Item 1. Business.
General
We are a leading independently operated convenience store chain in the southeastern United States. As of September 25, 2014, we operated 1,518 stores in 13 states primarily under the Kangaroo Express® operating banner. All but our very smallest stores offer a wide selection of merchandise which includes foodservice, fuel and ancillary products and services designed to appeal to the convenience needs of our customers. A limited number of stores do not offer fuel.
Our principal executive offices are located at 305 Gregson Drive, Cary, North Carolina 27511. Our telephone number is 919-774-6700. We were originally incorporated under the laws of Delaware on July 13, 1987.
References in this annual report to "The Pantry," "Pantry," "we," "us," "our" and "our company" refer to The Pantry, Inc. and its subsidiary. References to "fiscal 2014" refer to our fiscal year which ended on September 25, 2014, references to "fiscal 2013" refer to our fiscal year which ended on September 26, 2013, references to "fiscal 2012" refer to our fiscal year which ended on September 27, 2012, references to "fiscal 2011" refer to our fiscal year which ended on September 29, 2011. All fiscal years presented included 52 weeks, except fiscal 2010, which included 53 weeks.
Operations
Our convenience stores offer a broad selection of merchandise, fuel and ancillary products and services designed to appeal to the convenience needs of our customers.
Each convenience store is generally staffed with a store manager, a lead assistant manager and sales associates who work various shifts to enable most stores to remain open 24 hours a day, seven days a week. Select stores are staffed with a store manager, a lead assistant manager, an assistant manager store food and sales associates. We operate 233 proprietary foodservice and quick service restaurants at 230 of our locations. Our field operations organization is comprised of a network of divisional vice presidents, regional directors and district managers who, with our corporate management, evaluate store operations. Each district manager typically oversees an average of 12 stores. We also monitor store conditions, maintenance and customer service through a regular store visitation program by district and region management as well as periodic visits by our executives and corporate management.
Merchandise Operations. Our convenience stores offer a wide assortment of food, beverages, non-food merchandise and various services. The following table details our category sales, as a percentage of total merchandise sales, for the last five fiscal years:
Our foodservice category includes both proprietary foodservice and quick service restaurants consisting of major national brands and our in-house proprietary brand, Aunt M’s®. The following table shows our quick service restaurants by brand:
(1) Our in-house proprietary quick service restaurants feature breakfast biscuits, fried chicken, deli and other hot food offerings.
(2) Other includes Church’s® in fiscal 2014 and Church’s®, Quiznos® and Taco Del Mar® in fiscal 2013.
Our services revenue is derived from sales of lottery tickets, prepaid products, money orders, ATMs and other ancillary product and service offerings. We also offer car washes at 235 locations.
Fuel Operations. We offer a mix of branded and private branded fuel based on an evaluation of local market conditions and other factors. The following table illustrates the number of locations selling branded and private branded retail fuel at the end of each of the last five fiscal years:
We purchase fuel from major oil companies and independent refiners. We purchase our branded fuel from major oil companies under multi-year supply agreements. Our branded fuel is sold under the Marathon®, BP®, CITGO®, Shell®, ExxonMobil®, ConocoPhillips® and Valero® brand names. The majority of our private branded fuel is sold under our Kangaroo Express® banner. Our fuel supply agreements typically contain provisions relating to, among other things, minimum volumes, payment terms, use of the supplier’s brand names, compliance with the supplier’s requirements, credit card processing and fees, acceptance of the supplier’s credit cards, insurance coverage and compliance with legal and environmental requirements. Our inventories of fuel turn approximately every five days.
We have wholesale fuel supply arrangements with locations operated by independent operators, who have long-term distribution agreements with the Company, which we refer to as "dealers" and "commission marketers". As of September 25, 2014, we have wholesale fuel supply arrangements with 64 dealer and commission marketer locations.
The following table highlights certain information regarding our combined branded and private branded fuel supply during fiscal 2014:
(1) The branded and unbranded product supply agreement expires in December 2017 subject to Marathon’s right to renew for an additional year which extends the agreement to December 2018. In addition, Marathon has agreed to provide products to us for a transition period ending on March 31st of the year following termination of the agreements.
(2) The branded product supply agreement expires in December 2019.
(3) We purchase fuel from various other suppliers including major oil companies and regional suppliers.
Distribution
Merchandise. In fiscal 2014, we purchased approximately 57% of our merchandise, including most tobacco and grocery products, through a single wholesale grocer, McLane Company, Inc. ("McLane"), a wholly owned subsidiary of Berkshire Hathaway, Inc. We have a distribution services agreement with McLane pursuant to which McLane is the primary distributor of traditional grocery products to our stores. We purchase the balance of our merchandise from approximately 640 vendors. All merchandise is delivered directly to our stores by McLane or other vendors. We do not maintain additional product inventories other than what is in our stores.
Fuel. Our fuel is distributed from fuel terminals to our stores through third parties. There are approximately 60 fuel terminals in our operating areas, allowing us to choose from more than one distribution point for most of our stores.
Employees
As of September 25, 2014, we had 15,140 total employees (6,042 full-time and 9,098 part-time), with 14,340 employed in our stores and 800 in corporate and field management positions. Fewer part-time employees are employed during the winter months than during the peak spring and summer seasons. None of our employees are subject to collective bargaining agreements and we consider our employee relations to be in good standing.
Operating Market
We operate convenience stores primarily in the southeastern United States. Approximately 32.0% of our stores are strategically located in coastal/resort areas such as:
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Jacksonville, Orlando/Disney World® and St. Augustine, Florida;
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Charleston, Hilton Head and Myrtle Beach, South Carolina; and
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Gulfport/Biloxi, Mississippi.
These areas attract a large number of tourists who we believe value convenience shopping. Additionally, approximately 21.8% of our stores are situated along major interstates and highways, which benefit from high traffic counts and customers seeking convenient fueling locations, including some stores in coastal/resort areas. Almost all of our stores are freestanding structures averaging approximately 2,900 square feet and provide ample customer parking.
Geographic Information
All of our revenues are generated within the United States and all of our long-lived assets are located within the United States. The following table shows the geographic distribution by state of our stores at the end of each of the last five fiscal years:
Competition
The convenience store and retail fuel industries are highly competitive and marked by ease of entry and constant change in the number and type of retailers offering the products and services found in our stores. We compete with numerous other convenience store chains, independent convenience stores, supermarkets, drugstores, discount clubs, fuel service stations, mass merchants, fast food operations and other similar retail outlets.
The performance of individual stores can be affected by changes in traffic patterns and the type, number and location of competing stores. Principal competitive factors include, among others, location, ease of access, fuel brands, pricing, product and service selections, customer service, store appearance, cleanliness and safety. We believe our store base, strategic mix of locations, fuel offerings and use of competitive market data, combined with our management’s expertise, allows us to compete effectively in our markets.
Seasonality
Due to the nature of our business and our reliance, in part, on consumer spending patterns in coastal, resort and tourist markets, we typically generate higher revenues during warm weather months in the southeastern United States, which fall within our third and fourth fiscal quarters. Accordingly, our working capital requirements are greater in the months leading up to our peak sales period.
Acquisitions and Divestitures
Acquisitions. In fiscal 2011, we purchased 47 stores from Presto Convenience Stores, LLC ("Presto") in Kansas (44) and Missouri (3). The 47 stores purchased separately from Presto operate under the Presto trade name. The Presto acquisition included the real estate underlying 36 of the stores. This acquisition was funded using available cash on hand. There have been no other significant acquisitions in the last five fiscal years.
Divestitures. We continually evaluate the performance of each of our stores to determine whether any particular store should be closed, sold or converted to wholesale operations based on profitability trends, store conditions and our market presence in the surrounding area. Although closing, selling or converting underperforming stores reduces revenues, our operating results typically improve as these stores are generally unprofitable.
The following table summarizes our activities related to acquisitions, store openings, store closures and sales and store conversions for each of the last five fiscal years:
Intellectual Property
We have registered, acquired the registration of, applied for the registration of and claim ownership of a variety of trade names, service marks and trademarks for use in our business, including our primary marks: Kangaroo Express®, Kangaroo®, Bean Street Coffee Company®, Celeste® and Aunt M’s®. In the highly competitive business in which we operate, our trade names, service marks and trademarks are important to distinguish our products and services from those of our competitors. We are not aware of any facts which would negatively impact our continuing use of any of the above trade names, service marks or trademarks.
Government Regulation
Environmental Matters. We are subject to various laws and government regulations concerning environmental matters. Federal environmental legislation that affects us includes the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act and the Clean Air Act. Additionally, the Environmental Protection Agency ("EPA") has the authority to write regulations that have an effect on our operations.
In addition to these federal legislative Acts, various states have authority under the federal statutes mentioned above. Many state and local governments have adopted environmental laws and regulations, some of which are similar to federal requirements.
We record environmental liabilities for these environmental costs when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Environmental liabilities represent our estimates for future expenditures for remediation and related litigation as a result of releases (i.e., overfills, spills and underground storage tank releases) and are based on current regulations, historical results and certain other factors. We rely upon reimbursements from applicable state trust funds and third-party insurance carriers to fund the majority of our environmental costs. Amounts that are probable of reimbursement under state trust fund programs or third-party insurers, based on our experience, are recognized as receivables, excluding all deductibles.
Compliance with these environmental laws and regulations affect our operations in the sale and storage of fuel, financial responsibility for corrective actions and compensatory damages to third parties. Federal and state authorities may seek fines and penalties for violating these laws and regulations. A violation or change of these laws or regulations could have a material effect on our business, financial condition, results of operations and cash flows.
Sale of Alcoholic Beverages and Tobacco Products. In certain areas where our stores are located, state or local laws limit the hours of operation for the sale of alcoholic beverages, prohibit the sale of alcoholic beverages or restrict the sale of alcoholic beverages and tobacco products to persons of a certain age. 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 tobacco products. These agencies may also 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. Imposition of restrictions or sanctions, including the loss of necessary licenses, fines or penalties, could have a material effect on our business, financial condition, results of operations and cash flows. While the potential exposure for damage claims as a seller of alcoholic beverages and tobacco products is substantial, we have adopted procedures intended to minimize such exposure. In addition, we maintain general liability insurance that may mitigate the effect of any liability.
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 failure 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 matters such 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 requirements of mandated health insurance, each of which could materially affect our financial condition, results of operations and cash flows.
Financial Information
For information with respect to revenue and operating profitability, see the items referenced in Item 6. Selected Financial Data, Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations and the Consolidated Statements of Operations, included in Item 8. Consolidated Financial Statements and Supplementary Data.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge through our internet website at www.thepantry.com, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission ("SEC").
The public may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site, www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Executive Officers of the Registrant
The following table provides information on our executive officers. There are no family relationships between any of our executive officers:
Dennis G. Hatchell joined us as our President and Chief Executive Officer on March 5, 2012, and as a Director on March 27, 2012. Prior to joining us, he was with Alex Lee, Inc., (“Alex Lee”), where he served as Vice Chairman since April 2011. Prior to becoming Vice Chairman, Mr. Hatchell served as President and Chief Operating Officer of Alex Lee from December 1995 to April 2011, where he was responsible for developing and implementing the company’s strategic business plan and operating budgets and overseeing its three operating companies as well as carrying out the succession plan, supervision and training of senior leadership. Mr. Hatchell has also served as President of Lowes Food Stores, Inc., a division of Alex Lee, from 1989 to 1995 and Group Vice President of Merchandising and Store Operations from 1986 to 1989 for H. E. Butt Grocery Company in San Antonio, Texas. Prior to that, Mr. Hatchell served as President of Merchant Distributors, Inc., a division of Alex Lee from 1980 to 1986. He also served in several positions rising to Vice President, General Manager of Western Grocers (Super Valu) in Denver, Colorado from 1972 to 1980. Mr. Hatchell received a Bachelor's degree from University of Colorado in 1971.
B. Clyde Preslar joined us as our Senior Vice President, Chief Financial Officer in February 2013. Prior to joining us, Mr. Preslar served as Senior Vice President and Chief Financial Officer for the short line and regional freight railroad operator, RailAmerica, Inc. Prior to RailAmerica, Inc., Mr. Preslar served as Executive Vice President and Chief Financial Officer at Cott Corporation, a manufacturer of non-alcoholic beverage products, and as Vice President and Chief Financial Officer and Secretary at snack food manufacturer Lance, Inc. Earlier in his career, he was Director of Financial Services for Worldwide Power Tools at Black & Decker, and served as Director of Investor Relations at RJR Nabisco. Mr. Preslar holds a Bachelor’s Degree in Business Administration and Economics from Elon College and a Master’s degree in Business Administration from Wake Forest University. He is a past Director of Alliance One International, Inc. and Forward Air Corporation.
Keith S. Bell joined us as our Senior Vice President, Fuels in July 2006. Prior to joining us, Mr. Bell spent 18 years with BP and Amoco Oil Company (“Amoco”), which was acquired by BP in 1998, where he most recently spent two years as Vice President of BP’s US branded jobber business. During his career at BP and Amoco, Mr. Bell progressed through a variety of executive positions including two years as Vice President of Pricing and Supply for BP’s US Fuels Northeast Region, two years as Eastern US Regional Vice President of BP’s branded jobber business, and three years as Performance Unit Leader - Southeast. Mr. Bell received a Bachelor's Degree from the University of Rochester.
Thomas D. Carney joined us as Senior Vice President, General Counsel and Secretary in June 2011. Prior to joining us, Mr. Carney served as Vice President, General Counsel and Secretary for Borders Group, Inc., which filed for protection under Chapter 11 of the U.S. Bankruptcy Code in 2011, from December 1994 until January 2011. Prior to joining Borders Group, Inc. in 1994, Mr. Carney served as a partner at the Dickinson Wright law firm and as Vice President, General Counsel and Secretary of Hoover Universal, Inc. Mr. Carney received a Bachelor's Degree from the University of Michigan and a Juris Doctor Degree from the University of Michigan Law School.
Keith A. Oreson joined us as our Senior Vice President, Human Resources in June 2010. Prior to joining us, Mr. Oreson served as Senior Vice President of Human Resources for Advance Auto Parts from 2005 to 2010. In that position, he led the human resources function for the country's second largest automotive retailer which employed 50,000 people in over 3,400 locations. He also served in the top human resource position for Frank’s Nursery and Crafts from 1998 to 2005 and the top human resource position at ARAMARK Uniform Services from 1993 to 2007. His career in human resources also includes positions with the Pizza Hut division of PepsiCo and GTE. Mr. Oreson received his Bachelor's Degree in Business Administration and his Master's Degree in Labor and Industrial Relations from Michigan State University.
