, a Treasurer and one or more Assistant Treasurers. Each such
officer shall hold office until the first meeting of the Board of Directors
after the annual meeting of stockholders next succeeding his election, and until
his successor is elected and qualified or until his earlier resignation or
removal. Any officer may resign at any time upon written notice to the
corporation. The Board of Directors may remove any officer with or without
cause at any time, but such removal shall be without prejudice to the
contractual rights of such officer, if any, with the corporation. Any number of
offices may be held by the same person. Any vacancy occurring in any office of
the corporation by death, resignation, removal or otherwise may be filled for
the unexpired portion of the term by the Board of Directors at any regular or
special meeting.
Section 4.2. Powers and Duties of Executive Officers. The officers
---------------------------------------
of the corporation shall have such powers and duties in the management of the
corporation as may be prescribed in a resolution by the Board of Directors and,
to the extent not so provided, as generally pertain to their respective offices,
subject to the control of the Board of Directors. The Board of Directors may
require any officer, agent or employee to give security for the faithful
performance of his duties.
-12-
<PAGE>
ARTICLE V
Stock
-----
Section 5.1. Certificates. Every holder of stock shall be entitled
------------
to have a certificate signed by or in the name of the corporation by the
Chairman or Vice Chairman of the Board of Directors, if any, or the President or
a Vice President, and by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary, of the corporation certifying the number of
shares owned by him in the corporation. Any of or all the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent, or registrar at the date
of issue.
Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance
------------------------------------------------------
of New Certificates. The corporation may issue a new certificate of stock in
- -------------------
the place of any certificate theretofore issued by it, alleged to have been
lost, stolen or destroyed, and the corporation may require the owner of the
lost, stolen or destroyed certificate, or his legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
-13-
<PAGE>
ARTICLE VI
Indemnification
---------------
Section 6.1. Right to Indemnification. The corporation may indemnify
------------------------
and hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any person (a "Covered Person")
who was or is made or is threatened to be made a party or is otherwise involved
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding"), by reason of the fact that he, or a person for
whom he is the legal representative, is or was a director or officer of the
corporation or, while a director or officer of the corporation, is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such Covered Person.
Section 6.2. Prepayment of Expenses. The corporation may pay the
----------------------
expenses (including attorneys' fees) incurred by a Covered Person in defending
any proceeding in advance of its final disposition, provided, however, that, to
-------- -------
the extent required by law, such payment of expenses in advance of the final
disposition of the proceeding shall be made only upon receipt of an undertaking
by the Covered Person to repay all amounts advanced if it should be ultimately
determined that the Covered Person is not entitled to be indemnified under this
Article VI or otherwise.
Section 6.3. Nonexclusivity of Rights. The rights conferred on any
------------------------
Covered Person by this Article VI shall not be exclusive of any other rights
which such Covered Person may have or hereafter acquire under any statute,
provision of the certificate of incorporation, these by-laws, agreement, vote of
stockholders or disinterested directors or otherwise.
Section 6.4. Other Sources. The corporation's obligation, if
-------------
any, to indemnify or to advance expenses to any Covered Person who was or is
serving at its request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, enterprise or nonprofit entity
shall be reduced by any amount such Covered Person may collect as
indemnification or advancement of expenses from such other corporation,
partnership, joint venture, trust, enterprise or non-profit enterprise.
Section 6.5. Other Indemnification and Prepayment of Expenses. This
------------------------------------------------
Article VI shall not limit the right of the corporation, to the extent and in
the manner permitted by law, to indemnify and to advance expenses to persons
other than Covered Persons when and as authorized by appropriate corporate
action.
-14-
<PAGE>
ARTICLE VII
Miscellaneous
-------------
Section 7.1. Fiscal Year. The fiscal year of the corporation shall
-----------
be determined by resolution of the Board of Directors.
Section 7.2. Seal. The corporate seal shall have the name of the
----
corpora tion inscribed thereon and shall be in such form as may be approved from
time to time by the Board of Directors.
Section 7.3. Manner of Notice. Except as otherwise provided herein,
----------------
notices to directors and stockholders shall be in writing and delivered
personally or mailed to the directors or stockholders at their addresses
appearing on the books of the corporation. Notice to directors may be given by
telegram, telecopier, telephone or other means of electronic transmission.
Section 7.4. Waiver of Notice of Meetings of Stockholders, Directors
-------------------------------------------------------
and Committees. Any written waiver of notice, signed by the person entitled to
- --------------
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at nor the purpose of any
regular or special meeting of the stockholders, directors, or members of a
committee of directors need be specified in any written waiver of notice.
Section 7.5. Form of Records. Any records maintained by the
---------------
corporation in the regular course of its business, including its stock ledger,
books of account, and minute books, may be kept on, or be in the form of, punch
cards, magnetic tape, photographs, microphotographs, or any other information
storage device, provided that the records so kept can be converted into clearly
legible form within a reasonable time.
Section 7.6. Amendment of By-Laws. These by-laws may be altered,
--------------------
amended or repealed, and new by-laws made, as provided for in the certificate of
incorporation.
-15-
<PAGE>
EXHIBIT 5.1
May 3, 1999
The Pantry, Inc.
P.O. Box 1410
1801 Douglas Drive
Sanford, North Carolina 27331-1410
Ladies and Gentlemen:
We have acted as counsel to The Pantry, Inc., a Delaware corporation
(the "Company"), in connection with the registration under the Securities Act of
1933, as amended (the "1933 Act"), of the sale in an underwritten public
offering of authorized but unissued shares of the Company's Common Stock, $.01
par value (the "Common Stock"). This opinion is delivered to you in connection
with the Registration Statement on Form S-1, Registration No. 333-74221, as
amended to date (the "Registration Statement"), for the aforementioned sale,
filed with the Securities and Exchange Commission (the "Commission") under the
1933 Act.
In rendering the opinion set forth herein, we have made such
investigations of fact and law, and examined such documents and instruments, or
copies thereof established to our satisfaction to be true and correct copies
thereof, as we have deemed necessary under the circumstances.
Based upon the foregoing and such other examination of law and fact as
we have deemed necessary, and in reliance thereon, we are of the opinion that,
subject to such proceedings as are now contemplated being duly taken and
completed by you prior to the issuance of the Common Stock, the issuance of an
appropriate order by the Commission declaring the Registration Statement, as
amended, effective, and the compliance with applicable state securities and
"blue sky" laws, the Common Stock have been duly authorized and will,
<PAGE>
The Pantry, Inc.
May 3, 1999
Page 2
upon sale and delivery thereof and receipt by the Company of full payment
therefor as set forth in the Registration Statement, be validly issued, fully
paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus which is a part of the Registration Statement.
Very truly yours,
/s/ Riordan & McKinzie
<PAGE>
EXHIBIT 10.29
INDEMNIFICATION
AGREEMENT
---------
This Indemnification Agreement, made and entered into this ___ day of May
1999 (the "Agreement"), by and between The Pantry, Inc., a Delaware corporation
(the "Company"), and _________________ (the "Indemnitee"):
WHEREAS, highly competent persons have become more reluctant to serve
corporations as directors or in other capacities unless they are provided with
adequate protection through insurance or adequate indemnification against
inordinate risks of claims and actions against them arising out of their service
to and activities on behalf of the corporation; and
WHEREAS, the uncertainties relating to such insurance and to
indemnification have increased the difficulty of attracting and retaining such
persons; and
WHEREAS, the Board of Directors of the Company (the "Board") has determined
that the increased difficulty in attracting and retaining such persons is
detrimental to the best interests of the Company's stockholders and that the
Company should act to assure such persons that there will be increased certainty
of such protection in the future; and
WHEREAS, it is reasonable, prudent and necessary for the Company
contractually to obligate itself to indemnify, and to advance expenses on behalf
of, such persons to the fullest extent permitted by applicable law so that they
will serve or continue to serve the Company free from undue concern that they
will not be so indemnified; and
WHEREAS, each of Section 145 of the General Corporation Law of the State of
Delaware and the Company's Bylaws is nonexclusive, and therefore contemplates
that contracts may be entered into with respect to indemnification of directors,
officers and employees; and
WHEREAS, Indemnitee is willing to serve, continue to serve and to take on
additional service for or on behalf of the Company on the condition that he be
so indemnified;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
Section 1. Services by Indemnitee. Indemnitee agrees to serve as a
----------------------
director of the Company. Indemnitee may at any time and for any reason resign
or be removed from such position (subject to any other contractual obligation or
any obligation imposed by operation of law). This Agreement shall continue in
force after Indemnitee has ceased to serve as a director of the Company.
<PAGE>
Section 2. Indemnification - General. The Company shall indemnify, and
-------------------------
advance Expenses (as hereinafter defined) to, Indemnitee (a) as provided in this
Agreement and (b) subject to the provisions of this Agreement, to the fullest
extent permitted by applicable law in effect on the date hereof and as such law
may be amended from time to time. The rights of Indemnitee provided under the
preceding sentence shall include, but shall not be limited to, the rights set
forth in the other Sections of this Agreement.
Section 3. Proceedings Other Than Proceedings by or in the Right of the
------------------------------------------------------------
Company. Subject to the provisions of this Agreement, Indemnitee shall be
- -------
entitled to the rights of indemnification provided in this Section 3 if, by
reason of his Corporate Status (as hereinafter defined), he is, or is threatened
to be made, a party to or a participant in any Proceeding (as hereinafter
defined), other than a Proceeding by or in the right of the Company. Pursuant
to this Section 3 but subject to the provisions of this Agreement, Indemnitee
shall be indemnified against all Expenses, judgments, penalties, taxes, fines
and amounts paid in settlement (including all interest assessments and other
charges paid or payable in connection therewith) actually and reasonably
incurred by him or on his behalf in connection with such Proceeding or any
claim, issue or matter therein, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal Proceeding, had no reasonable cause to believe
his conduct was unlawful.
Section 4. Proceedings by or in the Right of the Company. Subject to
---------------------------------------------
the provisions of this Agreement, Indemnitee shall be entitled to the rights of
indemnification provided in this Section 4 if, by reason of his Corporate
Status, he is, or is threatened to be made, a party to or a participant in any
Proceeding brought by or in the right of the Company to procure a judgment in
its favor. Pursuant to this Section but subject to the provisions of this
Agreement, Indemnitee shall be indemnified against all Expenses actually and
reasonably incurred by him or on his behalf in connection with such Proceeding
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company; provided, however, that, if
-------- -------
applicable law so provides, no indemnification against such Expenses shall be
made in respect of any claim, issue or matter in such Proceeding as to which
Indemnitee shall have been adjudged to be liable to the Company unless and to
the extent that the Court of Chancery of the State of Delaware, or the court in
which such Proceeding shall have been brought or is pending, shall determine
that such indemnification may be made.