Gordon W. Schmidt was appointed our Senior Vice President, Operations in April 2014. Mr. Schmidt first joined us as a Division Vice President, Western Division in July 2013 and served as the Interim Senior Vice President, Operations from March 2014 until his appointment in April 2014. Prior to joining us, Mr. Schmidt was a Group Vice President at Target, responsible for store operations in the southeast, for 11 years. In this capacity, Mr. Schmidt oversaw 11,000 team members in 95 stores across the south and southeast generating increased sales, profits, and productivity for his $2.7 billion unit. Mr. Schmidt earned his Bachelor's Degree in Management from Carson-Newman University in Tennessee.
Boris Zelmanovich joined us as our Senior Vice President, Chief Merchandising Officer in June 2013. Prior to joining us, Mr. Zelmanovich served as Vice President-Merchandising Strategy and Food & Beverage with Big Lots, an international value store chain with 1,500 stores in the USA and Canada. Mr. Zelmanovich was responsible for development of strategic merchandising plans and repositioning the merchandising portfolio to drive market differentiation. Prior to Big Lots, Mr. Zelmanovich worked for nine years at Family Dollar in various Vice President positions in merchandising where he was responsible for food, beverage, candy, general merchandise and household products categories. Mr. Zelmanovich also has additional experience in supply chain management, management consulting and running his own business. Mr. Zelmanovich earned his Bachelor's degree in Logistics & Transportation / Marketing and his Master's Degree in Supply Chain Management & Information Technology from the University of Tennessee.
David Zodikoff joined us as our Senior Vice President, Chief Information Officer in January 2014. Prior to joining us, Mr. Zodikoff served as Chief Information Officer overseeing all technology aspects of human resources, benefits, and payroll services for 1,000 small companies and 13,000 employees at Ambrose Employer Group ("Ambrose") in New York. Before Mr. Zodikoff joined Ambrose, he was a Global IT Director for Whole Foods Market in Austin, Texas. In his 11 years there, he led several IT areas including Private Label, Global Purchasing, Business Intelligence and Retail Systems. In prior positions with Dell, Pepsi, and Citicorp, Mr. Zodikoff led IT architecture, enterprise application architecture, database management, and marketing systems teams. Mr. Zodikoff earned his Bachelor's degree in Computer Science from Cornell University.
Item 1A.
Item 1A. Risk Factors.
You should carefully consider the known material risks described below and under "Part II.-Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" before making a decision to invest in our securities. The risks and uncertainties described below and elsewhere in this report are not the only ones facing us. These risk factors may change from time to time and may be amended, supplemented or superseded by updates to the risk factors contained in our future periodic reports on Form 10-K, Form 10-Q and reports on other forms we file with the SEC. If any such risks actually occur, our business, financial condition or results of operations could be materially affected. In that case, the trading price of our securities could decline, and you may lose all or part of your investment.
Risks Related to Our Industry
The convenience store and retail fuel industries are highly competitive and impacted by new entrants. Increased competition could result in lower margins.
The convenience store and retail fuel industries in the geographic areas in which we operate are highly competitive and marked by ease of entry and constant change in the number and type of retailers offering the products and services found in our stores. We compete with numerous other convenience store chains, independent convenience stores, supermarkets, drugstores, discount clubs, fuel service stations, mass merchants, dollar stores, fast food operations and other similar retail outlets. In recent years, several non-traditional retailers, including supermarkets, club stores and mass merchants, have begun to compete directly with convenience stores. These non-traditional fuel retailers have obtained a significant share of the fuel market and their market share is expected to grow, and these retailers may use promotional pricing or discounts, both at the fuel pump and in the store, to encourage in-store merchandise sales and fuel sales. Additionally, major convenience store operators have announced intentions to enter or expand in markets we currently serve. In some of our markets, our competitors have been in existence longer and have greater financial, marketing and other resources than we do. As a result, our competitors may be able to respond better to changes in the economy and new opportunities within the industry.
To remain competitive, we must constantly analyze consumer preferences and competitors’ offerings and prices to ensure we offer a selection of convenience products and services at competitive prices to meet consumer demand. We must also maintain and upgrade our customer service levels, facilities and locations to remain competitive and drive customer traffic to our stores. Principal competitive factors include, among others, location, ease of access, fuel brands, pricing, product and service selections, customer service, store appearance, cleanliness and safety. From time to time, our competitors may sell fuel or alternative energy products which are not available to us due to our fuel contracts. Competitive pressures could materially impact our fuel and merchandise volume, sales and gross profit and overall customer traffic, which could in turn have a material effect on our business, financial condition and results of operations.
Volatility in oil and wholesale fuel costs could impact our operating results.
Oil and domestic wholesale fuel markets are volatile. General political conditions, acts of war or terrorism, instability in oil producing regions, particularly in the Middle East and South America, and the value of the U.S. dollar could significantly impact oil supplies and wholesale fuel costs. In addition, the supply of fuel and our wholesale purchase costs could be materially impacted in the event of a shortage, which could result from, among other things, lack of capacity at United States oil refineries, sustained increase in global demand, or the fact that our fuel contracts do not guarantee an uninterrupted, unlimited supply of fuel. Significant increases and volatility in wholesale fuel costs have resulted, and could in the future result, in significant increases in the retail price of fuel products and in lower fuel gross margin per gallon. This volatility makes it extremely difficult to predict the impact future wholesale cost fluctuations will have on our operating results and financial condition. Dramatic increases in oil prices squeeze retail fuel margin because fuel costs typically increase faster than retailers are able to pass them along to customers. A significant change in any of these factors could materially impact our fuel and merchandise volume, fuel gross profit and overall customer traffic, which in turn could have a material effect on our business, financial condition and results of operations.
In addition, rising fuel costs have other adverse impacts which include (i) liquidity as it increases the cost of our fuel inventory as well as the size of related letters of credit we must obtain and (ii) fuel costs are a focus of national attention and rising fuel costs in the past have led to political criticism of fuel sellers as well as investigations into alleged fuel "price gouging".
Changes in credit card expenses could tighten profit margins, especially on fuel.
A significant portion of our fuel sales involve payment using credit cards. We are assessed credit card fees as a percentage of transaction amounts and not as a fixed dollar amount or percentage of our margins. Higher fuel prices trigger higher credit card expenses, and an increase in credit card use or an increase in credit card fees would have a similar effect. Therefore, credit card fees charged on fuel purchases that are more expensive as a result of higher fuel prices are not necessarily accompanied by higher profit margins. In fact, such fees may cause lower profit margins. Lower profit margins on fuel sales caused by higher credit card fees may decrease our overall profit margin and could have a material effect on our business, financial condition and results of operations.
Changes in economic conditions, consumer behavior, travel and tourism could impact our business.
In the convenience store industry, customer traffic is generally driven by consumer preferences and spending trends, growth rates for automobile and commercial truck traffic and trends in travel, tourism and weather. Changes in economic conditions generally, or in the southeastern United States specifically, could adversely impact consumer spending patterns and travel and tourism in our markets. In particular, weakening economic conditions may result in decreases in miles driven and discretionary consumer spending and travel, which impact spending on fuel and convenience items. In addition, changes in the types of products and services demanded by consumers may adversely affect our merchandise sales and gross profit. Additionally, negative publicity or perception surrounding fuel suppliers could adversely affect their reputation and brand image which may negatively affect our fuel sales and gross profit. Similarly, advanced technology and increased use of "green" automobiles (i.e., those automobiles that do not use petroleum-based fuel or that run on hybrid fuel sources) could drive down demand for fuel. Our success depends on our ability to anticipate and respond in a timely manner to changing consumer demands and preferences while continuing to sell products and services that will positively impact overall merchandise gross profit.
Many of our stores are located in coastal/resort or tourist destinations. Historically, travel and consumer behavior in such markets is more severely impacted by weak economic conditions. If the number of visitors to coastal/resort or tourist locations decreases due to economic conditions, changes in consumer preferences, changes in discretionary consumer spending or otherwise, our sales could decline, which in turn could have a material effect on our business, financial condition and results of operations.
Market turmoil and uncertain economic conditions, including increases in food and fuel prices, changes in the credit and housing markets, actual and potential job losses among sectors of the economy, significant declines in the stock market resulting in large losses in consumer retirement and investment accounts, uncertainty regarding future federal tax and economic policies and similar circumstances affect consumer confidence and may curtail retail spending and result in decreases in miles driven. We have experienced periodic per store sales declines in both fuel and merchandise as a result of these economic conditions. If these economic conditions exist, we may experience sales declines in both fuel and merchandise, which could have a material effect on our business, financial condition and results of operations.
Legal, technological, political and scientific developments regarding climate change may decrease demand for fuel.
Developments regarding climate change and the effects of greenhouse gas emissions on climate change and the environment may decrease the demand for our major product, petroleum-based fuel. Attitudes toward our product and its relationship to the environment and the "green movement" may significantly affect our sales and ability to market our product. New technologies developed to steer the public toward non-fuel dependent means of transportation may create an environment with negative attitudes toward fuel, thus affecting the public's attitude toward our major product and potentially having a material effect on our business, financial condition and results of operations. Further, new technologies developed to improve fuel efficiency or governmental mandates to improve fuel efficiency may result in decreased demand for petroleum-based fuel, which could have a material effect on our business, financial condition and results of operations.
Wholesale cost increases of, tax increases on, and campaigns to discourage tobacco products could adversely impact our operating results.
Significant increases in wholesale cigarette costs and tax increases on tobacco products, as well as national and local campaigns to discourage the use of tobacco products, may have an adverse effect on demand for cigarettes and other tobacco products. Although the states in which we operate have historically imposed relatively low taxes on tobacco products, periodically one or more of these states consider increasing the tax rate for tobacco products, either to raise revenues or deter the use of tobacco. Any increase in federal or state taxes on our tobacco products could materially impact our retail price of cigarettes, cigarette unit volume and revenues, merchandise gross profit and overall customer traffic, which could in turn have a material effect on our business, financial condition and results of operations.
Currently, major cigarette manufacturers offer substantial rebates to retailers. We include these rebates as a component of our gross margin from sales of cigarettes. In the event these rebates are no longer offered, or decreased, our wholesale cigarette costs will increase accordingly. In general, we attempt to pass price increases on to our customers. However, due to competitive pressures in our markets, we may not be able to do so. In addition, reduced retail display allowances on cigarettes offered by cigarette manufacturers negatively impact gross margins. These factors could materially impact our retail price of cigarettes, cigarette unit volume and revenues, merchandise gross profit and overall customer traffic, which could in turn have a material effect on our business, financial condition and results of operations.
Federal regulation of tobacco products could adversely impact our operating results.
In June 2009, Congress gave the Food and Drug Administration ("FDA") broad authority to regulate tobacco products through passage of the Family Smoking Prevention and Tobacco Control Act ("FSPTCA"). The FSPTCA:
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Sets national performance standards for tobacco products;
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Requires manufacturers, with certain exceptions, to obtain FDA clearance or approval for cigarette and smokeless tobacco products commercially launched, or to be launched;
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Required new and larger warning labels on tobacco products; and
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Requires FDA approval for the use of terms such as "light" or "low tar".
Under the FSPTCA, the FDA has passed regulations that:
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Prohibit the sale of cigarettes or smokeless tobacco to anyone under the age of 18 years (state laws are permitted to set a higher minimum age);
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Prohibit the sale of single cigarettes or packs with less than 20 cigarettes;
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Prohibit the sale or distribution of non-tobacco items such as hats and t-shirts with tobacco brands, names or logos;
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Prohibits the sale of cigarettes and smokeless tobacco in vending machines, self-service displays or other impersonal modes of sales, except in very limited situations;
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Prohibits free samples of cigarettes and limits distribution of smokeless tobacco products;
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Prohibits tobacco brand name sponsorship of any athletic, musical or other social or cultural event, or any team or entry in those events;
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Prohibits gifts or other items in exchange for buying cigarettes or smokeless tobacco products; and
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Requires that audio ads use only words with no music or sound effects.
Governmental actions and regulations, such as those noted above, as well as state laws and regulations banning smoking in restaurants and other public places, and limiting the number of cartons that may be purchased, combined with the diminishing social acceptance of smoking, declines in the number of smokers in the general population and private actions to restrict smoking, have resulted in reduced industry volume, and we expect that such actions will continue to reduce consumption levels. These governmental actions could materially impact our retail price of cigarettes, cigarette unit volume and revenues, merchandise gross profit and overall customer traffic, which could in turn have a material effect on our business, financial condition and results of operations.
Risks Related to Our Business
Unfavorable weather conditions, the impact of climate change or other trends or developments in the southeastern United States could adversely affect our business.
Substantially all of our stores are located in the southeastern United States. Although the southeast region is generally known for its mild weather, the region is susceptible to severe storms, including hurricanes, thunderstorms, tornadoes, extended periods of rain, ice storms and heavy snow, all of which we have historically experienced.
Inclement weather conditions as well as severe storms in the southeast region could damage our facilities, our suppliers or could have a significant impact on consumer behavior, travel and convenience store traffic patterns, as well as our ability to operate our stores. In addition, we typically generate higher revenues and gross margins during warmer weather months in the Southeast, which fall within our third and fourth fiscal quarters. If weather conditions are not favorable during these periods, our operating results and cash flow from operations could be adversely affected. We could also be impacted by regional occurrences in the southeastern United States such as energy shortages or increases in energy prices, fires or other natural disasters.
Many of our stores are located in coastal/resort or tourist destinations. Our coastal locations may be particularly susceptible to natural disasters or adverse localized effects of climate change, such as sea-level rise and increased storm frequency or intensity. To the extent broad environmental factors, triggered by climate change or otherwise, lead to localized physical effects, disruption in our business or unexpected relocation costs, the performance of stores in these locations could be adversely impacted.
Besides these more obvious consequences of severe weather to our coastal/resort stores, our ability to insure these locations, and the related cost of such insurance, may also impact our business, financial condition and results of operations. Many insurers already have plans in place to address the increased risks that may arise as a result of climate change, with many reducing their near-term catastrophic exposure in both reinsurance and primary insurance coverage along the gulf coast and the eastern seaboard.
Our indebtedness could negatively impact our financial health.
We are highly leveraged. Our substantial indebtedness could have important consequences such as:
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Make it more difficult for us to satisfy our obligations with respect to our debt and our leases;
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Increase our vulnerability to general adverse economic and industry conditions;
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Require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, including lease finance obligations, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
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Limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
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Place us at a competitive disadvantage compared to our competitors that have less indebtedness or better access to capital by, for example, limiting our ability to enter into new markets or renovate our stores; and
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Limit our ability to borrow additional funds in the future.
We are vulnerable to increases in interest rates because the debt under our senior credit facility is subject to a variable interest rate.
If we are unable to meet our debt obligations, we could be forced to restructure or refinance our obligations, seek additional equity financing or sell assets, which we may not be able to do on satisfactory terms or at all. As a result, we could default on those obligations.
In addition, the credit agreement governing our senior credit facility and the indenture governing our senior unsecured notes ("senior notes") contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness, which would adversely affect our financial health and could prevent us from fulfilling our obligations.
Despite current indebtedness levels, we and our subsidiaries may still be able to incur additional debt. This could further increase the risks associated with our substantial leverage.
We are able to incur additional indebtedness. The terms of the indenture that governs our senior notes permit us to incur additional indebtedness under certain circumstances. In addition, the credit agreement governing our senior credit facility permits us to incur additional indebtedness (assuming certain financial conditions are met at the time) beyond the amounts available under our revolving credit facility. If we incur additional indebtedness, the related risks that we now face could increase.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.
Our ability to make payments on our indebtedness, including without limitation any payments required to be made to holders of our senior notes and to refinance our indebtedness and fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
Based on our current level of operations, we believe our cash flow from operations, available cash and available borrowings under our revolving credit facility will be adequate to meet our future liquidity needs for at least the next 12 months.
We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our revolving credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, reduce or delay capital expenditures, seek additional equity financing or seek third-party financing to satisfy such obligations. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. Our failure to fund indebtedness obligations at any time could constitute an event of default under the instruments governing such indebtedness, which would likely trigger a cross-default under our other outstanding debt.
If we do not comply with the covenants and other terms in the credit agreement governing our senior credit facility and the indenture governing our senior notes or otherwise default under them, we may not have the funds necessary to pay all of our indebtedness that could become due.
The credit agreement governing our senior credit facility and the indenture governing our senior notes require us to comply with certain covenants. In particular, the credit agreement requires us to comply with certain financial covenants. As discussed under "Capital Resources", "Debt" included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K, the financial covenants under our credit agreement changed as of the end of the first quarter of fiscal 2014. We believe that we will be able to continue to satisfy these covenants; however, certain factors could result in our inability to comply with our covenants. In the event we are unable to comply with our financial covenants, or our performance suggests an impending inability to comply, we would attempt to negotiate with our lenders to obtain loan modifications or, if necessary, waivers of compliance with required ratios under our senior credit facility. We cannot predict whether our lenders will provide loan modifications or waivers, what the terms of such modifications or waivers would be or what impact any such modifications or waivers might have, but depending on the results of such negotiation, the impact could be material to our liquidity, financial condition or results of operations.
In addition to the financial covenants under our credit agreement, our credit agreement and the indenture governing our senior notes contain additional affirmative and negative covenants, including restrictions on our ability to acquire and dispose of assets, engage in mergers or reorganizations, incur indebtedness, pay dividends or make investments or capital expenditures. A violation of any of our covenants could cause an event of default under our credit agreement and the indenture.
Finally, a change of control of our company, which for purposes of our credit agreement and the indenture includes, among other things, certain changes in the majority of the directors on our Board, would trigger certain provisions of those documents that could have a material effect on our business. Under our credit agreement, a change of control constitutes an event of default, upon which the lenders holding a majority of the outstanding term loans and revolving credit commitments under the credit facility would be able to accelerate any unpaid loan amounts requiring us to immediately repay all such amounts (plus accrued interest to the date of repayment). Under the indenture, a change of control would require us to offer to purchase all outstanding senior notes at a purchase price equal to 101% of the principal amount of the senior notes, plus accrued and unpaid interest, if any, to the purchase date, subject to certain conditions. Failure to make or comply with the purchase offer would be an event of default under the indenture, which would trigger a cross-default under our credit agreement. Additionally, an event of default under our credit agreement that results in the acceleration of indebtedness thereunder would result in an event of default under the indenture. Upon an event of default under the indenture, the requisite noteholders would be able to accelerate and require us to immediately repay all unpaid senior note amounts (plus accrued interest to the date of repayment).
If we default on the credit agreement or the indenture because of a covenant breach or otherwise, all outstanding amounts thereunder could become immediately due and payable. Any acceleration of amounts due would have a material effect on our liquidity and financial condition, and we cannot assure you that we would be able to obtain a waiver of any such default, that we would have sufficient funds to repay all of the outstanding amounts, or that we would be able to obtain alternative financing to satisfy such obligations on commercially reasonable terms or at all.
If future circumstances indicate that goodwill is impaired, there could be a requirement to write down amounts of goodwill and record impairment charges.
Goodwill is initially recorded at fair value and is not amortized, but is reviewed for impairment at least annually or more frequently if impairment indicators are present. In assessing the recoverability of goodwill, we make estimates and assumptions about sales, operating margin, growth rates, consumer spending levels, general economic conditions and the market prices for our common stock. There are inherent uncertainties related to these factors and management’s judgment in applying these factors. We could be required to evaluate the recoverability of goodwill prior to the annual assessment if we experience, among others, disruptions to the business, unexpected significant declines in our operating results, divestiture of a significant component of our business, changes in operating strategy or sustained market capitalization declines. These types of events and the resulting analyses could result in goodwill impairment charges in the future. Impairment charges could substantially affect
our financial results in the periods of such charges. In addition, impairment charges could negatively impact our financial ratios and could limit our ability to obtain financing on favorable terms, or at all, in the future.
We are subject to state and federal environmental laws and other regulations. Failure to comply with, or liabilities pursuant to, these laws and regulations may result in penalties or costs that could have a material effect on our business.
We are subject to extensive governmental laws and regulations including, but not limited to, environmental regulations, employment laws and regulations, regulations governing the sale of alcohol and tobacco, minimum wage requirements, working condition requirements, public accessibility requirements, citizenship requirements and other laws and regulations. A violation or change of these laws or regulations could have a material effect on our business, financial condition and results of operations.
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.
Compliance with existing and future environmental laws and regulations regulating underground storage tanks may require significant capital expenditures and increased operating and maintenance costs. The remediation costs and other costs required to clean up or treat contaminated sites could be substantial. We pay tank registration fees and other taxes to state trust funds established in our operating areas and maintain private insurance coverage in Florida and Georgia in support of future remediation obligations.
These state trust funds or other responsible third parties (including insurers) are expected to pay or reimburse us for remediation expenses less a deductible. To the extent third parties do not pay for remediation as we anticipate, we will be obligated to make these payments. These payments could materially affect our business, financial condition and results of operations. Reimbursements from state trust funds will be dependent on the maintenance and continued solvency of the various funds.
In the future, we may incur substantial expenditures for remediation of contamination that has not been discovered at existing or acquired locations. 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. In addition, failure to comply with any environmental laws, ordinances or regulations or an increase in regulations could adversely affect our business, financial condition and results of operations.
Failure to comply with state laws regulating the sale of alcohol and tobacco products may result in the loss of necessary licenses and the imposition of fines and penalties on us, which could have a material effect on our business.
State laws regulate the sale of alcohol and tobacco products. A violation or change of these laws could adversely affect our business, financial condition and results of operations because state and local regulatory agencies have the power to approve, revoke, suspend or deny applications for, and renewals of, permits and licenses relating to the sale of these products or to seek other remedies. Such a loss or imposition could have a material effect on our business. In addition, certain states regulate relationships, including overlapping ownership, among alcohol manufacturers, wholesalers and retailers, and may deny or revoke licensure if relationships in violation of the state laws exist. We are not aware of any alcoholic beverage manufacturers or wholesalers having a prohibited relationship with our company.
Failure to comply with the other state and federal regulations we are subject to may result in penalties or costs that could have a material effect on our business.
Our business is subject to various other state and federal regulations, including, without limitation, employment laws and regulations, minimum wage requirements, overtime requirements, working condition requirements and other laws and regulations. Any appreciable increase in the statutory minimum wage rate, income or overtime pay, or impact of mandated
health care benefits would likely result in an increase in our labor costs and such cost increase, or the penalties for failing to comply with such statutory minimums or regulations, could have a material effect on our business, financial condition and results of operations. In addition, legislative and regulatory initiatives regarding climate change and greenhouse gas emissions could have a material impact on our business, financial condition and results of operations by increasing our regulatory compliance expenses, increasing our fuel costs and/or decreasing customer demand for fuel sold at our locations.
We depend on one principal supplier for the majority of our merchandise. A disruption in supply or a change in our relationship could have a material effect on our business.
The majority of our general merchandise, including most tobacco products and grocery items, is purchased from a single wholesale grocer, McLane. We have a contract with McLane through December 31, 2019, but we may not be able to renew the contract when it expires, or on similar terms. A change of merchandise suppliers, a disruption in supply or a significant change in our relationship with our principal merchandise suppliers could have a material effect on our business, cost of goods sold, financial condition and results of operations.
We depend on suppliers for all of our fuel. A disruption in fuel supply, a change in our relationship with our suppliers or a failure to comply with our fuel supply contracts could have a material effect on our business.
We purchase primarily all of our fuel from oil companies with which we have fuel supply agreements of varying durations. During fiscal 2014, Marathon and BP supplied approximately 72% of our fuel purchases. Refer to Part I, Fuel Operations, of this Annual Report on Form 10-K for further information regarding expiration dates of our fuel contracts.
Many of our fuel supply agreements contain minimum volume provisions. A failure to purchase the minimum volumes could result in an increase in our fuel costs and/or other remedies available to the supplier, including termination of some agreements.
We cannot provide assurance that we will be able to continue to obtain fuel on acceptable terms. A change of suppliers, a disruption in supply or a significant change in our relationship with our principal suppliers, or a failure to purchase required minimum volumes under our fuel agreements could have a material impact on our business, financial condition and results of operations.
Because we depend on our senior management’s experience and knowledge of our industry, we would be adversely affected if we were to lose any members of our senior management team.
We are dependent on the continued efforts of our senior management team. If, for any reason, our senior executives do not continue to be active in management or management is unable to successfully locate a successor for them, our business, financial condition, results of operations and cash flows could be adversely affected. We may not be able to attract and retain additional qualified senior personnel as needed in the future. In addition, we do not maintain key personnel life insurance on our senior executives and other key employees. We also rely on our ability to recruit qualified store and field managers. If we fail to continue to attract these individuals at reasonable compensation levels, our operating results may be adversely affected.
Pending or future litigation could adversely affect our financial condition, results of operations and cash flows.
We are from time to time party to various legal actions in the course of our business and an adverse outcome in such litigation could adversely affect our business, financial condition and results of operations. Refer to Part I, Item 3, Legal Proceedings, of this Annual Report on Form 10-K for further information regarding our litigation.
Litigation and publicity concerning food quality, health and other related issues could result in significant liabilities or litigation costs and cause consumers to avoid our convenience stores.
Convenience store businesses and other foodservice operators can be adversely affected by litigation and complaints from customers or government agencies resulting from food quality, illness, or other health or environmental concerns or operating issues stemming from one or more locations. Lack of fresh food handling experience among our workforce increases the risk of food borne illness resulting in litigation and reputational damage. Adverse publicity about these allegations may negatively affect us, regardless of whether the allegations are true, by discouraging customers from purchasing fuel, merchandise or food at one or more of our convenience stores. We could also incur significant liabilities if a lawsuit or claim results in a decision against us. Even if we are successful in defending such litigation, our litigation costs could be significant, and the litigation may divert time and money away from our operations and adversely affect our performance or our ability to continue operating branded quick service restaurants under franchise agreements.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential investors could lose confidence in our financial reporting, which could harm our business and the trading price of our stock.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our business and operating results could be harmed. The Sarbanes-Oxley Act of 2002, as well as related rules and regulations implemented by the SEC, NASDAQ and the Public Company Accounting Oversight Board, have required changes in the corporate governance practices and financial reporting standards for public companies. These laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002, have increased our legal and financial compliance costs and made many activities more time-consuming and more burdensome. These laws, rules and regulations are subject to varying interpretations in many cases. As a result, their application in practice may evolve over time as regulatory and governing bodies provide new guidance, which could result in continuing uncertainty regarding compliance matters. The costs of compliance with these laws, rules and regulations have adversely affected our financial results. Moreover, we run the risk of non-compliance, which could adversely affect our financial condition or results of operations or the trading price of our stock.
We have in the past discovered, and may in the future discover, areas of our internal control over financial reporting that need improvement. We have devoted significant resources to remediate our deficiencies and improve our internal control over financial reporting. Although we believe that these efforts have strengthened our internal control over financial reporting, we are continuing to work to improve our internal control over financial reporting. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal control over financial reporting could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.
The dangers inherent in the storage of fuel could cause disruptions and could expose us to potentially significant losses, costs or liabilities.
We store fuel in storage tanks at our retail locations. Our operations are subject to significant hazards and risks inherent in storing fuel. These hazards and risks include, but are not limited to, fires, explosions, spills, discharges and other releases, any of which could result in distribution difficulties and disruptions, environmental pollution, governmentally-imposed fines or clean-up obligations, personal injury or wrongful death claims and other damage to our properties and the properties of others. Any such event could have a material effect on our business, financial condition and results of operations.
We rely on information technology systems to manage numerous aspects of our business, and a disruption of these systems could adversely affect our business.
We depend on information technology systems ("IT systems") to manage numerous aspects of our business transactions and provide information to management. Our IT systems are an essential component of our business and growth strategies, and a serious disruption to our IT systems could significantly limit our ability to manage and operate our business efficiently. These systems are vulnerable to, among other things, damage and interruption from power loss or natural disasters, computer system and network failures, loss of telecommunications services, physical and electronic loss of data, security breaches, computer viruses and laws and regulations necessitating mandatory upgrades and timelines with which we may not be able to comply. Any serious disruption could cause our business and competitive position to suffer and adversely affect our operating results.