Section 5. Indemnification for Expenses of a Party Who is Wholly or
--------------------------------------------------------
Partly Successful. Notwithstanding any other provision of this Agreement, to the
- -----------------
extent that Indemnitee is, by reason of his Corporate Status, a party to (or a
participant in) and is successful, on the merits or otherwise, in any
Proceeding, he shall be indemnified to the maximum extent permitted by law
against all Expenses actually and reasonably incurred by him or on his behalf in
connection therewith. If Indemnitee is not wholly successful in such Proceeding
but is successful, on the merits or otherwise, as to one or more but less than
all claims, issues or matters in such Proceeding, the Company shall indemnify
Indemnitee against all Expenses actually and reasonably incurred by him or on
his behalf in connection with each successfully resolved claim, issue or matter.
For purposes of this Section
2
<PAGE>
and without limitation, the termination of any claim, issue or matter in such a
Proceeding by dismissal, with or without prejudice, shall be deemed to be a
successful result as to such claim, issue or matter.
Section 6. Indemnification for Expenses of a Witness. Notwithstanding
-----------------------------------------
any other provision of this Agreement, to the extent that Indemnitee is, by
reason of his Corporate Status, a witness in any Proceeding to which Indemnitee
is not a party, he shall be indemnified against all Expenses actually and
reasonably incurred by him or on his behalf in connection therewith.
Section 7. Advancement of Expenses. Notwithstanding any provision of
-----------------------
this Agreement to the contrary, the Company shall advance all reasonable
Expenses incurred by or on behalf of Indemnitee in connection with any
Proceeding in which Indemnitee is involved with by reason of Indemnitee's
Corporate Status within fifteen (15) days after the receipt by the Company of a
statement or statements from Indemnitee requesting such advance or advances from
time to time, whether prior to or after final disposition of such Proceeding.
Such statement or statements shall reasonably evidence the Expenses incurred by
Indemnitee and shall include or be preceded or accompanied by an undertaking by
or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately
be determined that Indemnitee is not entitled to be indemnified against such
Expenses. Any advance and undertakings to repay pursuant to this Section 7 shall
be unsecured and interest free.
Section 8. Procedure for Determination of Entitlement to
---------------------------------------------
Indemnification..
- ---------------
(a) To obtain indemnification under this Agreement, Indemnitee shall
submit to the Chief Executive Officer of the Company a written request,
including therein or therewith such documentation and information as is
reasonably available to Indemnitee and is reasonably necessary to determine
whether and to what extent Indemnitee is entitled to indemnification. The
Company shall, promptly upon receipt of such a request for indemnification,
advise the Board in writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant to
Section 8(a) hereof, a determination with respect to Indemnitee's entitlement
thereto shall be made in the specific case: (i) if a Change in Control (as
hereinafter defined) shall have occurred, by Independent Counsel (as hereinafter
defined) in a written opinion to the Board of Directors, a copy of which shall
be delivered to Indemnitee; or (ii) if a Change in Control shall not have
occurred, (A) by a majority vote of the Disinterested Directors (as hereinafter
defined), even though less than a quorum of the Board, or (B) if there are no
such Disinterested Directors or, if such Disinterested Directors so direct, by
Independent Counsel in a written opinion to the Board, a copy of which shall be
delivered to Indemnitee or (C) if so directed by the Board, by the stockholders
of the Company; and, if it is so determined that Indemnitee is entitled to
indemnification, payment to Indemnitee shall be made within thirty (30) days
after such determination. Indemnitee shall cooperate with the person, persons
or entity making such determination with respect to Indemnitee's entitlement to
indemnification, including providing to such person, persons or entity upon
reasonable advance request any
3
<PAGE>
documentation or information which is not privileged or otherwise protected from
disclosure and which is reasonably available to Indemnitee and reasonably
necessary to such determination. Any costs or expenses (including attorneys'
fees and disbursements) incurred by Indemnitee in so cooperating with the
person, persons or entity making such determination shall be borne by the
Company (irrespective of the determination as to Indemnitee's entitlement to
indemnification) and the Company hereby indemnifies and agrees to hold
Indemnitee harmless therefrom.
(c) In the event the determination of entitlement to indemnification
is to be made by Independent Counsel pursuant to Section 8(b) hereof, the
Independent Counsel shall be selected as provided in this Section 8(c). If a
Change in Control shall not have occurred, the Independent Counsel shall be
selected by the Disinterested Directors or, if there are no such Disinterested
Directors, by the Board of Directors, and the Company shall give written notice
to Indemnitee advising him of the identity of the Independent Counsel so
selected. If a Change in Control shall have occurred, the Independent Counsel
shall be selected by Indemnitee (unless Indemnitee shall request that such
selection by made by the Board of Directors, in which event the preceding
sentence shall apply), and Indemnitee shall give written notice to the Company
advising it of the identity of the Independent Counsel so selected. In either
event, Indemnitee or the Company, as the case may be, may, within ten (10) days
after such written notice of selection shall have been given, deliver to the
Company or to Indemnitee, as the case may be, a written objection to such
selection; provided; however, that such objection may be asserted only on the
-------- -------
ground that the Independent Counsel so selected does not meet the requirements
of "Independent Counsel" as defined in Section 17 of this Agreement, and the
objection shall set forth with particularity the factual basis of such
assertion. Absent a proper and timely objection, the person so selected shall
act as Independent Counsel. If such written objection is so made and
substantiated, the Independent Counsel so selected may not serve as Independent
Counsel unless and until such objection is withdrawn or the Court of Chancery of
the State of Delaware or other court of competent jurisdiction has determined
that such objection is without merit. If, within twenty (20) days after
submission by Indemnitee of a written request for indemnification pursuant to
Section 8(a) hereof, no Independent Counsel shall have been selected and not
objected to, either the Company or Indemnitee may petition the Court of Chancery
of the State of Delaware or other court of competent jurisdiction for resolution
of any objection which shall have been made by the Company or Indemnitee to the
other's selection of Independent Counsel and/or for the appointment as
Independent Counsel of a person selected by the Court or by such other person as
the Court shall designate, and the person with respect to whom all objections
are so resolved or the person so appointed shall act as Independent Counsel
under Section 8(b) hereof. Upon the due commencement of any judicial proceeding
or arbitration pursuant to Section 10(a) of this Agreement, Independent Counsel
shall be discharged and relieved of any further responsibility in such capacity
(subject to the applicable standards of professional conduct then prevailing).
(d) The Company shall not be required to obtain the consent of the
Indemnitee to the settlement of any Proceeding which the Company has undertaken
to defend if the Company assumes full and sole responsibility for such
settlement and the settlement grants the Indemnitee a complete and unqualified
release in respect of the potential liability. The Indemnitee shall not
unreasonably withhold his consent to any proposed settlement; provided, however,
that the Company
4
<PAGE>
shall not settle any proceeding in any manner that would impose any penalty or
limitation on the Indemnitee without his written consent. The Company shall not
be liable for any amount paid by the Indemnitee in settlement of any Proceeding
unless the Company has consented to such settlement, which consent shall not be
unreasonably withheld.
Section 9. Presumptions and Effect of Certain Proceedings; Limitations
-----------------------------------------------------------
on Indemnification.
- ------------------
(a) In making a determination with respect to entitlement to
indemnification under this Agreement, the person or persons or entity making
such determination shall presume that Indemnitee is entitled to indemnification
under this Agreement if Indemnitee has submitted a request for indemnification
in accordance with Section 8(a) of this Agreement, and the Company shall have
the burden of proof to overcome that presumption in connection with the making
by any person, persons or entity of any determination contrary to that
presumption. Neither the failure of the Company (including by its directors or
Independent Counsel) to have made a determination prior to the commencement of
any action pursuant to this Agreement that indemnification is proper in the
circumstances because Indemnitee has met the applicable standard of conduct, nor
an actual determination by the Company (including by its directors or
Independent Counsel) that Indemnitee has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that
Indemnitee has not met the applicable standard of conduct.
(b) If the person, persons or entity empowered or selected under
Section 8 of this Agreement to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within sixty (60) days after
receipt by the Company of the request therefor, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee
shall be entitled to such indemnification, absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification under
applicable law; provided, however, that such sixty (60) day period may be
-------- -------
extended for a reasonable time, not to exceed an additional thirty (30) days, if
the person, persons or entity making the determination with respect to
entitlement to indemnification in good faith requires such additional time for
the obtaining or evaluating of documentation and/or information relating
thereto; and provided, further, that the foregoing provisions of this Section
9(b) shall not apply (i) if the determination of entitlement to indemnification
is to be made by the stockholders pursuant to Section 8(b) of this Agreement and
if (A) within fifteen (15) days after receipt by the Company of the request for
such determination the Board of Directors has resolved to submit such
determination to the stockholders for their consideration at an annual meeting
thereof to be held within seventy-five (75) days after such receipt and such
determination is made thereat, or (B) a special meeting of stockholders is
called within fifteen (15) days after such receipt for the purpose of making
such determination, such meeting is held for such purpose within sixty (60) days
after having been so called and such determination is made thereat, or (ii) if
the determination of entitlement to indemnification is to be made by Independent
Counsel pursuant to Section 8(b) of this Agreement.
5
<PAGE>
(c) The termination of any Proceeding or of any claim, issue or matter
therein, by judgment, order, settlement or conviction, or upon a plea of nolo
----
contendere or its equivalent, shall not (except as otherwise expressly provided
- ----------
in this Agreement or as otherwise required by law) of itself adversely affect
the right of Indemnitee to indemnification or create a presumption that
Indemnitee did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Company or, with
respect to any criminal Proceeding, that Indemnitee had reasonable cause to
believe that his conduct was unlawful.
(d) For purposes of any determination of Good Faith, Indemnitee shall
be deemed to have acted in Good Faith if Indemnitee's action is based on the
records or books of account of the Company, including financial statements, or
on information supplied to Indemnitee by the officers of the Company in the
course of their duties, or on the advice of legal counsel for the Company or on
information or records given or reports made to the Company by an independent
certified public accountant or by an appraiser or other expert selected with the
reasonable care by the Company. The provisions of this Section 9(d) shall not
be deemed to be exclusive or to limit in any way the other circumstances in
which the Indemnitee may be deemed to have met the applicable standard of
conduct set forth in this Agreement.
(e) The knowledge and/or actions, or failure to act, of any director,
officer, agent or employee of the Company shall not be imputed to Indemnitee for
purposes of determining the right to indemnification under this Agreement.
(f) Notwithstanding any other provision of this Agreement, no
indemnification shall be paid or Expenses reimbursed under this Agreement on
account of any judgment rendered against the Indemnitee (i) in a matter for
which indemnification is not permitted under applicable law (federal or state)
or (ii) for an accounting of profits made from the purchase and sale of
securities of the Company under Section 1b of the Securities Exchange Act of
1934, as amended. Any provision herein to the contrary notwithstanding, the
Company shall not be obligated pursuant to the terms of this Agreement to
indemnify the Indemnitee or otherwise act in violation of any undertaking
appearing in and required by the rules and regulations promulgated under the
Securities Act in any registration statement filed with the Securities and
Exchange Commission under the Securities Act. The Indemnitee acknowledges that
paragraph (h) of Item 512 of Regulation S-K currently generally requires the
Company to undertake in connection with any registration statement filed under
the Act to submit the issue of the enforceability of the Indemnitee's rights
under this Agreement in connection with any liability under the Securities Act
on public policy grounds to a court of appropriate jurisdiction and to be
governed by any final adjudication of such issue. The Indemnitee specifically
agrees that any such undertaking shall supersede the provisions of this
Agreement and to be bound by any such undertaking.