Our business, financial position and our reputation could be adversely affected by the failure to protect sensitive customer, employee or vendor data or to comply with applicable regulations relating to data security and privacy.
In the normal course of our business as a fuel and merchandise retailer, we obtain large amounts of personal data, including credit and debit card information from our customers. While we have invested significant amounts in the protection of our information technology and maintain what we believe are adequate security controls over individually identifiable customer, employee and vendor data provided to us, a breakdown or a breach in our systems that results in the unauthorized release of individually identifiable customer or other sensitive data could nonetheless occur and have a material effect on our reputation, operating results and financial condition. Such a breakdown or breach could also materially increase the costs we incur to protect against such risks. Also, a material failure on our part to comply with regulations relating to our obligation to protect such sensitive data or to the privacy rights of our customers, employees and others could subject us to fines or other regulatory sanctions and potentially to lawsuits.
Our store improvement strategies require significant resources, which, if they are not completed successfully, may divert our resources from more productive uses and harm our financial results.
We expect to devote significant resources to our store improvement strategies, which include remodeling and/or re-branding certain stores. There can be no assurance that these initiatives will be successful or that they will represent the most productive use of our resources. If we are unable to successfully implement our store improvement strategies, or if these strategies do not yield the expected benefits, our financial results may be harmed. In addition, our experience is that re-branding our stores often results in a temporary loss of sales at the applicable stores. If such reductions in sales are larger or longer in duration than we expect, we may not realize the anticipated benefits from our initiatives, which could adversely affect our operating results.
We may not be successful in our efforts to divest non-core stores and may have on-going liabilities with respect to divested or dealer operated properties.
We periodically review our store portfolio to identify those stores that, due to their performance, location or other characteristics, merit investment on an on-going basis. We attempt to divest the remaining stores and other non-strategic assets through a variety of means, including asset sales, leases and subleases of property and dealer arrangements. There can be no assurance that we will be able to identify acceptable parties to purchase or lease the assets or operate the stores that we desire to divest. In addition, we may remain liable or contingently liable for obligations relating to the divested or dealer-operated properties, and there can be no assurance that the other party to a transaction will be able to satisfy its indemnification or other obligations to us.
Other Risks
Future sales of additional shares into the market may depress the market price of our common stock.
If we or our existing stockholders sell shares of our common stock in the public market, including shares issued upon the exercise of outstanding options, or if the market perceives such sales or issuances could occur, the market price of our common stock could decline. As of December 4, 2014, there were 23,441,536 shares of our common stock outstanding, most of which are freely tradable. Sales by our existing stockholders 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.
In addition, we have filed with the SEC a registration statement that covers up to 839,385 shares of common stock issuable upon the exercise of stock options currently outstanding under our 1999 Stock Option Plan, as well as a registration statement that covers up to 2.4 million shares issuable pursuant to share-based awards under our Omnibus Plan, plus any options issued under our 1999 Stock Option Plan that are forfeited or cancelled after March 29, 2007. Generally, shares registered on a registration statement may be sold freely at any time after issuance.
Any issuance of shares of our common stock in the future could have a dilutive effect on your investment.
We may sell securities in the public or private equity markets if and when conditions are favorable, even if we do not have an immediate need for capital at that time. In other circumstances, we may issue shares of our common stock pursuant to existing agreements or arrangements.
The market price for our common stock has been and may in the future be volatile, which could cause the value of your investment to decline.
There currently is a public market for our common stock, but there is no assurance that there will always be such a market. Securities markets worldwide experience significant price and volume fluctuations. This market volatility could significantly affect the market price of our common stock without regard to our operating performance. In addition, the price of our common stock could be subject to wide fluctuations in response to the following factors among others:
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A deviation in our results from the expectation of public market analysts and investors;
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Statements by research analysts about our common stock, our Company or our industry;
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Changes in market valuations of companies in our industry and market evaluations of our industry generally;
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Additions or departures of key personnel;
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Actions taken by our competitors;
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Sales or other issuances of common stock by us or our senior officers; or
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Other general economic, political or market conditions, many of which are beyond our control.
The market price of our common stock will also be impacted by our quarterly operating results and quarterly comparable store sales growth, which may fluctuate from quarter to quarter. Factors that may impact our quarterly results and comparable store sales include, among others, general regional and national economic conditions, competition, unexpected costs and changes in pricing, consumer trends, the number of stores we open and/or close during any given period, costs of compliance with corporate governance and Sarbanes-Oxley requirements and other factors discussed in this Item 1A and throughout “Part II.-Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You may not be able to resell your shares of our common stock at or above the price you pay.
Provisions in our certificate of incorporation, our bylaws and Delaware law may have the effect of preventing or hindering a change in control and adversely affecting the market price of our common stock.
Provisions in our certificate of incorporation and our bylaws and applicable provisions of the Delaware General Corporation Law may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. Our certificate of incorporation and bylaws:
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Authorize the issuance of up to five million shares of "blank check" preferred stock that could be issued by our Board of Directors to thwart a takeover attempt without further stockholder approval;
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Prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors;
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Limit who may call special meetings;
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Limit stockholder action by written consent, generally requiring all actions to be taken at a meeting of the stockholders; and
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Establish advance notice requirements for any stockholder that wants to propose a matter to be acted upon by stockholders at a stockholders’ meeting, including the nomination of candidates for election to our Board of Directors.
We are also subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our outstanding voting stock that our Board of Directors has not approved.
These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation and may apply even if some of our stockholders consider the proposed transaction beneficial to them. For example, these provisions might discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock. These provisions could also limit the price that investors are willing to pay in the future for shares of our common stock.
We may, in the future, adopt other measures that may have the effect of delaying, deferring or preventing an unsolicited takeover, even if such a change in control were at a premium price or favored by a majority of unaffiliated stockholders. Such measures may be adopted without vote or action by our stockholders.
Item 1B.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2.
Item 2. Properties.
As of September 25, 2014, we own the real property at 472 of our stores and lease the real property at 1,046 stores. Management believes that none of these leases are individually material. Most of these leases are net leases requiring us to pay all costs related to the property, including taxes, insurance and maintenance costs. Certain of these leases are accounted for as lease finance obligations whereby the leased assets and related lease liabilities are included in our Consolidated Balance Sheets.
The aggregate rent paid in fiscal 2014 for operating leases and leases accounted for as lease finance obligations was $66.6 million and $46.2 million, respectively. The following table lists our leases by calendar year of expiration:
Management anticipates that it will be able to negotiate acceptable extensions of the leases that expire for those locations that we intend to continue operating.
When appropriate, we have chosen to sell and then lease back properties. Factors leading to this decision include alternative desires for use of cash, beneficial taxation, 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 lease finance transactions.
We own a two-story, 62,000 square foot office building in Cary, North Carolina that functions as our corporate headquarters. We also own a three story, 51,000 square foot corporate support building in Sanford, North Carolina. We believe that we will continue to have adequate office space for the foreseeable future.
Item 3.
Item 3. Legal Proceedings.
We are party to various legal actions in the ordinary course of our business. We believe these actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, management’s present judgment is that the resolution of these matters will not have a material impact on our business, financial condition, results of operations and cash flows. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our business, financial condition, results of operations and cash flows could be materially affected.
Item 4.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock, $.01 par value, represents our only voting securities. There were 23,445,826 shares of common stock issued and outstanding as of September 25, 2014. Our common stock is traded on The NASDAQ Global Select Market under the symbol "PTRY". The following table sets forth for each fiscal quarter the high and low sale prices per share of our common stock over the last two fiscal years as reported by NASDAQ, based on published financial sources.
As of December 4, 2014, there were 145 holders of record of our common stock. This number does not include beneficial owners of our common stock whose stock is held in nominee or "street" name accounts through brokers.
During the last three fiscal years, we have not paid any cash dividends on our common stock, and we do not expect to pay cash dividends on our common stock for the foreseeable future. We intend to retain earnings to support operations, reduce debt, finance expansion and repurchase our common stock. The payment of cash dividends in the future may depend upon our ability to satisfy certain loan restrictions and other factors such as our earnings, operations, capital requirements, financial condition and will depend on other factors deemed relevant by our Board of Directors. Currently, the payment of cash dividends is restricted by covenants contained in our senior credit facility and our senior unsecured notes. Refer to Note 6, Debt, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our debt obligations.
There were no sales of unregistered equity securities during the fourth quarter of fiscal 2014.
The following table lists all repurchases during the fourth quarter of fiscal 2014 of any of our securities registered under Section 12 of the Exchange Act by or on behalf of us or any affiliated purchaser.
Issuer Purchases of Equity Securities
(1) Represents shares repurchased in connection with tax withholding obligations under The Pantry, Inc. 2007 Omnibus Plan ("Omnibus Plan").
(2) Represents the average price paid per share for the shares repurchased in connection with tax withholding obligations under the Omnibus Plan.
Total Return to Shareholders
The following table and graph compare the total returns (assuming reinvestment of dividends) of the Company's common stock, the Russell 2000 Index and the NASDAQ Retail Trade Index. The graph assumes $100 invested on September 24, 2009 in stock (calculated on a month-end basis), including reinvestment of dividends.
The above graph compares the cumulative total stockholder return on our common stock from September 24, 2009 through September 25, 2014, with the cumulative total return for the same period on the Russell 2000 Index and the NASDAQ Retail Trade Index.
The graph assumes that, at the beginning of the period indicated, $100 was invested in our common stock, the stock of the companies comprising the Russell 2000 Index and the NASDAQ Retail trade Index and that all dividends were reinvested.
The stockholder return shown on the graph above is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.
Item 6.
Item 6. Selected Financial Data.
The following table sets forth our historical consolidated financial data and store operating information for the periods indicated. The selected historical annual consolidated statement of operations and balance sheet data as of and for each of the five fiscal years presented are derived from, and are qualified in their entirety by, our consolidated financial statements. Historical results are not necessarily indicative of the results to be expected in the future. You should read the following data together with "Part I - Item 1. Business, Part II. - Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes in Part II. - Item 8. Consolidated Financial Statements and Supplementary Data.
(1) Fiscal 2010 included 53 weeks.
(2) Fuel gross profit per gallon represents fuel revenue less cost of product and expenses associated with credit card processing fees, environmental remediation expenses and repairs and maintenance on fuel equipment. Fuel gross profit per gallon as presented may not be comparable to similarly titled measures reported by other companies.
(3) During fiscal 2010, we determined that the carrying value of our goodwill exceeded its implied fair value and we recorded a non-cash pre-tax impairment charge of $230.8 million.
(4) Working Capital and Total Assets were adjusted in prior years as a result of our immaterial restatement. Refer to Note 1, Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis ("MD&A") is intended to help the reader understand the results of operations and financial condition of The Pantry, Inc. MD&A is provided as a supplement to, and should be read in conjunction with "Part II. - Item 6. Selected Financial Data" and our consolidated financial statements and the related notes appearing in "Part II. - Item 8. Consolidated Financial Statements and Supplementary Data".
References to "fiscal 2014" refer to our fiscal year which ended on September 25, 2014, references to "fiscal 2013" refer to our fiscal year which ended on September 26, 2013 and references to "fiscal 2012" refer to our fiscal year which ended on September 27, 2012. All fiscal years presented included 52 weeks.
Safe Harbor Discussion
This report, including, without limitation, our MD&A, contains statements that are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and that are intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally can be identified by the use of phrases such as "believe," "plan," "expect," "anticipate," "will," "may," "intend," "outlook," "target", "forecast," "goal," "guidance" or other similar words or phrases. Descriptions of our objectives, goals, targets, plans, strategies, anticipated financial performance, projected costs and burdens of environmental remediation, anticipated capital expenditures, expected cost savings and benefits and anticipated synergies, plans to divest non-core assets, and expectations regarding remodeling, re-branding, re-imaging, adding new equipment or products or otherwise converting our stores or opening new stores are forward-looking statements, as are our statements relating to our anticipated liquidity, financial position and compliance with our covenants under our credit and other agreements, our pricing and merchandising strategies and their anticipated impact and our intentions with respect to acquisitions, the constructions of new stores, including additional quick service restaurants, and the remodeling of our existing stores. These forward-looking statements are based on our current plans and expectations and involve a number of risks and uncertainties that could cause actual results and events to vary materially from the results and events anticipated or implied by such forward-looking statements, including:
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Competitive pressures from convenience stores, fuel stations and other non-traditional retailers located in our markets;
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Inability to enhance our operating performance through in-store initiatives, including adding new equipment or products and our store remodel program;
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Failure to realize the expected benefits from our fuel supply agreements, including our ability to satisfy minimum fuel provisions;
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Financial difficulties of suppliers, including our principal suppliers of fuel and merchandise, and their ability to continue to supply our stores;
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Volatility in domestic and global petroleum and fuel markets;
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Political conditions in oil producing regions and global demand;
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Changes in credit card expenses;
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Changes in economic conditions generally and in the markets we serve;
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Consumer behavior, travel and tourism trends;
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Legal, technological, political and scientific developments regarding climate change;
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Wholesale cost increases of, tax increases on and campaigns to discourage the use of tobacco products;
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Federal and state regulation of tobacco products;
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Unfavorable weather conditions, the impact of climate change or other trends or developments in the southeastern United States;
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Inability to identify, acquire and integrate new stores or to divest our non-core stores to qualified buyers or operators on acceptable terms;
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Financial leverage and debt covenants, including increases in interest rates;
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Inability to identify suitable acquisition targets and to take advantage of expected synergies in connection with acquisitions;
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Federal and state environmental, tobacco and other laws and regulations;
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Dependence on one principal supplier for merchandise and three principal suppliers for fuel;
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Dependence on senior management;
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Litigation risks, including with respect to food quality, health and other related issues;
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Inability to maintain an effective system of internal control over financial reporting;
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Disruption of our information technology systems or a failure to protect sensitive customer, employee or vendor data;
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Inability to effectively implement our store improvement strategies;
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Unanticipated expenses including those related to mandated health care laws; and
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Other unforeseen factors.
For a discussion of these and other risks and uncertainties, please refer to "Part I. - Item 1A. Risk Factors". The list of factors that could affect future performance and the accuracy of forward-looking statements is illustrative but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The forward-looking statements included in this report are based on, and include, our estimates as of December 9, 2014. We anticipate that subsequent events and market developments will cause our estimates to change. However, while we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if new information becomes available.
Our Business
We are a leading independently operated convenience store chain in the southeastern United States. As of September 25, 2014, we operated 1,518 stores in 13 states primarily under the Kangaroo Express® operating banner. All but our smallest stores offer a wide selection of merchandise, fuel and ancillary products and services designed to appeal to the convenience needs of our customers. A limited number of stores do not offer fuel.
Business Strategy
Our strategy is to grow revenue and profitability by focusing on prioritizing our markets and improving the stores within those markets. We then remodel stores, selectively open new stores and restaurants and acquire stores. In addition we have seven initiatives designed to improve the performance of our company. This strategy is intended to allow us to reinvest in our business and maintain sufficient liquidity and financial flexibility. Our initiatives are as follows:
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Invest in the development of the best and most energized people;
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Increase merchandise sales and gross margin with targeted merchandising and foodservice initiatives;
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Optimize fuel gallons sold and fuel margin;
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Reduce our corporate general and administrative and store operating expenses as a percent of revenue;
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Generate strong operating cash flow to reinvest in our business and reduce our leverage;
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Divest underperforming store assets and non-productive surplus properties; and
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Utilize technology throughout the business to improve the customer experience, our performance and our people.
Executive Summary
Our net income for fiscal 2014 was $13.2 million, or $0.57 per share, compared to a net loss of $3.0 million or $0.13 per share in fiscal 2013. Adjusted EBITDA for fiscal 2014 was $220.9 million, an increase of $18.5 million, or 9.2%, from fiscal 2013. For the definition and reconciliation of Adjusted EBITDA please see our discussion of Fiscal 2014 compared to Fiscal 2013.
Our total revenue for the year decreased 3.5% to $7.5 billion primarily driven by a decrease in fuel revenue of 5.2%. Retail gallons sold declined 3.4% driven by a 2.9% decline in comparable store retail fuel gallons sold and retail fuel prices decreased 1.4% from an average of $3.46 a gallon in fiscal 2013 to an average of $3.41 a gallon in fiscal 2014. We were able to grow fuel margin by 6.1% during the same period to 12.2 cents per gallon. Merchandise revenue increased 1.9% in fiscal 2014 while merchandise margin increased 20 basis points to 34.2%. We were able to grow comparable store merchandise revenue 2.6% through a 4.0% increase in sales per customer. Comparable store merchandise revenue increased 4.3% excluding the impact of cigarettes.
During fiscal 2014, we remained focused on upgrading our store base as we completed 43 remodels, one scrape and rebuild with a new, large-format store and opened one new store. We expanded our foodservice offerings by achieving our target of adding 20 quick service restaurants in fiscal 2014, including 17 Little Caesars® locations. We also continued our initiative to divest under-performing store assets and non-productive surplus properties during fiscal 2014 by closing or selling 31 under-performing stores. Although our retail store count decreased by 30 stores during fiscal 2014, we believe this initiative is conducive to increasing our overall profitability.
We paused our remodel program during the third quarter of fiscal 2014 in order to avoid store disruptions during peak selling periods and to allow us to focus on optimizing returns on remodels recently completed. We anticipate resuming our remodel program in early 2015. In addition we continue to develop a pipeline of sites to support new store growth in high potential markets in the future. Over the next several quarters we plan to continue executing our merchandising programs as well as balancing our fuel profitability and volumes throughout our store portfolio. We may also continue evaluating opportunities to enhance density in key markets through disciplined acquisitions of individual stores or chains of stores.
Market and Industry Trends
In recent years, the convenience store industry has concentrated on increasing and improving in-store foodservice offerings, including fresh foods, quick service restaurants or proprietary food offerings. Should this trend continue, we believe consumers may become more likely to patronize convenience stores that include such offerings, which may also lead to increased inside merchandise sales or fuel sales for such stores. We are attempting to capitalize on this trend by improving our in-store food offerings. Other significant trends include a national decline in retail fuel gallons sold and the number of cigarettes sold.
We believe our focus on foodservice offerings will compensate for lower sales and gross profit resulting from cigarettes and retail fuel.
The markets in which we operate continued to show signs of economic improvement. Looking at relevant indices, new housing permits in our markets have continued to improve. From September 2013 to September 2014, the southern region of the U.S. experienced an 11.0% increase in new housing permits. Consumer confidence, as measured by The Conference Board Consumer Confidence Index®, increased 5.8 points from 80.2 in September 2013 to 86.0 in September 2014. However, consumer credit levels increased during fiscal 2014 and unemployment in the majority of our markets remains slightly above the national average. While national trends for retail fuel gallons sold continue on the decline, we believe our markets have experienced a slight improvement in recreational travel and spending on gasoline, resulting in a minor increase in demand for our fuel in fiscal 2014 as compared to fiscal 2013. Certain merchandise categories experienced growth in fiscal 2014, resulting from an increase in spending on essentials including grocery items, while spending on most discretionary items continued to remain stagnant. We continue to improve on our ability to anticipate and respond in a timely manner to changing consumer demands and preferences while selling products and services that will positively impact overall merchandise gross profit.
Wholesale fuel prices were volatile during the last three fiscal years and we expect that they will remain volatile into the foreseeable future. During fiscal 2014, the closing Gulf Spot unleaded regular fuel price began the year at $2.54 per gallon, reaching a low of $2.28 per gallon in the first quarter and a high of $2.93 in the third quarter, before returning to $2.68 per gallon to finish our fiscal year. We attempt to pass along wholesale fuel cost changes to our customers through retail price changes; however, we are not always able to do so. The timing of any related increase or decrease in retail prices is affected by competitive conditions. As a result, we tend to experience lower fuel margins when the cost of fuel is increasing gradually over a longer period and higher fuel margins when the cost of fuel is declining or more volatile over a shorter period of time.
The following table and graph details wholesale fuel prices, as measured by the Gulf Spot unleaded regular fuel price, during fiscal 2014:
Results of Operations
We believe the data presented in the table below is important in evaluating the performance of our business operations. We operate in one business segment and believe the information presented in MD&A provides an understanding of our business operations and our financial condition. This table should be read in conjunction with the following discussion and analysis and the consolidated financial statements, including the related notes to the consolidated financial statements.
(1) We compute gross profit exclusive of depreciation and allocation of store operating, general and administrative expenses.
(2) Fuel gross profit per gallon represents fuel revenue less cost of product and expenses associated with credit card processing fees, environmental remediation expenses and repairs and maintenance on fuel equipment. Fuel gross profit per gallon as presented may not be comparable to similarly titled measures reported by other companies.
(3) For the definition of Adjusted EBITDA, see our discussion of fiscal 2014 results compared to fiscal 2013 results.
(4) The stores included in calculating comparable store data are existing or replacement retail stores, which were in operation during the entire comparable period of all fiscal years. Remodeling, adding or removing restaurants, physical expansion or changes in store square footage are not considered when computing comparable store data as amounts have no meaningful impact on measures. Comparable store data as defined by us may not be comparable to similarly titled measures reported by other companies.
Fiscal 2014 Compared to Fiscal 2013
Merchandise Revenue and Gross Profit. Merchandise revenue for fiscal 2014 increased $34.9 million, or 1.9%, from fiscal 2013 primarily due to comparable store merchandise sales growth of 2.6%, or $46.6 million. We were able to drive growth in packaged beverage, proprietary foodservice and quick service restaurant revenue categories, while we continue to see declining comparable store sales in cigarettes. Our comparable store merchandise revenue increased 4.3%, excluding the impact of cigarettes. New or acquired stores since the beginning of fiscal 2013 also drove a $10.4 million increase in revenues in fiscal 2014 from fiscal 2013. These increases in revenue are partially offset by the impact of stores closed or converted to dealer operations since the beginning of fiscal 2013, resulting in lost revenue of $22.1 million in fiscal 2014.
Merchandise gross profit for fiscal 2014 increased $14.8 million, or 2.4%, from fiscal 2013 primarily due to the increases in merchandise revenue discussed above and a 20 basis point improvement in merchandise margin to 34.2% in fiscal 2014 from 34.0% in fiscal 2013. Excluding adjustments for our last-in, first-out ("LIFO") merchandise inventory method, merchandise gross margin declined to 33.9% from 34.0%. During the fourth quarter of fiscal 2014 our LIFO adjustment was $5.6 million compared to $2.5 million in fiscal 2013. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses.
Fuel Revenue, Gallons, and Gross Profit. Fuel revenue for fiscal 2014 decreased $311.2 million, or 5.2%, from fiscal 2013 due to a decrease in retail fuel gallons sold and a decline in our average retail fuel prices. Retail fuel gallons sold decreased 3.4% or 57.6 million gallons in fiscal 2014 compared to fiscal 2013. Average retail fuel price per gallon declined from $3.46 in fiscal 2013 to $3.41 in fiscal 2014. The gallon decline is primarily attributable to a 2.9%, or 48.9 million gallon, decline in comparable store retail fuel gallons sold along with 17.7 million gallons lost from stores closed or converted to dealer operations since the beginning of fiscal 2013. These declines were partially offset by the impact of new or acquired stores since the beginning of fiscal 2013, resulting in an increase of 9.6 million gallons.
Fuel gross profit for fiscal 2014 increased $4.6 million, or 2.3%, from fiscal 2013 despite the decline in gallon volume. This increase in fuel gross profit is primarily due to an increase in retail fuel margin of 0.7 cents per gallon as retail fuel margin improved to 12.2 cents per gallon in fiscal 2014 from 11.5 cents per gallon in fiscal 2013. This increase in fuel margin is a result of favorable market conditions as we experienced more periods of declining wholesale fuel costs in fiscal 2014 as compared to fiscal 2013. In fiscal 2013, wholesale fuel costs initially declined sharply, then we experienced a sharp upward trend for most of fiscal 2013. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses. We present fuel margin per gallon inclusive of credit card processing fees, environmental remediation expenses and repairs and maintenance on fuel equipment. These fees and costs totaled $0.070 per gallon for both fiscal 2014 and fiscal 2013.
Store Operating. Store operating expenses for fiscal 2014 increased $1.6 million, or 0.3%, from fiscal 2013 primarily due to higher medical insurance costs related to the Affordable Care Act, which resulted in an additional $4.5 million in expense. The increase was partially offset by lower store lease expenses related to store closing/lease expirations of $2.1 million compared to fiscal 2013.
General and Administrative. General and administrative expenses for fiscal 2014 decreased $0.8 million, or 0.8%, from fiscal 2013 primarily due to incurring a $3.1 million charge for a legal settlement and $1.5 million in strategy consulting expenses in fiscal 2013. These expenses were primarily offset by increased incentive compensation in connection with improved operating results in fiscal 2014.
Impairment Charges. We recorded impairment related to operating stores and surplus properties of $4.0 million and $4.7 million for fiscal 2014 and fiscal 2013, respectively. See Note 5, Impairment Charges and Note 15, Fair Value Measurements in Part II, Item 8, Consolidated Financial Statements and Supplementary Data.
Interest Expense. Interest expense is primarily comprised of interest on our long-term debt and lease finance obligations. Interest expense for fiscal 2014 was $85.2 million compared to $88.8 million for fiscal 2013. The decrease is primarily due to lower interest rates on our term loan in connection with an amendment in August 2013 and lower average outstanding borrowings.
Income Tax Expense. Our effective tax rate for fiscal 2014 was 32.0% compared to 65.8% for fiscal 2013. The decrease in our effective tax rate is primarily the result of increased pre-tax income and the impact of work opportunity credits for fiscal 2014 compared to fiscal 2013.
Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) before interest expense, gain(loss) on extinguishment of debt, income taxes, impairment charges and depreciation and amortization. Adjusted EBITDA for fiscal 2014 was $220.9 million, which was an increase of $18.5 million, or 9.2%, from fiscal 2013. This increase is primarily attributable to our ability to grow merchandise and fuel gross profit, while holding store operating and general administrative expenses relatively consistent year over year.
Adjusted EBITDA is not a measure of operating performance or liquidity under GAAP and should not be considered as a substitute for net income, cash flows from operating activities or other income or cash flow statement data. We have included information concerning Adjusted EBITDA because we believe investors find this information useful as a
reflection of the resources available for strategic opportunities including, among others, to invest in our business, make strategic acquisitions and to service debt. Management also uses Adjusted EBITDA to review the performance of our business directly resulting from our retail operations and for budgeting and compensation targets.
Any measure that excludes interest expense, loss on extinguishment of debt, depreciation and amortization, impairment charges or income taxes has material limitations because we use debt and lease financing in order to finance our operations and acquisitions, we use capital and intangible assets in our business and the payment of income taxes is a necessary element of our operations. Due to these limitations, we use Adjusted EBITDA only in addition to and in conjunction with results and cash flows presented in accordance with GAAP. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not to rely on any single financial measure. Adjusted EBITDA does not include impairment of long-lived assets and other charges. We excluded the effect of impairment losses because we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our remaining assets.
Because non-GAAP financial measures are not standardized, Adjusted EBITDA, as defined by us, may not be comparable to similarly titled measures reported by other companies. It therefore may not be possible to compare our use of Adjusted EBITDA with non-GAAP financial measures having the same or similar names used by other companies.
The following table contains a reconciliation of Adjusted EBITDA to net income (loss):
The following table contains a reconciliation of Adjusted EBITDA to net cash provided by operating activities:
There were no other significant transactions during the fourth quarter of fiscal 2014.
Fiscal 2013 Compared to Fiscal 2012
Merchandise Revenue and Gross Profit. Merchandise revenue for fiscal 2013 decreased $9.3 million, or 0.5%, from fiscal 2012 primarily due to lost revenue from closed or converted stores, which is partially offset by comparable store sales growth and the impact of new and acquired stores. Since the beginning of fiscal 2012, we closed or converted to dealer operations 38 underperforming stores resulting in lost revenue of $30.0 million in fiscal 2013. This decrease in revenue is partially offset by comparable store merchandise sales growth of 0.9% or $16.5 million in fiscal 2013 from fiscal 2012 primarily due to growth in proprietary foodservice and other services revenues. New and acquired stores also drove a $2.0 million increase in revenues in fiscal 2013 from fiscal 2012.