Section 10. Remedies of Indemnitee.
----------------------
(a) In the event that (i) a determination is made pursuant to Section
8 of this Agreement that Indemnitee is not entitled to indemnification under
this Agreement, (ii) advancement
6
<PAGE>
of Expenses is not timely made pursuant to Section 7 of this Agreement, (iii) no
determination of entitlement to indemnification shall have been made pursuant to
Section 8(b) of this Agreement within ninety (90) days after receipt by the
Company of the request for indemnification, (iv) payment of indemnification
required under Section 5, 6, the last sentence of Section 8(b) or the last
sentence of Section 17(h) of this Agreement is not made within fifteen (15) days
after receipt by the Company of a written request therefor, or (v) payment of
indemnification pursuant to Section 3 or 4 of this Agreement is not made within
thirty (30) days after a determination has been made that Indemnitee is entitled
to indemnification, Indemnitee shall be entitled to an adjudication by the Court
of Chancery of the State of Delaware of his entitlement to such indemnification
or advancement of Expenses. Alternatively, in accordance with this Section 10,
Indemnitee, at his option, may seek an award in arbitration to be conducted by a
single arbitrator pursuant to the Commercial Arbitration rules of the American
Arbitration Association. Indemnitee shall commence such proceeding seeking an
adjudication or an award in arbitration within one hundred eighty (180) days
following the date on which Indemnitee first has the right to commence such
proceeding pursuant to this Section 10(a); provided, however, that the foregoing
-------- -------
clause shall not apply in respect of a proceeding brought by Indemnitee to
enforce his rights under Section 5 of this Agreement. The Company shall not
oppose Indemnitee's right to seek any such adjudication or award in arbitration.
(b) In the event that a determination shall have been made pursuant to
Section 8(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section 10 shall be conducted in all respects as a de novo trial, or
-- ----
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination.
(c) If a determination shall have been made pursuant to Section 8(b)
of this Agreement that Indemnitee is entitled to indemnification, the Company
shall be bound by such determination in any judicial proceeding or arbitration
commenced pursuant to this Section 10, absent (i) a misstatement by Indemnitee
of a material fact, or an omission of a material fact necessary to make
Indemnitee's statement not materially misleading, in connection with the request
for indemnification, or (ii) a prohibition of such indemnification under
applicable law.
(d) In the event that Indemnitee, pursuant to this Section 10, seeks a
judicial adjudication of or an award in arbitration to enforce his rights under,
or to recover damages for breach of, this Agreement, Indemnitee shall be
entitled to recover from the Company, and shall be indemnified by the Company
against, any and all expenses (of the types described in the definition of
Expenses in Section 17 of this Agreement) actually and reasonably incurred by
him in such judicial adjudication or arbitration, but only if (and only to the
extent) he prevails therein. If it shall be determined in said judicial
adjudication or arbitration that Indemnitee is entitled to receive part but not
all of the indemnification or advancement of Expenses sought, the expenses
incurred by Indemnitee in connection with such judicial adjudication or
arbitration shall be appropriately prorated.
7
<PAGE>
(e) The Company shall be precluded from asserting in any judicial
preceding or arbitration commenced pursuant to this Section 10 that the
procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Company is bound by all the provisions of this Agreement.
Section 11. Non-Exclusivity; Survival of Rights; Insurance; Subrogation.
-----------------------------------------------------------
(a) The rights of indemnification and to receive advancement of
Expenses as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under applicable
law, the Company's Certificate of Incorporation, the Company's Bylaws, any other
agreement, a vote of stockholders or a resolution of directors, or otherwise.
No amendment, alteration or repeal of this Agreement or of any provision hereof
shall limit or restrict any right of Indemnitee under this Agreement in respect
of any action taken or omitted by such Indemnitee in his Corporate Status prior
to such amendment, alteration or repeal. To the extent that a change in the
General Corporation Law of the State of Delaware, whether by statute or judicial
decision, permits greater indemnification or advancement of Expenses than would
be afforded currently under the Company's Bylaws and this Agreement, it is the
intent of the parties hereto that Indemnitee shall enjoy by this Agreement the
greater benefits so afforded by such change. No right or remedy herein conferred
is intended to be exclusive of any other right or remedy, and every other right
and remedy shall be cumulative and in addition to every other right and remedy
given hereunder or now or hereafter existing at law or in equity or otherwise.
The assertion or employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent assertion or employment of any other right or
remedy.
(b) To the extent that the Company maintains an insurance policy or
policies providing liability insurance for directors, officers, employees, or
agents of the Company or of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise which such person serves at the
request of the Company, Indemnitee shall be covered by such policy or policies
in accordance with its or their terms to the maximum extent of the coverage
available for any such director, officer, employee or agent under such policy or
policies.
(c) In the event of any payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, and Indemnitee shall execute all papers required and
take all action necessary to secure such rights, including execution of such
documents as are necessary to enable the Company to bring suit to enforce such
rights.
(d) The Company shall not be liable under this Agreement to make any
payment of amounts otherwise indemnifiable (or for which advancement is provided
hereunder) hereunder if and to the extent that Indemnitee has otherwise actually
received such payment under any insurance policy, contract, agreement or
otherwise.
(e) The Company's obligation to indemnify or advance Expenses
hereunder to Indemnitee who is or was serving at the request of the Company as a
director, officer, employee or
8
<PAGE>
agent of any other corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise shall be reduced by any amount Indemnitee has
actually received as indemnification or advancement of expenses from such other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise.
Section 12. Duration of Agreement; Successors and Assigns. This
---------------------------------------------
Agreement shall continue until and terminate upon the later of: (a) ten (10)
years after the date that Indemnitee shall have ceased to serve as a director of
the Company or as a director of any enterprise which Indemnitee served at the
request of the Company; or (b) the final termination of any Proceeding then
pending in respect of which Indemnitee is granted rights of indemnification or
advancement of Expenses hereunder and of any proceeding commenced by Indemnitee
pursuant to Section 10 of this Agreement relating thereto. This Agreement shall
be binding upon the Company and its successors and assigns (including any direct
or indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company) and shall inure to
the benefit of Indemnitee and his heirs, executors and administrators. In the
event that the Company shall be a constituent corporation in a consolidation,
merger or other reorganization, the Company, if it shall not be the surviving,
resulting or acquiring company therein, shall require as a condition thereto
that the surviving, resulting or acquiring company agree to indemnify the
Indemnitee to the full extent provided herein. Whether or not the Company is
the resulting, surviving or acquiring company in any such transaction, the
Indemnitee shall also stand in the same position under this Agreement with
respect to the resulting, surviving or acquiring company as he or she would have
with respect to the Company if its separate existence had continued. The
Company shall require and cause any successor (whether direct or indirect, by
purchase, merger, consolidation, or otherwise) to all, substantially all, or a
substantial part of the business and/or assets of the Company, by written
agreement in form and substance satisfactory to Indemnitee, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had taken
place.
Section 13. Severability. If any provision or provisions of this
------------
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever: (a) the validity, legality and enforceability of the remaining
provisions of this Agreement (including without limitation, each portion of any
Section of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or unenforceable)
shall not in any way be affected or impaired thereby and shall remain
enforceable to the fullest extent permitted by law; (b) such provision or
provisions shall be deemed reformed to the extent necessary to conform to
applicable law and to give the maximum effect to the intent of the parties
hereto; and (c) to the fullest extent possible, the provisions of this Agreement
(including, without limitation, each portion of any Section of this Agreement
containing any such provision held to be invalid, illegal or unenforceable, that
is not itself invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested thereby.
Section 14. Exception to Right of Indemnification or Advancement of
-------------------------------------------------------
Expenses. Notwithstanding any other provision of this Agreement, but subject to
- --------
Section 10(d) hereof,
9
<PAGE>
Indemnitee shall not be entitled to indemnification or advancement of Expenses
under this Agreement with respect to any Proceeding brought by Indemnitee, or
any claim therein, unless the bringing of such Proceeding or making of such
claim shall have been approved by the Board of Directors.
Section 15. Identical Counterparts. This Agreement may be executed in
----------------------
one or more counterparts, each of which shall for all purposes be deemed to be
an original but all of which together shall constitute one and the same
Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of this
Agreement.
Section 16. Headings. The headings of the paragraphs of this Agreement
--------
are inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction thereof.
Section 17. Definitions. For purposes of this Agreement:
-----------
(a) "Change of Control" means a change in control of the Company
occurring after the Effective Date of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in
response to any similar item on any similar schedule or form) promulgated under
the Securities Exchange Act of 1934 (the "Act"), whether or not the Company is
then subject to such reporting requirement; provided, however, that, without
-------- -------
limitation, such a Change in Control shall be deemed to have occurred if after
the Effective Date (i) any "person" (as such term is used in Section 13(d) and
14(d) of the Act)(other than (A) a trustee or other fiduciary holding securities
under an employee benefit plan of the Company, (B) a corporation owned directly
or indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company, or (C) FS Equity
Partners III, L.P., FS Equity Partners IV, L.P. or any of their affiliates) is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act),
directly or indirectly, of securities of the Company representing 30% or more of
the combined voting power of the Company's then outstanding securities without
the prior approval of at least two-thirds of the members of the Board in office
immediately prior to such person attaining such percentage interest; (ii) there
occurs a proxy contest, or the Company is a party to a merger, consolidation,
sale of assets, plan of liquidation or other reorganization not approved by at
least two-thirds of the members of the Board then in office, as a consequence of
which members of the Board in office immediately prior to such transaction or
event constitute less than a majority of the Board thereafter; or (iii) during
any period of two consecutive years, other than as a result of an event
described in clause (a)(ii) of this Section 17, individuals who at the beginning
of such period constituted the Board (including for this purpose any new
director whose election or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of such period) cease for any reason
to constitute at least a majority of the Board.
10
<PAGE>
(b) "Corporate Status" describes the status of a person who is or was
a director of the Company, of any Subsidiary of the Company or of any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise which such person is or was serving at the request of the Company.
(c) "Disinterested Director" means a director of the Company who is
not and was not a party to the Proceeding in respect of which indemnification is
sought by Indemnitee.
(d) "Effective Date" means May __, 1999.
(e) "Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees or experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, being or preparing to be a witness in, or
otherwise participating in, a Proceeding.
(f) "Good Faith" shall mean Indemnitee having acted in good faith and
in a manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal Proceeding, having
had no reasonable cause to believe Indemnitee's conduct was unlawful.