Merchandise gross profit for fiscal 2013 increased $2.3 million, or 0.4%, from fiscal 2012 primarily due to a 30 basis points improvement in merchandise margin to 34.0% in fiscal 2013 from 33.7% in fiscal 2012. The margin improvement was primarily in proprietary foodservice, dispensed beverage and other services categories. The increase in merchandise gross profit was largely offset by the decrease in merchandise revenue discussed above. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses.
Fuel Revenue, Gallons, and Gross Profit. Fuel revenue for fiscal 2013 decreased $422.0 million, or 6.5%, from fiscal 2012 due to a decrease in retail fuel gallons sold and a decline in our average retail fuel prices. Retail fuel gallons sold decreased 5.7% or 103.7 million gallons in fiscal 2013 compared to fiscal 2012. Average retail fuel price per gallon declined from $3.50 in fiscal 2012 to $3.46 in fiscal 2013. The gallon decline is primarily attributable to a 4.8%, or 86.1 million gallon, decline in comparable store retail fuel gallons sold along with 22.7 million gallons lost from stores closed or converted to dealer operations since the beginning of fiscal 2012. These declines were partially offset by the 4.4 million gallon impact of new or acquired stores since the beginning of fiscal 2012.
Fuel gross profit for fiscal 2013 decreased $11.1 million, or 5.3%, from fiscal 2012 primarily due to the decline in gallon volume discussed above for fiscal 2013. Retail fuel margin was consistent at $11.5 cents per gallon in fiscal 2013 and 2012. We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses. We present fuel margin per gallon inclusive of credit card processing fees, environmental remediation expenses and repairs and maintenance on fuel equipment. These fees and costs totaled $0.070 per gallon and $0.068 per gallon for fiscal 2013 and fiscal 2012, respectively.
Store Operating. Store operating expenses for fiscal 2013 decreased $8.5 million, or 1.7%, from fiscal 2012 primarily due to lower store personnel, facilities and insurance costs. The decline in store personnel costs resulted from the impact of closed or converted stores. Facilities costs declined due to our continued initiative to reduce controllable expenses and lower utility costs due to cooler temperatures earlier in the year. These decreases in facility costs were partially offset by the cost to remodel and maintain our existing stores. Our decline in insurance cost of $4.2 million resulted from improved loss experience and claims management processes related to our workers compensation and general liability self-insurance programs.
General and Administrative. General and administrative expenses for fiscal 2013 increased $7.5 million, or 7.7%, from fiscal 2012 primarily due to incurring $1.5 million in strategy consulting expenses and a $3.1 million charge for a legal settlement. In addition, fiscal 2012 included gains realized from store sales, store condemnations and insurance claims of $2.9 million compared to insignificant activity in fiscal 2013.
Impairment Charges. Impairment charges for fiscal 2013 decreased $1.6 million, or 25.2%, from fiscal 2012 primarily due to lower impairment charges on operating stores. In fiscal 2012, we recorded impairment charges of $1.3 million on underperforming operating stores that we reclassified from property held for sale to property held for use because we planned to close or convert them to dealer locations or commission marketers. There were no operating stores reclassified to held for sale in fiscal 2013. See Note 5, Impairment Charges and Note 15, Fair Value Measurements in Part II, Item 8, Consolidated Financial Statements and Supplementary Data.
Loss on Extinguishment of Debt. The loss on extinguishment of debt in fiscal 2012 resulted from purchasing convertible notes on the open market, repaying our subordinated notes and transactions related to our refinancing in fiscal 2012. We purchased $48.5 million in principal amount of our convertible notes on the open market resulting in a loss on extinguishment of debt of approximately $2.5 million. Additionally, we repaid $237 million of our subordinated notes which resulted in a loss on extinguishment of debt of approximately $2.0 million. As part of our refinancing in fiscal 2012, we also had a non-cash write-off of $1.1 million related to deferred financing costs.
Income Tax Benefit. Our effective tax rate for fiscal 2013 was 65.8% compared to 54.1% for fiscal 2012. The increase in our effective rate is primarily the result of the benefit of recording increased work opportunity credits in fiscal 2013 compared to fiscal 2012.
Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) before interest expense, net, gain(loss) on extinguishment of debt, income taxes, impairment charges and depreciation and amortization. Adjusted EBITDA for fiscal 2013 was $202.4 million, which was a decrease of $7.8 million, or 3.7%, from fiscal 2012. This decrease is primarily attributable to our lower gross profit and the variances discussed above.
The following table contains a reconciliation of Adjusted EBITDA to net loss:
The following table contains a reconciliation of Adjusted EBITDA to net cash provided by operating activities:
Liquidity and Capital Resources
Cash Flows
(1) As defined by the senior credit facility agreement.
Cash provided by operating activities was $136.9 million in fiscal 2014, compared to $128.1 million in fiscal 2013 and decreased from $144.0 million in fiscal 2012. The increase in cash flows from operations in fiscal 2014 compared to fiscal 2013 is primarily due to an increase in Adjusted EBITDA of $18.5 million, offset primarily by changes in working capital. For the definition and reconciliation of Adjusted EBITDA please see our discussion of Fiscal 2014 compared to Fiscal 2013. Changes in working capital used cash of $4.9 million in fiscal 2014 compared to cash provided of $7.5 million in fiscal 2013. These changes were primarily driven by a decreased cash inflow from receivables of $13.9 million, driven by the improvement of collections in fiscal 2013 that were sustained through fiscal 2014, as well as a decreased cash inflow from inventories of $6.9 million This was offset by a decreased cash outflow for other current liabilities of $10.8 million, driven by increased incentive
compensation in connection with improved operating results in fiscal 2014 and deferred vendor rebates. The decrease in cash flow from operations in fiscal 2013 compared to 2012 is primarily due to a $4.2 million decline in income from operations and changes in working capital. Changes in working capital provided cash of $7.5 million in fiscal 2013 compared to cash provided of $15.1 million in fiscal 2012.
Cash used in investing activities was $96.8 million in fiscal 2014 compared to $84.7 million in fiscal 2013 and $55.0 million in fiscal 2012. Capital expenditures were $101.5 million, which was partially offset by the proceeds from the sale of property and equipment of $5.1 million in fiscal 2014. In fiscal 2013, capital expenditures were $88.1 million, which was partially offset by the proceeds from the sale of property and equipment of $5.5 million. The increase in capital expenditures in fiscal 2014 was primarily due to remodeling 43 stores and the carryover effect of accrued capital expenditures from fiscal 2013, completing one scrape and rebuild with a new, large-format store, opening one new store and 20 quick service restaurants. Capital expenditures primarily relate to store improvements, store equipment, new store development including quick service restaurants, information systems and expenditures to comply with regulatory statutes, including those related to environmental matters. The proceeds from the sale of property and equipment relate to our ongoing initiative to divest our under-performing store assets and non-productive surplus properties. Capital expenditures, net of proceeds, increased $23.8 million in fiscal 2013 compared to fiscal 2012 primarily due to building and opening three new stores and remodeling 72 stores. We finance substantially all capital expenditures through cash flows from operations, asset dispositions and vendor reimbursements.
Cash used in financing activities was $15.6 million in fiscal 2014, $75.5 million in fiscal 2013 and $213.6 million in fiscal 2012. The $59.9 million decrease in cash used by financing activities in fiscal 2014 compared to fiscal 2013 is primarily related to the use of available cash to repay the $61.3 million of outstanding senior subordinated convertible notes in the first three months of fiscal 2013. The $138.2 million increase in cash used by financing activities in fiscal 2013 compared to fiscal 2012 is due to our refinancing transactions in August 2012, as well as the repayment of our convertible notes at maturity.
Sources of Liquidity
As of September 25, 2014, we had approximately $81.7 million in cash and cash equivalents and approximately $140.1 million in available borrowing capacity under our Fourth Amended and Restated Credit Agreement ("credit facility"), approximately $75.1 million of which was available for the issuances of letters of credit.
Our credit facility includes a $225.0 million senior secured revolving credit facility which expires in 2017 and a $255.0 million senior secured term loan which matures in 2019. The credit facility permits the issuance of letters of credit up to $160.0 million. Letters of credit issued pursuant to our credit facility reduces the amount otherwise available for borrowing. Our ability to access our credit facility is subject to our compliance with the terms and conditions of our facilities, including financial and restrictive covenants. As of September 25, 2014, we were in compliance with all covenants. Refer to Note 6, Debt, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our credit facility.
Due to the nature of our business, substantially all sales are for cash and credit cards which are converted to cash shortly after the transaction. Funds generated by operating activities, available cash and cash equivalents, our credit facility and asset dispositions continue to be our most significant sources of liquidity. During the second and third quarters of fiscal 2014, we used our revolving credit facility to fund working capital needs. As of September 25, 2014, we had no borrowings under our revolving credit facility. We believe our sources of liquidity will be sufficient to sustain operations and to finance anticipated strategic initiatives in fiscal 2015. However, in the event our liquidity is insufficient, we may be required to limit our spending on future initiatives or other business opportunities. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our existing credit facilities or obtain additional financing, if necessary, on favorable terms.
Our financing strategy is to maintain liquidity and access to capital markets while reducing our leverage. We expect to continue to have access to capital markets on both short and long-term bases when needed for liquidity purposes. Our continued access to these markets depends on multiple factors including the condition of debt capital markets, our operating performance and maintaining our credit ratings. Our credit ratings and outlooks issued by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Rating Services ("Standard & Poor's") as of September 25, 2014, are summarized below:
Credit rating agencies review their ratings periodically and therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Accordingly, we are not able to predict whether our current credit ratings will remain as disclosed above. Factors that can affect our credit ratings include changes in our operating performance, the economic environment, conditions in the convenience store industry, our financial position, and changes in our business strategy. If further changes in our credit ratings were to occur, they could impact, among other things, our future borrowing costs, access to capital markets and vendor financing terms.
Capital Resources
Capital Expenditures
We anticipate spending approximately $135.0 million in capital expenditures during fiscal 2015. Our capital expenditures typically include new stores and store remodeling, fuel imaging, store equipment, merchandising projects, maintenance and information technology enhancements. The following table presents our capital expenditures for each of the past three fiscal years:
Refer to Note 11, Contingencies and Commitments, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information regarding our significant commitments for capital expenditures.
Debt
Our credit facility includes a $225.0 million senior secured revolving credit facility which expires in 2017 and a $255.0 million senior secured term loan which matures in 2019. The senior secured revolving credit facility is available for working capital and general corporate purposes, and a maximum of $160.0 million is available for issuance of letters of credit. The issuance of letters of credit will reduce the amount otherwise available for borrowing under the senior secured revolving credit facility. In addition, the credit facility provides for the ability to incur additional senior secured term loans and/or increases in the senior secured revolving credit facility in an aggregate principal amount of up to $200.0 million provided certain conditions are satisfied, and provided that the aggregate principal amount for all increases in the senior secured revolving credit facility cannot exceed $100.0 million.
The interest rate on borrowings under the senior secured revolving credit facility is dependent on our consolidated total leverage ratio, and at our option, is either the base rate (generally the applicable prime lending rate of Wells Fargo Bank, National Association, as announced from time to time) plus 250 to 350 basis points or LIBOR plus 350 to 450 basis points. Our current interest rate under the revolving credit facility is, at our option, either the base rate plus 325 basis points or LIBOR plus 425 basis points, with an unused commitment fee of 50 basis points. The interest rate on the senior secured term loan is also dependent on our consolidated total leverage ratio and ranges between LIBOR plus 350 to 375 basis points, with a LIBOR floor of 100 basis points. Our current interest rate under the senior secured term loan is LIBOR (with a floor of 100 basis points) plus 375 basis points. Interest under the credit facility is paid on the last day of each LIBOR interest period, but no less than every three months.
Borrowings under our senior secured term loan are required to be paid in equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount, with the remainder due on the maturity date. In addition, borrowings under our credit facility are required to be prepaid with: (a) 100% of the net cash proceeds of the issuance or incurrence of debt by the Company or any of its subsidiaries, subject to certain exceptions; (b) 100% of the net cash proceeds of all asset sales, insurance and condemnation recoveries and other asset dispositions by the Company or its subsidiaries, if any, subject to reinvestment provisions and certain other exceptions; and (c) to the extent the total leverage ratio is greater than 3.5 to 1.0 at the end of any fiscal year, the lesser of (i) 50% of excess cash flow during such fiscal year minus voluntary prepayments of our
senior secured term loan or senior unsecured notes or (ii) the amount of prepayment necessary to lower the total leverage ratio to 3.5 to 1.0, after giving pro forma effect to such prepayment.
Our ability to access our credit facility is subject to our compliance with the terms and conditions of the credit agreement governing our credit facility, including financial and negative covenants.
The financial covenants under our credit facility currently include the following: (a) maximum total adjusted leverage ratio, which is the maximum ratio of debt (net of cash and cash equivalents in excess of $40.0 million) plus eight times rent expenses to EBITDAR (which represents EBITDA plus rental expenses for operating leases); and (b) minimum interest coverage ratio. The financial covenants apply to the Company and its subsidiaries, if any, on a consolidated basis.
The negative covenants under our credit facility include, without limitation, restrictions on the following: capital expenditures; indebtedness; liens and related matters; investments and joint ventures; contingent obligations; dividends and other restricted payments; fundamental changes, asset sales and acquisitions; sales and leasebacks; sale or discount of receivables; transactions with shareholders and affiliates; disposal of subsidiary capital stock and formation of new subsidiaries; conduct of business; certain amendments; senior debt status; fiscal year, state of organization and accounting practices; and management fees.
In addition, a change of control of our company, which includes among other things, the majority of the directors on our Board consisting of new directors whose nomination was not recommended by a majority of our current directors, a person acquiring beneficial ownership of a certain amount of our equity securities or a change of control occurring under the indenture governing our senior unsecured notes, would constitute an event of default, upon which, the lenders holding a majority of the outstanding term loans and revolving credit commitments under the credit facility would be able to accelerate any unpaid loan amounts requiring us to immediately repay all such amounts (plus accrued interest to the date of repayment).