(g) "Independent Counsel" means a law firm, or a member of a law firm,
that is experienced in matters of corporation law and neither presently is, nor
in the past five (5) years has been, retained to represent: (i) the Company or
Indemnitee in any matter material to either such party (other than with respect
to matters concerning the Indemnitee under this Agreement, or of other
indemnitees under similar indemnification agreements), or (ii) any other party
to the Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term "Independent Counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the Company
or Indemnitee in an action to determine Indemnitee's rights under this
Agreement. The Company agrees to pay the reasonable fees and expenses of the
Independent Counsel referred to above and to fully indemnify such counsel
against any and all Expenses, claims, liabilities and damages arising out of or
relating to this Agreement or its engagement pursuant hereto.
(h) "Proceeding" includes any threatened, pending or completed action,
suit, arbitration, alternate dispute resolution mechanism, investigation,
inquiry, administrative hearing or any other actual, threatened or completed
proceeding, whether brought by or in the right of the Company or otherwise,
including any counterclaims therein, and whether civil, criminal, administrative
or investigative, in which Indemnitee was, is or will be involved as a party or
otherwise, by reason of the fact of Indemnitee's Corporate Status, by reason of
any action taken by him or of any inaction on his part while acting as director
of the Company or any subsidiary of the Company or by reason of the fact that he
is or was serving at the request of the Company as a
11
<PAGE>
director, officer, employee or agent of any other corporation, partnership,
joint venture, trust or other enterprise, in each case whether or not (i) the
claim arose, or is based on facts occurring, before or after the Effective Date
and (ii) he is acting or serving in any such capacity at the time any liability
or expense is incurred for which indemnification or advancement of expenses can
be provided under this Agreement.
Section 18. Enforcement.
-----------
(a) The Company expressly confirms and agrees that it has entered into
this Agreement and assumed the obligations imposed on it hereby in order to
induce Indemnitee to continue to serve as a director of the Company, and the
Company acknowledges that Indemnitee is relying upon this Agreement in serving
as a director of the Company.
(b) This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral, written and implied, between the
parties hereto with respect to the subject matter hereof.
Section 19. Modification and Waiver. No supplement, modification or
-----------------------
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
Section 20. Notice by Indemnitee. Indemnitee agrees promptly to notify
--------------------
the Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification or advancement of Expenses
covered hereunder. The failure of Indemnitee to so notify the Company shall not
relieve the Company of any obligation which it may have to the Indemnitee under
this Agreement or otherwise, except to the extent the Company is materially
prejudiced by such failure.
Section 21. Notices. All notices, requests, demands and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other Communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
(a) If to Indemnitee, to:
(b) If to the Company, to:
12
<PAGE>
The Pantry, Inc.
1801 Douglas Drive
Sanford, North Carolina 27330
Telephone: (919) 774-6700
Facsimile: (919) 774-3329
Attention: Chief Executive Officer
or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be.
Section 22. Contribution. To the fullest extent permissible under
------------
applicable law, if the indemnification provided for in this Agreement is
unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of
indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee,
whether for judgments, fines, penalties, excise taxes, amounts paid or to be
paid in settlement and/or for Expenses, in connection with any claim relating to
an indemnifiable event under this Agreement, in such proportion as is deemed
fair and reasonable in light of all of the circumstances of such Proceeding in
order to reflect (i) the relative benefits received by the Company and
Indemnitee as a result of the event(s) and/or transaction(s) giving cause to
such Proceeding; and/or (ii) the relative fault of the Company (as its
directors, officers, employees and agents) and Indemnitee in connection with
such event(s) and/or transactions(s).
Section 23. Governing Law; Submission to Jurisdiction; Appointment of
---------------------------------------------------------
Agent for Service of Process. This Agreement and the legal relations among the
- ----------------------------
parties shall be governed by, and construed and enforced in accordance with, the
laws of the State of Delaware, without regard to its conflict of laws rules.
Except with respect to any arbitration commenced by Indemnitee pursuant to
Section 10(a) of this Agreement, the Company and Indemnitee hereby irrevocably
and unconditionally (i) agree that any action or proceeding arising out of or in
connection with this Agreement shall be brought only in the Chancery Court of
the State of Delaware (the "Delaware Court"), and not in any other state or
federal court in the United States of America or any court in any other country,
(ii) consent to submit to the exclusive jurisdiction of the Delaware Court for
purposes of any action or proceeding arising out of or in connection with this
Agreement, (iii) appoint, to the extent such party is not a resident of the
State of Delaware, irrevocably RL&F Service Corp., One Rodney Square, 10th
Floor, 10th and King Streets, Wilmington, Delaware 19801 as its agent in the
State of Delaware as such party's agent for acceptance of legal process in
connection with any such action or proceeding against such party with the same
legal force and validity as if served upon such party personally within the
State of Delaware, (iv) waive any objection to the laying of venue of any such
action or proceeding in the Delaware Court, and (v) waive, and agree not to
plead or to make, any claim that any such action or proceeding brought in the
Delaware Court has been brought in an improper or otherwise inconvenient forum.
Section 24. Miscellaneous. Use of the masculine pronoun shall be deemed
-------------
to include usage of the feminine pronoun where appropriate.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
THE PANTRY, INC.
By:_______________________________________________
Name:_____________________________________________
Title:____________________________________________
__________________________________________________
Indemnitee:
Address: __________________________________________________
__________________________________________________
14
<PAGE>
EXHIBIT 10.30
THE SECURITIES EVIDENCED BY THIS WARRANT OR ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
APPLICABLE BLUE SKY LAWS AND ARE SUBJECT TO CERTAIN INVESTMENT REPRESENTATIONS.
THESE SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH APPLICABLE BLUE
SKY LAWS OR AN EXEMPTION THEREFROM.
Warrant No. W96-1 December 30, 1996
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, FS Equity Partners III, L.P.
and permitted assigns ("Warrantholder") is entitled to purchase from The Pantry,
Inc., a Delaware corporation (the "Company"), on the terms and conditions
contained herein, Forty-Four Thousand Two Hundred Twenty-One (44,221) shares of
the Company's Common Stock, par value $.01 per share (the "Common Stock"), at a
price of Three Hundred Eighty Dollars ($380.00) per share (the "Warrant Price").
1. Exercisability of Warrant. This Warrant shall be exercised in
-------------------------
the manner described in Section 2 below at any time and from time to time on or
prior to the date of termination set forth in Section 9 below.
2. Method of Exercise; Payment; Issuance of New Warrant; Transfer
--------------------------------------------------------------
and Exchange. This Warrant may be exercised by Warrantholder, in whole or in
- ------------
part, by the surrender of this Warrant, properly endorsed, at the principal
office of the Company at 1801 Douglas Drive, Sanford, North Carolina 27330, and
by (a) the payment to the Company of the then applicable Warrant Price of the
Common Stock being purchased, which Warrant Price may be paid, in whole or in
part, by the delivery of cash or check in an amount equal to such Warrant Price,
and (b) delivery to the Company of a customary investment letter executed by
Warrantholder, confirming that the shares of Common Stock being purchased are
being acquired for Warrantholder's own account and not with a view to or for
sale in connection with any distribution of such shares, acknowledging
securities law restrictions applicable to such shares, and agreeing that
certificates evidencing such shares shall bear a legend accordingly restricting
the transfer of such shares. In the event of any exercise of the rights
represented by this Warrant, certificates for the shares of Common Stock so
purchased shall be delivered to Warrantholder within a reasonable time after the
rights represented by this Warrant shall have been so exercised, and unless this
Warrant has expired, a new Warrant representing the number of shares of Common
Stock, if any, with respect to which this Warrant shall not then have been
exercised or that may become exercisable after such date, shall also be issued
to Warrantholder within such
<PAGE>
time. In lieu of exercising this Warrant for a specified number of shares of
Common Stock (the "Exercised Shares") and paying the aggregate Warrant Price
therefor (the "Exercise Price"), Warrantholder may elect, at any time after the
Exercise Date and prior to the expiration of this Warrant, to receive a number
of shares of Common Stock equal to the number of Exercised Shares minus that
number of shares of Common Stock having an aggregate Fair Market Value equal to
the Exercise Price. Following such election, the number of shares of Common
Stock covered by this Warrant shall be deemed automatically reduced by the
number of Exercised Shares. For purposes of this Warrant, the "Fair Market
Value" shall mean, with respect to shares of Common Stock, if then listed on a
national securities exchange, the average closing prices of Common Stock on such
national securities exchange on which listed or, if then quoted on the Nasdaq
National Market, the closing sales price of Common Stock, in any such case on
each of the ten (10) trading days immediately preceding the date of such
conversion.
3. Stock Fully Paid; Reservation of Shares. The Company covenants
---------------------------------------
and agrees that all shares of Common Stock that may be issued upon the exercise
of the rights represented by this Warrant will, upon issuance, be fully paid and
nonassessable and free from all liens. The Company covenants and agrees that,
during the period within which the rights represented by this Warrant may be
exercised, it shall reserve for the purpose of the issuance upon exercise of the
purchase rights evidenced by this Warrant, at least the maximum number of shares
of Common Stock as are issuable upon the exercise of the rights represented by
this Warrant.
4. Restrictions on Transferability of Securities; Compliance with
--------------------------------------------------------------
Securities Act.
- --------------
(a) Restrictions on Transferability. This Warrant and the shares of
-------------------------------
Common Stock issuable hereunder shall not be transferable except upon the
conditions specified in this Section 4, which conditions are intended to insure
compliance with the provisions of the Securities Act of 1933, as amended (the
"Securities Act"). Each holder of this Warrant or the Common Stock issuable
hereunder will cause any proposed transferee of the Warrant or such Common Stock
to agree to take and hold such securities subject to the provisions and upon the
conditions specified in this Section.
(b) Restrictive Legend. Each certificate representing (i) this
------------------
Warrant, (ii) the shares of Common Stock issued upon exercise of this Warrant
and (iii) any other securities issued in respect of such shares of Common Stock
upon any stock split, stock dividend or similar event (collectively, the
"Restricted Securities"), shall (unless otherwise permitted by the provisions of
Section 4(c) below or unless such securities have been registered under the
Securities Act) be imprinted with the following legend, in addition to any
legend required under applicable state securities laws:
2.
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR APPLICABLE BLUE SKY LAWS AND ARE
SUBJECT TO CERTAIN INVESTMENT REPRESENTATIONS. THESE SECURITIES MAY
NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION UNDER THE ACT AND SUCH APPLICABLE BLUE SKY LAWS
OR AN EXEMPTION THEREFROM.
Upon request of a holder of a certificate with such legend imprinted
thereon, the Company shall remove the foregoing legend therefrom or, if
appropriate, issue to such holder a new certificate therefor free of any
transfer legend, if, with such request, the Company shall have received either
the opinion referred to in Section 4(c)(i) or the "no-action" letter referred to
in Section 4(c)(ii) to the effect that any transfer by such holder of the
securities evidenced by such certificate will be exempt from the registration
and/or qualification requirements of, and that such legend is not required in
order to establish compliance with the Securities Act, and if applicable, any
state securities laws under which transfer restrictions on such securities had
been previously imposed.
(c) Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 4(c). Prior to any proposed
transfer of any Restricted Securities, the holder thereof shall give written
notice to the Company of such holder's intention to effect such transfer. Each
such notice shall describe the manner and circumstances of the proposed transfer
in sufficient detail, and shall be accompanied by either (i) an unqualified
written legal opinion addressed to the Company from counsel who shall be
reasonably satisfactory to such parties, which opinion shall be reasonably
satisfactory in form and substance to such parties' legal counsel, to the effect
that the proposed transfer of the Restricted Securities may be effected without
registration under the Securities Act and any applicable state securities laws,
or (ii) a "no-action" letter from the Securities and Exchange Commission (and
any necessary state securities administrator) to the effect that the transfer of
such securities without registration will not result in a recommendation by the
staff of the Commission (or such administrators) that action be taken with
respect thereto, whereupon the holder of such Restricted Securities shall be
entitled to transfer such Restricted Securities in accordance with the terms of
the notice delivered by the holder to the Company. Each certificate evidencing
the Restricted Securities transferred as above provided shall bear the
appropriate restrictive legend set forth in Section 4(b) above.
5. Adjustment of Purchase Price and Number of Shares of Common
-----------------------------------------------------------
Stock. The number and kind of securities purchasable upon the exercise of this
- -----
Warrant and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
3.
<PAGE>
(a) Consolidation, Merger, Reorganization, Etc. If the Company at any
-------------------------------------------
time while this Warrant remains outstanding and unexpired shall consolidate with
or merge into any other corporation, reorganize or reclassify, or in any manner
change the securities then purchasable upon the exercise of this Warrant, then
upon consummation thereof this Warrant shall thereafter represent the right of
Warrantholder to receive, in lieu of shares of Common Stock, the cash or such
number of securities to which Warrantholder would have been entitled upon
consummation thereof if Warrantholder had exercised this Warrant immediately
prior thereto. Upon any such event, an appropriate adjustment shall also be
made to the Warrant Price, if necessary in the good faith judgment of the Board
of Directors of the Company, to preserve the economic benefit intended to be
conferred upon Warrantholder in accordance with its terms.
(b) Subdivision or Combination of Shares; Dividends and Distribution
----------------------------------------------------------------
of Common Stock. If the Company at any time shall subdivide or combine its
- ---------------
Common Stock, or take a record of the holders of its Common Stock for the
purpose of entitling them to receive without payment a dividend payable in, or
other distribution of, Common Stock or other securities, then the number of
shares of Common Stock purchasable hereunder shall be adjusted to that number
determined by multiplying the number of shares purchasable upon the exercise of
this Warrant immediately prior to such adjustment by a fraction (i) the
numerator of which shall be the total number of shares of Common Stock
outstanding immediately after such subdivision, combination, dividend or
distribution, and (ii) the denominator of which shall be the total number of
shares of Common Stock outstanding immediately prior to such subdivision,
combination, dividend or distribution. Additionally, the Warrant Price shall be
adjusted to that price determined by multiplying the Warrant Price in effect
immediately prior to such subdivision, combination, dividend or distribution by
a fraction (x) the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such subdivision, combination,
dividend or distribution, and (y) the denominator of which shall be the total
number of shares of Common Stock outstanding immediately after such subdivision,
combination, dividend or distribution.
(c) When any adjustment is required to be made in the Warrant Price,
either initially or as adjusted hereunder, the Company shall forthwith determine
the new Warrant Price and shall (i) prepare and retain on file a statement
describing in reasonable detail the method used in arriving at the new Warrant
Price and (ii) cause a copy of such statement to be mailed to Warrantholder as
of a date within ten (10) days after the date when the circumstances giving rise
to the adjustment occurred.
6. Fractional Shares. No fractional shares of Common Stock will be
-----------------
issued in connection with any exercise hereunder but in lieu of such fractional
shares, the Company shall make a cash payment therefor upon the basis of the
fair market value of the Common Stock on the date of such exercise.
4.
<PAGE>
7. Registration Rights. The Warrant Shares shall have registration
-------------------
rights provided for in that certain Registration Rights Agreement (Common Stock)
dated as of an even date herewith.
8. Governing Law. This Warrant shall be construed and enforced in
-------------
accordance with, and the rights of the parties shall be governed by, the laws of
the State of North Carolina.
9. Expiration of Warrant. This Warrant shall terminate and expire
---------------------
and shall no longer be exercisable on or after December 30, 2006.
IN WITNESS WHEREOF, this Warrant has been duly executed and issued by
a duly authorized officer of the Company as of this 30th day of December, 1996.
THE PANTRY, INC.
a Delaware corporation
By: /s/ Mark C. King
--------------------
Mark C. King
Senior Vice President, Chief Financial Officer
and Secretary
5.
<PAGE>
FORM OF SUBSCRIPTION
--------------------
(To be signed only upon exercise of Warrant)
To the Company:
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, __________________________ (______) of the number of
shares of Common Stock purchasable under this Warrant and herewith makes payment
of ____________ Dollars ($______) therefor, and requests that a certificate(s)
for such shares be issued in the name of, and delivered to,
__________________________, whose address is ________________________________
____________________________________.
The undersigned represents that it is acquiring such shares of Common
Stock for its own account for investment purposes only and not with a view to or
for sale in connection with any distribution thereof.
DATED:
--------------------------- -------------------------------------------
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant)
------------------------------------------
------------------------------------------
(Address)
6.
<PAGE>
EXHIBIT 10.31
THE SECURITIES EVIDENCED BY THIS WARRANT OR ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
APPLICABLE BLUE SKY LAWS AND ARE SUBJECT TO CERTAIN INVESTMENT REPRESENTATIONS.
THESE SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE
OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH APPLICABLE BLUE
SKY LAWS OR AN EXEMPTION THEREFROM.
Warrant No. W96-2 December 30, 1996
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, FS Equity Partners
International, L.P. and permitted assigns ("Warrantholder") is entitled to
purchase from The Pantry, Inc., a Delaware corporation (the "Company"), on the
terms and conditions contained herein, One Thousand Seven Hundred Seventy-Nine
(1,779) shares of the Company's Common Stock, par value $.01 per share (the
"Common Stock"), at a price of Three Hundred Eighty Dollars ($380.00) per share
(the "Warrant Price").
1. Exercisability of Warrant. This Warrant shall be exercised in
-------------------------
the manner described in Section 2 below at any time and from time to time on or
prior to the date of termination set forth in Section 9 below.
2. Method of Exercise; Payment; Issuance of New Warrant; Transfer
--------------------------------------------------------------
and Exchange. This Warrant may be exercised by Warrantholder, in whole or in
- ------------
part, by the surrender of this Warrant, properly endorsed, at the principal
office of the Company at 1801 Douglas Drive, Sanford, North Carolina 27330, and
by (a) the payment to the Company of the then applicable Warrant Price of the
Common Stock being purchased, which Warrant Price may be paid, in whole or in
part, by the delivery of cash or check in an amount equal to such Warrant Price,
and (b) delivery to the Company of a customary investment letter executed by
Warrantholder, confirming that the shares of Common Stock being purchased are
being acquired for Warrantholder's own account and not with a view to or for
sale in connection with any distribution of such shares, acknowledging
securities law restrictions applicable to such shares, and agreeing that
certificates evidencing such shares shall bear a legend accordingly restricting
the transfer of such shares. In the event of any exercise of the rights
represented by this Warrant, certificates for the shares of Common Stock so
purchased shall be delivered to Warrantholder within a reasonable time after the
rights represented by this Warrant shall have been so exercised, and unless this
Warrant has expired, a new Warrant representing the number of shares of Common
Stock, if any, with respect to which this Warrant shall not then have been
exercised or that may become exercisable after such date, shall also be issued
to Warrantholder within such
<PAGE>
time. In lieu of exercising this Warrant for a specified number of shares of
Common Stock (the "Exercised Shares") and paying the aggregate Warrant Price
therefor (the "Exercise Price"), Warrantholder may elect, at any time after the
Exercise Date and prior to the expiration of this Warrant, to receive a number
of shares of Common Stock equal to the number of Exercised Shares minus that
number of shares of Common Stock having an aggregate Fair Market Value equal to
the Exercise Price. Following such election, the number of shares of Common
Stock covered by this Warrant shall be deemed automatically reduced by the
number of Exercised Shares. For purposes of this Warrant, the "Fair Market
Value" shall mean, with respect to shares of Common Stock, if then listed on a
national securities exchange, the average closing prices of Common Stock on such
national securities exchange on which listed or, if then quoted on the Nasdaq
National Market, the closing sales price of Common Stock, in any such case on
each of the ten (10) trading days immediately preceding the date of such
conversion.
3. Stock Fully Paid; Reservation of Shares. The Company covenants
---------------------------------------
and agrees that all shares of Common Stock that may be issued upon the exercise
of the rights represented by this Warrant will, upon issuance, be fully paid and
nonassessable and free from all liens. The Company covenants and agrees that,
during the period within which the rights represented by this Warrant may be
exercised, it shall reserve for the purpose of the issuance upon exercise of the
purchase rights evidenced by this Warrant, at least the maximum number of shares
of Common Stock as are issuable upon the exercise of the rights represented by
this Warrant.
4. Restrictions on Transferability of Securities; Compliance with
--------------------------------------------------------------
Securities Act.
- --------------
(a) Restrictions on Transferability. This Warrant and the shares
-------------------------------
of Common Stock issuable hereunder shall not be transferable except upon the
conditions specified in this Section 4, which conditions are intended to insure
compliance with the provisions of the Securities Act of 1933, as amended (the
"Securities Act"). Each holder of this Warrant or the Common Stock issuable
hereunder will cause any proposed transferee of the Warrant or such Common Stock
to agree to take and hold such securities subject to the provisions and upon the
conditions specified in this Section.
(b) Restrictive Legend. Each certificate representing (i) this
------------------
Warrant, (ii) the shares of Common Stock issued upon exercise of this Warrant
and (iii) any other securities issued in respect of such shares of Common Stock
upon any stock split, stock dividend or similar event (collectively, the
"Restricted Securities"), shall (unless otherwise permitted by the provisions of
Section 4(c) below or unless such securities have been registered under the
Securities Act) be imprinted with the following legend, in addition to any
legend required under applicable state securities laws:
2.
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
APPLICABLE BLUE SKY LAWS AND ARE SUBJECT TO CERTAIN
INVESTMENT REPRESENTATIONS. THESE SECURITIES MAY NOT BE
SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION UNDER THE ACT AND SUCH
APPLICABLE BLUE SKY LAWS OR AN EXEMPTION THEREFROM.
Upon request of a holder of a certificate with such legend imprinted
thereon, the Company shall remove the foregoing legend therefrom or, if
appropriate, issue to such holder a new certificate therefor free of any
transfer legend, if, with such request, the Company shall have received either
the opinion referred to in Section 4(c)(i) or the "no-action" letter referred to
in Section 4(c)(ii) to the effect that any transfer by such holder of the
securities evidenced by such certificate will be exempt from the registration
and/or qualification requirements of, and that such legend is not required in
order to establish compliance with the Securities Act, and if applicable, any
state securities laws under which transfer restrictions on such securities had
been previously imposed.