We have outstanding $250.0 million of 8.375% senior unsecured notes (“senior notes”) maturing in 2020. Interest on the notes is payable semiannually in February and August of each year until maturity. If a change of control occurs under the indenture governing our senior notes, which includes among other things, the majority of the directors on our Board consisting of new directors whose election or nomination for election was not approved by a majority of our current directors, a person acquiring beneficial ownership of a certain amount of our equity securities, certain mergers or consolidations, and the sale of all or substantially all of our assets, we must give holders of the senior notes an opportunity to sell their senior notes to us at a purchase price equal to 101% of the principal amount of the senior notes, plus accrued and unpaid interest, if any, to the purchase date, subject to certain conditions. Failure to make or comply with the repurchase offer would be an event of default under the indenture governing our senior notes, which would also trigger a cross-default under our credit facility. Additionally, an event of default under our credit facility that results in the acceleration of indebtedness thereunder would result in an event of default under the indenture governing our senior notes. Upon an event of default under the indenture governing our senior notes, the requisite noteholders would be able to accelerate and require us to immediately repay all unpaid senior unsecured note amounts (plus accrued interest to the date of repayment).
In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the senior notes at 100% of their principal amount, together with accrued and unpaid interest and additional interest, if any, to the date of purchase. Failure to make or comply with the repurchase offer would be an event of default under the indenture governing our senior notes, which would also trigger a cross-default under our credit facility.
The negative covenants under the indenture governing our senior notes are similar to those under our credit facility and include, without limitation, the following: restricted payments; dividend and other payment restrictions affecting subsidiaries; incurrence of indebtedness and issuance of preferred stock; asset sales; transactions with affiliates; liens; corporate existence; and no layering of debt.
As of September 25, 2014, we were in compliance with all covenants under our credit facility and senior notes.
If we default under our credit facility or the indenture governing our senior notes because of a covenant breach or otherwise, all outstanding amounts thereunder could become immediately due and payable. Any acceleration of amounts due would have a material adverse effect on our liquidity and financial condition, and we cannot assure you that we would be able to obtain a waiver of any such default, that we would have sufficient funds to repay all of the outstanding amounts, or that we would be able to obtain alternative financing to satisfy such obligations on commercially reasonable terms or at all.
We use capital leases and sale leaseback transactions to finance a portion of our stores. The net present value of our capital lease obligations and sale leaseback transactions are reflected in our Condensed Consolidated Balance Sheets in lease finance obligations and current maturities of lease finance obligations.
Refer to Note 6, Debt, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information on our debt obligations.
Contractual Obligations and Commitments
Contractual Obligations. The following table summarizes by fiscal year our expected long-term debt payment schedule, lease finance obligation commitments, future operating lease commitments and purchase obligations as of September 25, 2014:
(1) Included in long-term debt are principal amounts owed on our senior notes due in 2020 and our credit facility. These borrowings are further explained in Note 6, Debt, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
(2) Included in interest are expected payments on our senior notes due in 2020, our credit facility, unused commitment fees on our revolving credit facility and letter of credit fees. Variable interest on our credit facility is based on LIBOR, which last reset on August 29, 2014. Refer to Note 6, Debt, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information of our debt obligations.
(3) We lease certain facilities under capital leases and through sale-leaseback arrangements accounted for as a lease financing. Included in lease finance obligations are both principal and interest.
(4) Some of our retail store leases require percentage rentals on sales and contain escalation clauses. The minimum future operating lease payments shown above do not include contingent rental expenses, which have historically been insignificant. Total expenses related to insurance, taxes and common area maintenance were approximately $7.4 million in fiscal 2014. Future lease payments do not include amounts for insurance, taxes and common area maintenance as these costs vary year by year and are based almost entirely on actual amounts incurred. Some lease agreements provide us with an option to renew. Our future operating lease obligations will change if we exercise these renewal options and if we enter into additional operating lease agreements.
(5) Purchase obligations include all legally binding contracts to purchase goods and services related to inventory purchases, equipment purchases, capital expenditures, software acquisitions and license commitments, marketing-related contracts and service contracts. Purchase obligations also include a penalty equal to two cents per gallon times the difference between the actual gallon volume of BP branded product purchased and the minimum volume requirement for a given period.
(6) Excluded from the contractual obligations table are $73.4 million in long-term environmental liabilities and $27.9 million in long-term tank removal reserves, each of which is included in other noncurrent liabilities on our consolidated balance sheet. We have excluded these liabilities from the contractual obligations table because we are unable to precisely predict the timing or cash settlement amounts of these reserves. Our environmental liabilities are further explained in Note 11, Commitments and Contingencies, and our long-term tank removal reserves are further explained in Note 8, Asset Retirement Obligations, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
(7) Represents our standby letters of credit issued under our credit facility as of September 25, 2014. At maturity, we expect to renew a significant number of our standby letters of credit.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on our financial position, results of operations or cash flows.
Inflation
The impact of inflation on our costs, and the ability to pass cost increases in the form of increased sale prices, is dependent upon market conditions. General Consumer Price Index, excluding energy, increased 1.9%, 1.7% and 1.9% during fiscal 2014,
2013 and 2012, respectively. While we have generally been able to pass along these price increases to our customers, we can make no assurances that continued inflation will not have a material effect on our sales and gross profit. Wholesale fuel prices were volatile during fiscal 2014, 2013 and 2012 and we expect that they will remain volatile into the foreseeable future.
New Accounting Standards
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This update requires that an unrecognized tax benefit, or portion of an unrecognized tax benefit, be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. If an applicable deferred tax asset is not available or a company does not expect to use the applicable deferred tax asset, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with an unrelated deferred tax asset. This new standard did not have a significant impact on our consolidated financial statements.
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the requirements for reporting discontinued operations. The update requires that only those disposals which represent a strategic shift that will have a major effect on the Company’s operations and financial results be reported as discontinued operations. The new standard is effective for all disposals occurring within annual periods beginning on or after December 15, 2014 and interim periods within annual periods beginning on or after December 15, 2015. Early adoption is permitted for disposals that have not yet been reported in financial statements previously issued or available for issuance. We adopted this ASU in the third quarter of fiscal 2014. The adoption of this new guidance did not have a significant impact on our consolidated financial statements.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with GAAP. The preparation of these financial statements requires us 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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Refer to Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our significant accounting policies.
Critical accounting policies are those we believe are both most important to the portrayal of our financial condition and results, and require our most difficult, subjective or complex judgments, often because we must make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We believe the following policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements.
Store Impairment Charges. Long-lived assets at the individual store level are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Our primary indicator that operating store assets may not be recoverable is consistent minimal positive or negative cash flow for a 12-month period for those stores that have been open in the same location for a sufficient period of time to allow for meaningful analysis of ongoing results. Management also monitors other factors when evaluating operating stores for impairment, including individual stores execution of their operating plans and local market conditions.
When an evaluation is required, the projected future undiscounted cash flows to be generated from each store over its remaining economic life are compared to the carrying value of the long-lived assets of that store to determine if a write-down to fair value is required. When determining future cash flows associated with an individual store, management makes assumptions about key store variables such as sales volume, gross margins and controllable expenses. Cash flows vary for each store year to year and as a result, we have identified and recorded impairment charges for operating and closed stores for each of the past three years as changes in market demographics, traffic patterns, competition and other factors have impacted the overall operations of certain of our individual store locations. Similar changes may occur in the future that will require us to record
impairment charges. We have not made any material changes in the methodology used to estimate future cash flows of operating stores during the past three fiscal years.
If the actual results of our operating stores are not consistent with the estimates and judgments we have made in estimating future cash flows and determining fair values, our actual impairment losses could vary positively or negatively from our estimated impairment losses. We recorded long-lived asset impairment charges for operating locations of approximately $3.0 million, $2.7 million and $4.3 million in fiscal 2014, 2013 and 2012, respectively. We also recorded impairment charges of approximately $1.3 million for under-performing operating stores that we reclassified from property held for use to property held for sale because we planned to close or convert them to dealers or commission marketers in fiscal 2012. There were no operating stores reclassified to held for sale and there were no related impairment charges in fiscal 2014 and fiscal 2013. We record losses on asset impairments as a component of impairment charges. Refer to Note 5, Impairment Charges, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our asset impairments.
Goodwill. We test goodwill for possible impairment in the second quarter of each fiscal year and more frequently if impairment indicators arise. An impairment indicator represents an event or change in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount. A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Management monitors events and changes in circumstances in between annual testing dates to determine if such events or changes in circumstances are impairment indicators. Such indicators may include the following, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of our goodwill and could have a material impact on our consolidated financial statements.
We conducted our annual impairment testing of goodwill in the second quarter of fiscal 2014. Our market capitalization was greater than our book value at our annual testing date; therefore, we determined our fair value by using market based approaches that utilized our market capitalization and a guideline transaction method to determine fair value. The resulting fair value of our one reporting unit was significantly greater than book value calculated under the two market based approaches.
Under the first approach, we determined fair value by starting with market capitalization as the fair value of our equity on a minority interest basis. We then applied a control premium to our market capitalization to determine fair value on a majority interest basis. In determining our fair value under this approach, we include a control premium, or value obtained from acquiring a controlling interest in an entity. The control premium was based on observable market data and a review of selected transactions of companies that operate in our industry.
Under the second approach, the guideline transaction method uses valuation multiples of companies engaged in the same or similar lines of business as us, which have been acquired, to determine the fair value of our reporting unit's enterprise value. A significant amount of judgment is involved in selecting companies with similar characteristics and determining appropriate risk-adjusted multiples. If different assumptions are used, impairment testing could yield different results and an impairment of goodwill may need to be recorded.
The Company also reconciles the fair value of our reporting unit with our market capitalization to determine if it is reasonable compared to the external market indicators. If our reconciliation indicates a significant difference between our external market capitalization and the fair value of our reporting unit, we review and adjust, if appropriate.
Changes in assumptions or estimates used in our goodwill impairment testing could materially affect the determination of our fair value and therefore could eliminate the excess of fair value over carrying value and, in some cases, could result in impairment. Such changes in assumptions could be caused by changes in the convenience store industry, increased competition, economic conditions, consumer spending and state and federal regulations. These changes could result in declining revenue over the long-term and could significantly affect the fair value assessment of our reporting unit and cause our goodwill to become impaired.
We determined in step one of the goodwill impairment test that fair value exceeded book value by a significant amount. The determination of a reasonable control premium requires management to make significant estimates and judgments regarding comparable acquisitions and capital raising transactions. A 10% change in the assumed control premium would not have impacted our conclusion with respect to our annual goodwill impairment test.
The goodwill impairment test is a two-step process. If we determine in the first step of our impairment test that the fair value of our reporting unit exceeds book value, then our goodwill is not impaired and the second step is not required. If we determine that the book value of our reporting unit is greater than fair value, then we complete the second step of the goodwill impairment test. No impairment charges related to goodwill were recognized in fiscal 2014, 2013 and 2012.
The impairment evaluation process requires management to make estimates and assumptions with regard to fair value. While we believe that all assumptions utilized in our testing were appropriate, they may not reflect actual outcomes that could occur. Specific factors that could negatively impact the assumptions used include the following: a change in the control premiums being realized in the market or a meaningful change in the number of mergers and acquisitions occurring; the amount of expense savings that may be realized in an acquisition scenario; significant fluctuations in our asset/liability balances or the composition of our balance sheet; a change in the overall valuation of the stock market, specifically stocks of companies in our industry; performance of our company; and our company's performance relative to peers. Changing these assumptions, or any other key assumptions, could have a material impact on the amount of goodwill impairment, if any, which could have a material impact on our consolidated financial statements.
Asset Retirement Obligations. At September 25, 2014 we had approximately 4,672 underground storage tanks at our operating store locations. We recognize the estimated future cost to remove these underground storage tanks over their estimated useful lives. We record a discounted liability for the fair value of an asset retirement obligation with a corresponding increase to the carrying value of the related long-lived asset at the time an underground storage tank is installed. We amortize the amount added to property and equipment and recognize accretion expense in connection with the discounted liability over the remaining life of the tank.
We have not made any material changes in the methodology used to estimate future costs for removal of an underground storage tank during the past three fiscal years. We base our estimates of such future costs on our prior experience with removal. We compare our cost estimates with our actual removal cost experience on an annual basis, and when the actual costs we experience exceed our original estimates, we will recognize an additional liability for estimated future costs to remove the underground storage tanks. Because these estimates are subjective and are based on historical costs with adjustments for estimated future changes in the associated costs, we expect the dollar amount of these obligations to change as more current information is obtained. For example, a 10% change in our estimate of anticipated future costs for removal of an underground storage tank would change our asset retirement obligation by approximately $2.8 million as of September 25, 2014. There were no material changes in our asset retirement obligation estimates during fiscal 2014. Refer to Note 8, Asset Retirement Obligations, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for further information about our asset retirement obligations.
Self-Insurance Reserves. We self-insure a significant portion of expected losses under our workers’ compensation and general liability programs. However, we maintain excess loss coverage to limit the exposure related to certain risks involving general liability and workers’ compensation when claims reach $500 thousand. We have recorded accrued liabilities based on our estimates of the costs to settle incurred and incurred but not reported claims. During fiscal 2014, our self-insurance liabilities for general liability and workers’ compensation decreased approximately $2.4 million to $25.9 million as of September 25, 2014.
Our liabilities represent estimates of the cost for claims incurred as of the balance sheet date. The estimated liabilities are not discounted and are established based upon analysis of historical data and actuarial estimates. The liabilities are reviewed by management and third-party actuaries on a regular basis to ensure that they are appropriate. While we believe these estimates are reasonable based on the information currently available, if actual trends, including the severity or frequency of claims, medical cost inflation or fluctuations in premiums, differ from our estimates, our results of operations could be impacted. Actual results related to these types of claims did not vary materially from estimated amounts for fiscal 2014, 2013 or 2012.
We have not made any material changes in the methodology used to establish our self-insurance liability during the past three fiscal years. Our accounting policies regarding self-insurance programs include judgments and actuarial assumptions regarding economic conditions, the frequency and severity of claims, claim development patterns and claim management and settlement practices. Although we have not experienced significant changes in actual expenditures compared to actuarial assumptions as a result of increased medical costs or incidence rates, such changes could occur in the future and could significantly impact our results of operations and financial position. A 10% change in our estimate for our self-insurance liability would have affected net earnings for fiscal 2014 by approximately $2.6 million.
Item 7A.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk.
Interest Rate Risk
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 notes due in 2020 and our variable rate debt relates to borrowings under our senior credit facility. 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.