(c) Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 4(c). Prior to any proposed
transfer of any Restricted Securities, the holder thereof shall give written
notice to the Company of such holder's intention to effect such transfer. Each
such notice shall describe the manner and circumstances of the proposed transfer
in sufficient detail, and shall be accompanied by either (i) an unqualified
written legal opinion addressed to the Company from counsel who shall be
reasonably satisfactory to such parties, which opinion shall be reasonably
satisfactory in form and substance to such parties' legal counsel, to the effect
that the proposed transfer of the Restricted Securities may be effected without
registration under the Securities Act and any applicable state securities laws,
or (ii a "no-action" letter from the Securities and Exchange Commission (and any
necessary state securities administrator) to the effect that the transfer of
such securities without registration will not result in a recommendation by the
staff of the Commission (or such administrators) that action be taken with
respect thereto, whereupon the holder of such Restricted Securities shall be
entitled to transfer such Restricted Securities in accordance with the terms of
the notice delivered by the holder to the Company. Each certificate evidencing
the Restricted Securities transferred as above provided shall bear the
appropriate restrictive legend set forth in Section 4(b) above.
5. Adjustment of Purchase Price and Number of Shares of Common Stock. The
-----------------------------------------------------------------
number and kind of securities purchasable upon the exercise of this Warrant and
the Warrant Price shall be subject to adjustment from time to time upon the
happening of certain events, as follows:
3.
<PAGE>
(a) Consolidation, Merger, Reorganization, Etc. If the Company at any
-------------------------------------------
time while this Warrant remains outstanding and unexpired shall consolidate with
or merge into any other corporation, reorganize or reclassify, or in any manner
change the securities then purchasable upon the exercise of this Warrant, then
upon consummation thereof this Warrant shall thereafter represent the right of
Warrantholder to receive, in lieu of shares of Common Stock, the cash or such
number of securities to which Warrantholder would have been entitled upon
consummation thereof if Warrantholder had exercised this Warrant immediately
prior thereto. Upon any such event, an appropriate adjustment shall also be
made to the Warrant Price, if necessary in the good faith judgment of the Board
of Directors of the Company, to preserve the economic benefit intended to be
conferred upon Warrantholder in accordance with its terms.
(b) Subdivision or Combination of Shares; Dividends and Distribution
----------------------------------------------------------------
of Common Stock. If the Company at any time shall subdivide or combine its
- ---------------
Common Stock, or take a record of the holders of its Common Stock for the
purpose of entitling them to receive without payment a dividend payable in, or
other distribution of, Common Stock or other securities, then the number of
shares of Common Stock purchasable hereunder shall be adjusted to that number
determined by multiplying the number of shares purchasable upon the exercise of
this Warrant immediately prior to such adjustment by a fraction (i) the
numerator of which shall be the total number of shares of Common Stock
outstanding immediately after such subdivision, combination, dividend or
distribution, and (ii the denominator of which shall be the total number of
shares of Common Stock outstanding immediately prior to such subdivision,
combination, dividend or distribution. Additionally, the Warrant Price shall be
adjusted to that price determined by multiplying the Warrant Price in effect
immediately prior to such subdivision, combination, dividend or distribution by
a fraction (x) the numerator of which shall be the total number of shares of
Common Stock outstanding immediately prior to such subdivision, combination,
dividend or distribution, and (y) the denominator of which shall be the total
number of shares of Common Stock outstanding immediately after such subdivision,
combination, dividend or distribution.
(c) When any adjustment is required to be made in the Warrant Price,
either initially or as adjusted hereunder, the Company shall forthwith determine
the new Warrant Price and shall (i) prepare and retain on file a statement
describing in reasonable detail the method used in arriving at the new Warrant
Price and (ii cause a copy of such statement to be mailed to Warrantholder as of
a date within ten (10) days after the date when the circumstances giving rise to
the adjustment occurred.
6. Fractional Shares. No fractional shares of Common Stock will be
-----------------
issued in connection with any exercise hereunder but in lieu of such fractional
shares, the Company shall make a cash payment therefor upon the basis of the
fair market value of the Common Stock on the date of such exercise.
4.
<PAGE>
7. Registration Rights. The Warrant Shares shall have registration
-------------------
rights provided for in that certain Registration Rights Agreement (Common Stock)
dated as of an even date herewith.
8. Governing Law. This Warrant shall be construed and enforced in
-------------
accordance with, and the rights of the parties shall be governed by, the laws of
the State of North Carolina.
9. Expiration of Warrant. This Warrant shall terminate and expire
---------------------
and shall no longer be exercisable on or after December 30, 2006.
IN WITNESS WHEREOF, this Warrant has been duly executed and issued by
a duly authorized officer of the Company as of this 30th day of December, 1996.
THE PANTRY, INC.
a Delaware corporation
By: /s/ Mark C. King.
----------------------------------------------
Mark C. King
Senior Vice President, Chief Financial Officer
and Secretary
5.
<PAGE>
FORM OF SUBSCRIPTION
--------------------
(To be signed only upon exercise of Warrant)
To the Company:
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, __________________________ (______) of the number of shares
of Common Stock purchasable under this Warrant and herewith makes payment of
____________ Dollars ($______) therefor, and requests that a certificate(s) for
such shares be issued in the name of, and delivered to, _____________________,
whose address is ______________________________________________________________.
The undersigned represents that it is acquiring such shares of Common
Stock for its own account for investment purposes only and not with a view to or
for sale in connection with any distribution thereof.
DATED:
----------------------- ---------------------------------------
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
---------------------------------------
---------------------------------------
(Address)
6.
<PAGE>
EXHIBIT 10.32
THE PANTRY, INC.
1999 Stock Option Plan
Section 1. Description of Plan. This is the 1999 Stock Option Plan
-------------------
(the "Plan"), of The Pantry, Inc., a Delaware corporation (the "Company").
Under this Plan, officers, key employees and consultants of the Company or any
of its subsidiaries and members of the board of directors of the Company or any
of its Subsidiaries, to be selected as set forth below, may be granted options
("Options") to purchase shares of the common stock, par value $.01, of the
Company ("Common Stock"). For purposes of this Plan, the term "subsidiary"
means any directly or indirectly majority or wholly owned entity of the Company
(individually, a "Subsidiary" and collectively, the "Subsidiaries"). It is
intended that the Options under this Plan will either qualify for treatment as
incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), and be designated "Incentive Stock Options" or not
qualify for such treatment and be designated "Nonqualified Stock Options."
Incentive Stock Options may only be granted to employees.
Section 2. Purpose of Plan. The purpose of the Plan and of granting
---------------
Options to specified persons is to further the growth, development and financial
success of the Company and its Subsidiaries by providing additional incentives
to certain officers, key employees, consultants and members of the board of
directors of the Company or its Subsidiaries. By assisting such persons in
acquiring shares of Common Stock, the Company can ensure that such persons will
themselves benefit directly from the Company's and its Subsidiaries' growth,
development and financial success.
Section 3. Eligibility. The persons who shall be eligible to receive
-----------
grants of Options under the Plan shall be the directors, officers, key employees
and consultants of the Company and the Subsidiaries; provided that bona fide
services shall be rendered to the Company or its Subsidiaries by such consultant
and such services shall not be rendered in connection with the offer and sale of
securities in a capital-raising transaction. Consultants as well as directors
who are not also employees of the Company ("Nonemployee Directors") are not
eligible to receive Incentive Stock Options. A person who holds an Option is
herein referred to as a "Participant," and more than one Option may be granted
to any Participant. The aggregate fair market value (determined as of the time
an Incentive Stock Option is granted) of the Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by any Participant in
any calendar year under this Plan and any other Incentive Stock Option plans of
the Company or any Subsidiary shall not exceed $100,000.
<PAGE>
Section 4. Administration.
--------------
(a) The Plan shall be administered by the board of directors of the
Company (the "Board") or, at the Board's option, a committee of the Board
(either the Board or such committee, the "Committee"). Members of the Committee
shall be appointed, both initially and as vacancies occur, by the Board, to
serve at the pleasure of the Board. Upon the first registration of an equity
security of the Company under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), to the extent possible and advisable, the Committee may be
constituted so as to permit this Plan to comply with Rule 16b-3 promulgated
under Section 16 of the Exchange Act and Section 162(m) of the Code. The
Committee shall meet at such times and places as it determines and may meet
through a telephone conference call. A majority of its members shall constitute
a quorum, and the decision of a majority of those present at any meeting at
which a quorum is present shall constitute the decision of the Committee. A
writing signed by all of its members shall constitute the decision of the
Committee without the necessity, in such event, for holding an actual meeting.
(b) The Committee is authorized and empowered to administer the Plan
and, subject to the Plan, (i) to select the Participants, to determine the
number of shares of Common Stock which may be purchased and in general to grant
Options; (ii) to determine the dates upon which Options shall be granted and the
terms and conditions thereof in a manner not inconsistent with the Plan, which
terms and conditions need not be identical as to the various Options granted;
(iii) to determine which Options are to be Incentive Stock Options and which
Options are to be Nonqualified Stock Options; (iv) to interpret the Plan; (v) to
prescribe, amend and rescind rules relating to the Plan; (vi) to authorize any
person to execute on behalf of the Company any instrument required to effectuate
the grant of an Option previously granted by the Committee; (vii) to determine
the rights and obligations of Participants under the Plan; (viii) to specify the
purchase price to be paid by Participants for shares of Common Stock; (ix) to
accelerate the time during which an Option may be exercised in accordance with
the provisions of Section 16 hereof, and to otherwise accelerate the time during
which an Option may be exercised in each case notwithstanding the provisions in
the Option Agreement (as defined in Section 13) stating the time during which it
may be exercised; (x) to extend the period of time during which a Nonqualified
Option may be exercised (e.g. following termination of employment) and (xi) to
make all other determinations deemed necessary or advisable for the
administration of the Plan. The interpretation and construction by the
Committee of any provision of the Plan or of any Option granted under it shall
be final, conclusive and binding. No member of the Committee shall be liable
for any action or determination made with respect to the Plan or any Option
granted hereunder.
Section 5. Shares Subject to Plan. The aggregate number of shares of
----------------------
Common Stock for which Options may be granted pursuant to the Plan shall be
75,000 subject to adjustment as provided in Section 11 hereof. The maximum
number of shares that may be granted to a single Participant is 35,000, subject
to adjustment as provided in Section 11 hereof. The number of shares of Common
Stock which may be purchased by a Participant upon exercise
2
<PAGE>
of each Option shall be determined by the Committee and set forth in each Option
Agreement. Upon the expiration or termination, in whole or in part, for any
reason of an outstanding Option or any portion thereof which shall not have
vested or shall not have been exercised in full or in the event that any shares
of Common Stock acquired pursuant to the Plan are reacquired by the Company, (a)
any shares of Common Stock which have not been purchased or (b) the shares of
Common Stock reacquired, as the case may be, shall again become available for
the granting of additional Options under the Plan. Notwithstanding the preceding
sentence, shares subject to a terminated option shall continue to be considered
to be outstanding for purposes of determining the maximum number of shares that
may be issued to a single Participant. Similarly, the repricing of an Option
will be considered the grant of a new Option for this purpose.
Section 6. Option Price. Except as provided in Section 12 hereof,
------------
the purchase price per share (the "Option Price") of the shares of Common Stock
underlying each Option shall not be less than 100 percent of the fair market
value of such shares on the date of grant of the Option; provided that with
respect to any Option the Committee may provide that the Option Price increases
over time; provided further, that if the Participant is a ten percent (10%)
stockholder of the Company determined in accordance with the constructive
ownership rules of Section 424(a) of the Code at the time such Participant is
granted an Incentive Stock Option, the Option Price shall be not less than 110
percent of said fair market value. Fair market value shall be determined by the
Committee (i) if the Company's securities are traded on a national securities
exchange or on the National Association of Securities Dealers Automated
Quotation System (or a similar successor system), on the basis of the reported
closing sales price on such date or, in the absence of a reported sales price on
such date, on the basis of the average of the reported closing bid and asked
price on such date; provided that if such exchange or system is closed on the
date of grant fair market value shall be determined based on the immediately
preceeding trading day, or (ii) in the absence of both a reported sales price
and a reported bid and asked price under clause (i), the Committee shall
determine such fair market value on the basis of such evidence as it deems
appropriate in its sole discretion; provided that in the case of an Incentive
Stock Option fair market value shall be determined without regard to any
restriction, other than one that by its terms will never lapse.
Section 7. Restrictions on Grants; Vesting of Options.
------------------------------------------
Notwithstanding any other provisions set forth herein or in any Option
Agreement, no Options may be granted under the Plan subsequent to 10 years from
the date this Plan was adopted by the Board. The vesting of all Options may be
based on the passage of time. The Committee shall determine the vesting
schedule applicable to each Option or group of Options in a schedule, a copy of
which shall be filed with the records of the Committee and attached to each
Option Agreement to which the same applies. The vesting schedule need not be
identical for all Options granted hereunder. The Committee may periodically
review the vesting criteria applicable to any Option or Options and, in its sole
judgment, may adjust the same to reflect unanticipated major events, including
but not limited to catastrophic occurrences, mergers and acquisitions.
3
<PAGE>
Section 8. Exercise of Options. Once vested, and prior to its
-------------------
termination date, an Option may be exercised by the Participant by giving
written notice to the Company specifying the whole number of shares of Common
Stock to be purchased and accompanied by payment of the full purchase price
therefor in cash, by check or in such other form of lawful consideration as the
Committee may approve from time to time, including without limitation and in the
sole discretion of the Committee, the assignment and transfer by the Participant
to the Company of outstanding shares of Common Stock theretofore held by the
Participant in a manner intended to comply with the provisions of Rule l6b-3
under the Exchange Act, if applicable; provided that the purchase price may not
be paid by a Participant via any type of "cashless exercise" in which the
Company directly, indirectly or effectively purchases shares of Common Stock
held by such Participant without the express written consent of the Committee,
which may be given or withheld in the Committee's sole discretion (provided that
such shares have been held by such Participant for such period of time as may be
necessary to avoid adverse accounting treatment and are not subject to
forfeiture conditions). After giving due consideration of the consequences
under Section 16 of the Exchange Act and under the Code, the Committee may also
authorize the exercise of Options by the delivery to the Company or its
designated agent of an irrevocable written notice of exercise form together with
irrevocable instructions to a broker-dealer to sell or margin a sufficient
portion of the shares of Common Stock and to deliver the sale or margin loan
proceeds directly to the Company to pay the exercise price of the Option. Once
vested, and prior to its termination date, an Option may only be exercised by
the Participant or in the event of death of the Participant, by the person or
persons (including the deceased Participant's estate) to whom the deceased
Participant's rights under such Option shall have passed by will or the laws of
descent and distribution. Notwithstanding the immediately preceding sentence,
in the event of disability (within the meaning of Section 22(e)(3) of the Code)
of a Participant, a designee of the Participant (or the legal representative of
the Participant if the Participant has no designee) may exercise the Option on
behalf of such Participant (provided such Option would have been exercisable by
such Participant) until the right to exercise such Option expires, as set forth
in such Participant's particular Option Agreement or this Plan.
Section 9. Issuance of Common Stock. The Company's obligation to
------------------------
issue its shares of Common Stock upon exercise of an Option is expressly
conditioned upon the compliance with any registration or other qualification
obligations with respect to such shares of Common Stock under any state and/or
federal law or rulings and regulations of any government regulatory body or the
rules of any stock exchange or quotation system upon which the Common Stock is
listed or quoted and/or the making of such investment representations or other
representations and undertakings by the Participant (or the Participant's
designee, legal representative, heir or legatee, as the case may be) in order to
comply with the requirements of any exemption from any such registration or
other qualification obligations with respect to such shares of Common Stock
which the Company in its sole discretion shall deem necessary or advisable.
Such required representations and undertakings may include representations and
agreements that such Participant (or the Participant's designee, legal
representative, heir or legatee): (a) is purchasing such shares of Common Stock
for investment and not with any present intention of selling or otherwise
disposing of such shares of Common Stock; and (b) agrees to
4
<PAGE>
have a legend placed upon the face and reverse of any certificates evidencing
such shares of Common Stock (or, if applicable, an appropriate data entry made
in the ownership records of the Company) setting forth (i) any representations
and undertakings which such Participant has given to the Company or a reference
thereto, and (ii) that, prior to effecting any sale or other disposition of any
such shares of Common Stock, the Participant must furnish to the Company an
opinion of counsel, satisfactory to the Company and its counsel, to the effect
that such sale or disposition will not violate the applicable requirements of
state and federal laws and regulatory agencies; provided, however, that any such
legend or data entry shall be removed when no longer applicable. The inability
of the Company to obtain from any regulatory body deemed by the Company's
counsel to be necessary for the lawful issuance and sale of any shares of Common
Stock hereunder shall relieve the Company of any liability in respect of the
nonissuance or sale of such shares of Common Stock as to which such requisite
authority shall not have been obtained.
Section 10. Nontransferability; Notice of Disqualifying Disposition.
-------------------------------------------------------
An Option may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent or
distribution. Any permitted transferee shall be required prior to any transfer
of an Option to execute a written undertaking to be bound by the provisions of
the applicable Option Agreement. A Participant must notify the Company if he or
she disposes of stock acquired pursuant to the exercise of an Incentive Stock
Option issued under the Plan prior to the holding periods required to qualify
for long-term capital gains treatment on the disposition.
Section 11. Recapitalization, Reorganization; Merger or Consolidation.
---------------------------------------------------------
(a) Subject to Section 11(b) hereof, if the outstanding shares of
Common Stock of the Company are exchanged for different securities of the
Company through a reorganization, recapitalization or reclassification or if the
number of outstanding shares is changed through a stock split, reverse stock
split or stock dividend, an appropriate adjustment shall be made by the
Committee (i) in the number or kind of shares which may be purchased pursuant to
the exercise of Options, as provided in Section 5 hereof, and (ii) in the
number, exercise price, or kind of securities subject to any outstanding Option
granted under the Plan. Any such adjustment in an outstanding Option, however,
shall be made without change in the total price applicable to the unexercised
portion of the Option but with a corresponding adjustment in the price for each
share covered by the Option. In making such adjustments, or in determining that
no such adjustments are necessary, the Committee may rely upon the advice of
counsel and accountants to the Company, and the determination of the Committee
shall be final, conclusive and binding. No fractional shares of stock shall be
issued or issuable under the Plan on account of any such adjustment.
(b) Subject to Section 16 hereof (i) upon the dissolution, liquidation
or sale of all or substantially all of the business, properties and assets of
the Company, (ii) upon any reorganization, merger, consolidation, sale or
exchange of securities in which the Company does not survive, (iii) upon any
reorganization, merger, consolidation, sale or exchange of
5
<PAGE>
securities in which the Company does survive and any of the Company's
stockholders have the opportunity to receive cash, securities and/or other
property in exchange for their shares of Common Stock of the Company or (iv)
upon any acquisition by any person or group (as defined in Section 13(d) of the
Exchange Act) of beneficial ownership of more than 50% of the Company's then
outstanding shares of Common Stock (each of the events described in clauses (i),
(ii), (iii) or (iv) is referred to herein as an "Extraordinary Event"), the Plan
and each outstanding Option shall terminate. In such event, each Participant
shall have the right until 10 days before the effective date of such
Extraordinary Event to exercise, in whole or in part, any unexpired Option or
Options issued to the Participant, to the extent that said Option is then vested
and exercisable pursuant to the provisions of said Option or Options and of
Section 7 hereof.
(c) The grant of an Option under the Plan shall not affect in any way
the right or power of the Company to make adjustments, reclassifications or
changes in its capital or business structures, to merge, consolidate, dissolve,
or liquidate or to sell or transfer all or any part of its business or assets or
to take any other corporate action.
Section 12. Substitute Options. If the Company at any time should
------------------
succeed to the business of another entity through a merger, consolidation,
corporate reorganization or exchange, or through the acquisition of stock or
assets of such entity or its subsidiaries or otherwise, Options may be granted
under the Plan to option holders of such entity or its subsidiaries, in
substitution for options to purchase interests in such entity held by them at
the time of succession. The Committee, in its sole and absolute discretion,
shall determine the extent to which such substitute Options shall be granted (if
at all), the person or persons to receive such substitute Options (who need not
be all option holders of such entity), the number of Options to be received by
each such person, the Option Price of such Option (which may be determined
without regard to Section 6 hereof) and the terms and conditions of such
substitute Options; provided, however, that the terms of each such substituted
Option that is intended to be an Incentive Stock Option shall be in compliance
with Section 424(a) of the Code.
Section 13. Option Agreement. Each Option granted under the Plan
----------------
shall be evidenced by a written option agreement (an "Option Agreement")
executed by the Company and the Participant which (a) shall contain each of the
provisions and agreements herein specifically required to be contained therein;
(b) shall indicate whether such Option is to be an Incentive Stock Option or a
Nonqualified Stock Option, and if an Incentive Stock Option shall contain terms
and conditions permitting such Option to qualify for treatment as an incentive
stock option under Section 422 of the Code; (c) may contain provisions which
give the Company a right of first refusal to purchase any shares of Common Stock
issued pursuant to the exercise of Options granted under the Plan which a
Participant proposes to sell; (d) may contain a right of repurchase in favor of
the Company in the event Participant's employment or other relationship with the
Company and all of its Subsidiaries terminates; and (e) may contain such other
terms and conditions as the Committee deems desirable and which are not
inconsistent with the Plan.
6
<PAGE>
Section 14. Rights as a Stockholder. No Participant (or any legal
-----------------------
representative, heir or legatee) shall have any rights as a stockholder with
respect to any shares covered by any Option until the date of the issuance of a
stock certificate to such person upon the due exercise of such Option. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued, except as
expressly provided in Section 11 hereof.
Section 15. Termination of Options. Each Option granted under the
----------------------
Plan shall set forth a termination date thereof, in addition to any other
termination events set forth in the Plan and in each particular Option
Agreement, which, with respect to Nonqualified Stock Options, shall be no later
than ten years from the date such Option is granted and with respect to
Incentive Stock Options, if the Participant is a 10-percent stockholder of the
Company determined using the constructive ownership rules of Section 424(d) of
the Code at the time such Option is granted, the Option shall terminate no later
than five years from the date of the grant thereof. An Incentive Stock Option
shall contain any termination events required by Section 422 of the Code. In
any event all Options shall terminate and expire upon the termination of the
Option pursuant to Section 11(b) of the Plan.
The termination of employment or engagement in another relationship of
a Participant (by death or otherwise) shall not accelerate or otherwise affect
the number of shares with respect to which an Option may be exercised, and the
Option may only be exercised with respect to that number of shares which could
have been purchased under the Option had the Option been exercised by the
Participant on the date of such termination.
Section 16. Acceleration of Options. Notwithstanding the provisions
-----------------------
of Section 7 or Section 15 hereof, or any provision to the contrary contained in
a particular Option Agreement, the Committee, in its sole discretion, at any
time, or from time to time, may elect to accelerate the vesting of all or any
portion of any Option then outstanding. The decision by the Committee to
accelerate an Option or to decline to accelerate an Option shall be final,
conclusive and binding. In the event of the acceleration of the exercisability
of Options as the result of a decision by the Committee pursuant to this Section
16, each outstanding Option so accelerated shall be exercisable for a period of
at least five days from and after the date of such acceleration and upon such
other terms and conditions as the Committee may determine in its sole
discretion; provided that such terms and conditions (other than terms and
conditions relating solely to the acceleration of exercisability and the related
termination of an Option) may not adversely affect the rights of any Participant
without the consent of the Participant so adversely affected. Any outstanding
Option which has not been exercised by the holder at the end of such period
shall terminate automatically and become null and void.
Section 17. Withholding of Taxes. The Company, or a Subsidiary, as
--------------------
the case may be, may deduct and withhold from the wages, salary, bonus and other
income paid by the Company (or such Subsidiary) to the Participant the requisite
tax upon the amount of taxable
7
<PAGE>
income, if any, recognized by the Participant in connection with the exercise in
whole or in part of any Option, or the sale of shares of Common Stock issued to
the Participant upon the exercise of an Option, as may be required from time to
time under any federal or state tax laws and regulations. This withholding of
tax shall be made from the Company's (or such Subsidiary's) concurrent or next
payment of wages, salary, bonus or other income to the Participant or by payment
to the Company (or such Subsidiary) by the Participant of the required
withholding tax, as the Committee may determine; provided, however, that, in the
sole discretion of the Committee, the Participant may pay such tax by reducing
the number of shares of Common Stock issued upon exercise of an Option (for
which purpose such shares of Common Stock shall be valued at fair market value
as determined by the Committee, which determination shall be final, conclusive
and binding). The maximum number of shares that can be withheld will be the
number needed to satisfy the applicable tax withholding rules.
Section 18. Effectiveness and Termination of the Plan. The Plan shall
-----------------------------------------
be effective on the date on which it is adopted by the Board; provided that it
is approved by a majority of the Company's stockholders, in accordance with the
provisions of Section 422 of the Code, within 12 months before or after the date
of its adoption by the Board. The Plan shall terminate, in addition to the
other termination events set forth in the Plan, at the time when all shares of
Common Stock which may be issued hereunder have been so issued; provided,
however, that the Board may in its sole discretion terminate the Plan at any
other time. Subject to Section 11 hereof, no such termination shall in any way
affect any Option then outstanding.
Section 19. Time of Granting Options. The date of grant of an Option
------------------------
shall, for all purposes, be the date on which the Committee makes the
determination granting such Option.
Section 20. Amendment of Plan. The Committee may make such amendments
-----------------
to the Plan and, with the consent of each Participant adversely affected, to the
terms and conditions of granted Options, as it shall deem advisable, including
without limitation the acceleration of the time at which an Option may be
exercised. No amendment shall in any way adversely affect any option then
outstanding without the consent of the Participant so adversely affected. Any
amendments to the class of individuals who are entitled to receive Incentive
Stock Options or to the maximum number of shares of Common Stock that may be
issued under the Plan, except as adjusted pursuant to Section 11 of this Plan,
must be approved by holders of a majority of the shares of the Company's Common
Stock.
Section 21. Transfers and Leaves of Absence. For purposes of the
-------------------------------
Plan, (a) a transfer of a Participant's employment or consulting relationship,
without an intervening period, between the Company and a Subsidiary (or vice
versa) or between Subsidiaries shall not be deemed a termination of employment
or a termination of a consulting relationship (provided that switching from
employee to consultant status will constitute a termination of employment for an
Incentive Stock Option) and (b) a Participant who is granted in writing a leave
of absence shall be deemed to have remained in the employ of, or in a consulting
relationship with, the Company
8
<PAGE>
(or a Subsidiary, whichever is applicable) during such leave of absence except
that for purposes of exercising an Incentive Stock Option, the Participant will
be considered to have terminated employment on the 91st day of the leave, unless
his or her right to re-employment is guaranteed by statute or contract.
Section 22. No Obligation to Exercise Option. The granting of an
--------------------------------
Option shall impose no obligation on the Participant to exercise such Option.
Section 23. Indemnification. In addition to such other rights of
---------------
indemnification as they may have as members of the Board, the members of the
Committee shall be indemnified by the Company to the fullest extent permitted by
law against the reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any Option granted thereunder, and against all
amounts paid by them in satisfaction of a judgment in any such action, suit or
proceeding except in relation to matters as to which it shall be adjudged in
such action, suit or proceeding that such Committee member is not entitled to
indemnification under applicable law; provided that within 60 days after
institution of any such action, suit or proceeding such Committee member shall
in writing offer the Company the opportunity, at the Company's expense, to
handle and defend the same, and such Committee member shall cooperate with and
assist the Company in the defense of any such action, suit or proceeding. The
Company shall not be obligated to indemnify any Committee member with regard to
any settlement of any action, suit or proceeding of which the Company did not
consent to in writing prior to such settlement.
Section 24. Governing Law. The Plan and any Option granted pursuant
-------------
to the Plan shall be construed under and governed by the laws of the State of
Delaware without regard to conflict of law provisions thereof.
Section 25. Not an Employment or Consulting Agreement. Nothing
-----------------------------------------
contained in the Plan or in any Option Agreement shall confer, intend to confer
or imply any rights of employment or any rights to a consulting relationship or
rights to continued employment by, or rights to a continued consulting
relationship with, the Company or any Subsidiary in favor of any Participant or
limit the ability of the Company or any Subsidiary to terminate, with or without
cause, in its sole and absolute discretion, the employment of, or consulting
relationship with, any Participant, subject to the terms of any written
employment or consulting agreement to which a Participant is a party. In
addition, nothing contained in the Plan or in any Option Agreement shall
preclude any lawful action by the Company or the Board of Directors.
9
<PAGE>
EXHIBIT 12.1
THE PANTRY, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended 26 Weeks Ended
-------------------------------------------- -------------------
Sept. Sept. Sept. Sept.
29, 28, Sept. 25, 24, March 26, March 25,
1994 1995 26, 1996 1997 1998 1998 1999
------- ------- -------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Pretax (loss) income.... $ (181) $(3,639) $(10,778) $ (975) $ 4,673 $(2,585) $ 1,795
Fixed Charges:
Interest Expense...... 12,047 13,241 11,992 13,039 28,946 12,851 18,873
Amortization of
deferred financing
costs................ 908 1,038 1,359 1,461 2,071 1,257 970
Rental expense(1)..... 2,183 2,253 2,709 2,901 7,919 3,508 6,152
------- ------- -------- ------- ------- ------- -------
Total fixed
charges............ $15,138 $16,532 $ 16,060 $17,401 $38,936 $17,616 $25,995
------- ------- -------- ------- ------- ------- -------
Earnings................ $14,957 $12,893 $ 5,282 $16,426 $43,609 $15,031 $27,790
------- ------- -------- ------- ------- ------- -------
Ratio (shortfall) of
earnings to fixed
charges................ $ (181) $(3,639) $(10,778) $ (975) 1.12 $(2,585) 1.07
======= ======= ======== ======= ======= ======= =======
</TABLE>
- --------
(1) One-third of rental expense related to operating leases representing an
appropriate interest factor.
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-74221 of The Pantry, Inc. 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,
and to the reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Jacksonville, Florida
May 5, 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 Amendment No. 2 to the registration statement on Form S-1 (No. 333-74221)
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
May 4, 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 2nd amendment
to the Form S-1 Registration Statement of The Pantry, Inc., to be filed on or
about May 5, 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
May 5, 1999
<PAGE>
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the use, in this Amendment No. 2 to Registration Statement No.
333-74221 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
May 5, 1999
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use
of our report dated February 18, 1999 and to all references to our Firm
included in or made a part of this Registration Statement File No. 333-74221.
/s/ Arthur Andersen llp
Jacksonville, Florida
May 5, 1999
<PAGE>
EXHIBIT 23.8
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement
No. 333-74221 of The Pantry, Inc. of our report dated March 30, 1999, on the
statement of net assets acquired from Miller Brothers and Circle Investments,
Ltd. as of January 28, 1999, 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.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
May 5, 1999
<PAGE>
EXHIBIT 23.9
CONSENT OF NATIONAL ASSOCIATION OF CONVENIENCE STORES
We hereby consent to the reference to our association in the prospectus
which is a part of the Registration Statement on Form S-1 of The Pantry, Inc.
and to the use of material from the National Association of Convenience Stores
1998 State of the Industry report therein. In giving such consent, we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder and we do not
thereby admit that we are experts with respect to any part of the Registration
Statement under the meaning of the term "expert" as used in the Securities Act.
NATIONAL ASSOCIATION OF CONVENIENCE STORES
/s/ Thomas Monday
Name: Thomas Monday
Title: Vice President, Education and
Information
April 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> SEP-25-1998
<PERIOD-END> MAR-25-1999
<CASH> 24,999
<SECURITIES> 0
<RECEIVABLES> 15,224
<ALLOWANCES> 395
<INVENTORY> 61,378
<CURRENT-ASSETS> 112,636
<PP&E> 405,727
<DEPRECIATION> 17,830
<TOTAL-ASSETS> 722,930
<CURRENT-LIABILITIES> 147,472
<BONDS> 454,277
0
0
<COMMON> 2
<OTHER-SE> 36,444
<TOTAL-LIABILITY-AND-EQUITY> 722,930
<SALES> 675,399
<TOTAL-REVENUES> 675,399
<CGS> 519,458
<TOTAL-COSTS> 519,458
<OTHER-EXPENSES> 135,401
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (18,873)
<INCOME-PRETAX> 1,795
<INCOME-TAX> (718)
<INCOME-CONTINUING> 1,077
<DISCONTINUED> 0
<EXTRAORDINARY> (3,557)
<CHANGES> 0
<NET-INCOME> (2,480)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