Our primary exposure relates to:
•
Interest rate risk on long-term and short-term borrowings resulting from changes in LIBOR;
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Our ability to pay or refinance long-term borrowings at maturity at market rates;
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The impact of interest rate movements on our ability to meet interest expense requirements and exceed financial covenants; and
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The impact of interest rate movements on our ability to obtain adequate financing to fund future strategic business initiatives.
As of September 25, 2014 and September 26, 2013, we had fixed-rate debt outstanding of $250.0 million and we had variable-rate debt outstanding of $250.5 million and $253.1 million, respectively. Variable-rate debt excludes original issuance discounts of $1.7 million and $2.1 million as of September 25, 2014 and September 26, 2013, respectively. The following table presents the future principal cash flows and weighted-average interest rates by fiscal year on our existing long-term debt instruments based on rates in effect at September 25, 2014. Fair values have been determined based on quoted market prices as of September 25, 2014.
At September 25, 2014 and September 26, 2013, the interest rate on approximately 50.0% of our debt was fixed by the nature of the obligation. The annualized effect of a one percentage point change on our floating rate debt obligations at September 25, 2014 would be an increase to interest expense of approximately $2.5 million.
We manage interest rate risk on our outstanding long-term and short-term debt through our use of fixed and variable rate debt. While we cannot 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.
Item 8.
Item 8. Consolidated Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
The Pantry, Inc.
Cary, North Carolina
We have audited the accompanying consolidated balance sheets of The Pantry, Inc. (the "Company") as of September 25, 2014 and September 26, 2013, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended September 25, 2014. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 Company as of September 25, 2014 and September 26, 2013, and the results of its operations and its cash flows for each of the three fiscal years in the period ended September 25, 2014, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of September 25, 2014, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 9, 2014 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
December 9, 2014
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See Notes to Consolidated Financial Statements
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
See Notes to Consolidated Financial Statements
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
See Notes to Consolidated Financial Statements
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Our consolidated financial statements included the accounts of The Pantry, Inc. and its wholly owned captive insurance subsidiary (the "Company"), with the exception of fiscal 2013 and 2012 when the Company was one legal entity with no subsidiaries. Transactions and balances of our wholly owned subsidiary were immaterial to the consolidated financial statements and all intercompany transactions and balances were eliminated in consolidation. Below are the accounting policies that we consider significant.
Accounting Period
We operate on a 52 or 53-week fiscal year ending on the last Thursday in September. Fiscal 2014, 2013 and 2012 each included 52 weeks. References to "fiscal 2014" refers to our fiscal year which ended on September 25, 2014, references to "fiscal 2013" refers to our fiscal year which ended on September 26, 2013 and references to "fiscal 2012" refers to our fiscal year which ended on September 27, 2012.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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. We base these estimates on historical results and various other assumptions believed to be reasonable. Actual results could differ from these estimates.
Immaterial Restatement of the Consolidated Balance Sheet
During the fourth quarter of fiscal 2014, management determined that the deferred taxes associated with the current portion of certain assets and liabilities were inappropriately netted in non-current deferred income taxes in the prior period Consolidated Balance Sheets. As a result, we have reclassified these amounts through adjustments to prior period current deferred income tax assets and long term deferred income tax liabilities.
The prior period Consolidated Balance Sheet has been restated for the recognition of these adjustments. We do not believe these corrections are material, individually or in the aggregate, to the consolidated financial statements in any prior periods. The restatement did not impact our Consolidated Statements of Operations, Consolidated Statements of Shareholders’ Equity and Consolidated statements of cash flows in any periods.
The following tables summarize the effects of the restatement on our Consolidated Balance Sheet as of September 26, 2013:
Segment Reporting
We are an independently operated convenience store chain with 1,518 stores primarily in the southeastern United States. Our convenience store operations represent a single operating segment based on the way we manage our business. Operating decisions are made at the Company level in order to maintain a consistent store presentation. Our stores sell similar products and services, use similar processes to sell those products and services, and sell their products and services to similar classes of customers.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, cash and cash equivalents include cash on hand, demand deposits and short-term investments with original maturities of three months or less. Our cash and cash equivalents at September 25, 2014 and September 26, 2013 included $1.9 million and $2.3 million, respectively in restricted cash collected for our Salute Our Troops® campaign. Our cash and cash equivalents at September 25, 2014 also included $739 thousand in restricted cash held by our captive insurance entity which, due to insurance and other regulations with respect to required reserves and minimum capital requirements, can only be utilized to pay captive claims.
Accounts Receivable
The majority of our trade receivables are from credit cards which typically convert to cash shortly after the transaction. Non-trade receivables consist mainly of vendor rebates, income tax and environmental receivables. We provide an allowance for doubtful accounts based on historical experience and on a specific identification basis. We write off accounts receivable when they become uncollectible. Our allowance for doubtful accounts was not significant for all periods presented.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out method for merchandise inventories and using the weighted-average method for fuel inventories. The fuel we purchase from our vendors is temperature adjusted. The fuel we sell at retail is sold at ambient temperatures. The volume of fuel we maintain in inventory can expand or contract with changes in temperature. Depending on the actual temperature experience and other factors, we may realize a net increase or decrease in the volume of our fuel inventory during our fiscal year. At interim periods, we record any projected increases or decreases through cost of goods sold ratably over the fiscal year, which we believe more fairly reflects our results by better matching our costs to our retail sales. At the end of any fiscal year, the entire variance is absorbed into fuel cost of goods sold. Our inventories of fuel turn approximately every five days, including both branded and private branded fuel.
Property Held for Sale
Property held for sale is included in prepaid expenses and other current assets on the accompanying Consolidated Balance Sheets when management’s intent is to sell such property in the ensuing 12 months and the other criteria under the authoritative guidance are met. The asset is then recorded at the lower of cost or estimated fair value less cost to sell and no longer depreciated. These assets consist of land and buildings.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization is provided by the straight-line method over the estimated useful lives of the assets.
Estimated useful lives are as follows:
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 guidance on accounting for leases, are recorded
at the lesser of fair value or the discounted present value of future minimum 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); whichever is less, using the straight-line method.
Goodwill and Other Intangibles
We test goodwill for possible impairment in the second quarter of each fiscal year and more frequently if impairment indicators arise. An impairment indicator represents an event or change in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount. All of our intangible assets have finite lives and are amortized over their estimated useful lives using the straight-line method. We review our intangible assets for impairment whenever events or circumstances indicate that it is more likely than not that the fair value of the asset is below its carrying amount.
A significant amount of judgment is involved in determining if an indicator of goodwill impairment has occurred. Management monitors events and changes in circumstances in between annual testing dates to determine if such events or changes in circumstances are impairment indicators. Such indicators may include the following, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition and slower growth rates. Any adverse change in these factors could be indicative of an impairment of our goodwill and that could cause a material impact on our consolidated financial statements.
The goodwill impairment test is a two-step process. The first step of the impairment test is a comparison of our fair value to our book value. If our fair value exceeds our book value, then our goodwill is recoverable and no additional analysis is required. If our book value is higher than fair value there is an indication that impairment exists and the second step must be performed to measure the impairment, if any. The second step compares the implied fair value of our goodwill with its carrying amount. The implied fair value of our goodwill is determined in the same manner as the amount of goodwill that would be recognized in a business combination. The impairment evaluation process requires management to make estimates and assumptions with regard to fair value. Actual values may differ significantly from these estimates. Such differences could result in future impairment that could have a material impact on our consolidated financial statements.
Self-Insurance
We are self-insured for certain losses related to general liability, workers’ compensation and medical claims. The expected cost for claims incurred as of the balance sheet date is not discounted and is recognized as a current liability within the Consolidated Balance Sheets. The expected cost of claims is estimated based upon analysis of historical data and actuarial estimates. We maintain excess loss coverage to limit the exposure related to certain risks involving general liability, workers’ compensation and employee medical programs when claims reach $500 thousand, $500 thousand and $300 thousand per person per claim, respectively. Our captive insurance subsidiary provides the general liability coverage when claims reach $500 thousand up to $800 thousand per person per claim ($2.0 million aggregate).
Environmental Costs
We account for the cost incurred to comply with federal and state environmental laws and regulations as follows:
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Environmental liabilities reflected in the Consolidated Balance Sheets are 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 the expected cost to remediate each contaminated site and the estimated length of time to remediate each contaminated site.
•
Future remediation costs are not discounted unless the timing and amounts are fixed or reliably determinable.
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Amounts that are probable of reimbursement under state trust fund programs or third-party insurers, based on our experience, are recorded as receivables, which exclude all deductibles. We also record a corresponding liability for the total remediation costs. The adequacy of the liability is evaluated quarterly and adjustments are made based on updated experience at existing sites, newly identified sites and changes in governmental policy.
•
Annual fees for tank registration and environmental compliance testing are expensed as incurred.
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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.
Excise and Other Taxes
We pay federal and state excise taxes on fuel products. Fuel sales and cost of goods sold included excise and other taxes of approximately $780.3 million, $808.9 million and $859.6 million for fiscal 2014, 2013 and 2012, respectively.
Income Taxes
All of our operations, including those of our subsidiary, are included in a consolidated federal income tax return. We recognize deferred income tax assets and liabilities for the expected future income tax consequences of temporary differences between financial statement carrying amounts and the related income tax basis. We classify interest and penalties as income tax expense.
Lease Accounting
Leases are accounted for as either operating or capital. In prior years, we also entered into sale-leaseback transactions for certain locations. For all sale-leaseback transactions, we retained ownership of the underground storage tanks, which represents a form of continuing involvement and as such, we account for these transactions as financing leases. Gains and losses from sale-leaseback transactions are deferred until our continuing involvement ends which is typically at the end of the lease term.
Revenue Recognition
Revenues from our two primary product categories, fuel and merchandise, are recognized at the point of sale. We derive service revenue, which is not material for any period presented and included in merchandise revenue, from sales of lottery tickets, money orders, car washes, ATMs and other ancillary product and service offerings. We evaluate the criteria of reporting revenue gross as a principal versus net as an agent, in determining whether it is appropriate to record the gross amount of service revenue and related costs or the net amount earned as commissions. When we are the primary obligor, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, influence product or service specifications or have several of these indicators, revenue is recorded on a gross basis. If we are not the primary obligor and do not possess other indicators of gross reporting as noted above, we record revenue on a net basis.
Cost of Goods Sold
The primary components of cost of goods sold are fuel, merchandise, credit card fees, environmental remediation expense, repairs and maintenance of customer delivery equipment (e.g., fuel dispensers) and franchise fees for branded fast foodservice less vendor allowances and rebates. Vendor allowances and rebates are recognized in cost of goods sold in accordance with vendor agreements and as the related inventories are sold.
We receive payments for vendor allowances, volume rebates and other supply arrangements in connection with various programs. Our accounting practices with regard to some of our most significant arrangements are as follows:
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Vendor allowances for price markdowns are credited to cost of goods sold during the period in which the related merchandise is sold and the markdown is taken.
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Store imaging allowances are recognized as a reduction of cost of goods sold in the period earned in accordance with the vendor agreement. Store imaging includes signage, canopies and other types of branding as defined in our fuel contracts.
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Volume rebates in the form of a reduction of the purchase price of merchandise are recorded as a reduction to cost of goods sold when the related merchandise is sold. Generally, volume rebates under a structured purchase program with allowances awarded based on the level of purchases are recognized when realization is probable and reasonably estimable. Volume rebates are recorded as a reduction in the cost of goods sold in the appropriate monthly period based on the actual level of purchases in the period relative to the total purchase commitment.
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Slotting and stocking allowances received from a vendor to ensure that its products are carried or to introduce a new product at our stores are recorded as a reduction of cost of goods sold over the period covered by the agreement.
Some of these vendor rebates, credit and promotional allowance arrangements require that we make assumptions and judgments regarding, for example, the likelihood of attaining specified levels of purchases or selling specified volumes of products, and the duration of carrying a specified product. We routinely review the relevant significant estimates and make adjustments where the facts and circumstances dictate.
The aggregate amounts recorded as a reduction of cost of goods sold related to these vendor programs was $151.4 million, $148.7 million and $170.1 million for fiscal 2014, 2013 and 2012, respectively.
Asset Retirement Obligations
We recognize the future cost to remove an underground storage tank over the estimated useful life of the storage tank. A liability for the fair value of an asset retirement obligation with a corresponding increase to the carrying value of the related long-lived asset is recorded at the time an underground storage tank is installed. We amortize the amount added to property and equipment and recognize accretion expense in connection with the discounted liability over the remaining life of the respective underground storage tanks. The estimated liability is based on our historical experience in removing these tanks, estimated tank useful lives, external estimates as to the cost to remove the tanks in the future and federal and state regulatory requirements.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was approximately $8.4 million, $8.2 million and $7.3 million for fiscal 2014, 2013 and 2012 respectively.
Store Operating and General and Administrative Expenses
Store operating and general and administrative expenses are expensed as incurred. The primary components of store operating expense are store labor, store occupancy and operations management expenses. The primary components of general and administrative expense are administrative personnel, insurance and other corporate expenses.
Store Closings and Impairment Charges
Long-lived assets at the individual store level are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of an asset to be held and used is measured by comparing the carrying value of the asset to the undiscounted future cash flows expected to be generated by the asset. If the total expected undiscounted future cash flows are less than the carrying value of the asset, the carrying value is written down to the estimated fair value if it is lower than carrying value. Cash flows vary for each store from year to year and as a result, we have identified and recorded impairment charges for operating and closed stores for each of the past three years as changes in market demographics, traffic patterns, competition and other factors have impacted the overall operations of certain of our individual store locations. Similar changes may occur in the future that will require us to record impairment charges. We record losses on asset impairments as a component of impairment charges on the Consolidated Statements of Operations.
Property and equipment of stores we are closing are written down to their estimated net realizable value at the time we close such stores. If applicable, we provide for future estimated rent and other exit costs associated with the store closure, net of sublease income, using a discount rate to calculate the present value of the remaining rent payments on closed stores. We estimate the net realizable value based on our experience in utilizing or disposing of similar assets and on estimates provided by our own and third-party real estate experts. Changes in real estate markets could significantly impact the net values realized from the sale of assets and rental or sublease income. We closed or sold 31, 36 and 42 stores in fiscal 2014, 2013 and 2012, respectively.
New Accounting Standards
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This update requires that an unrecognized tax benefit, or portion of an unrecognized tax benefit, be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. If an applicable deferred tax asset is not available or a company does not expect to use the applicable deferred tax asset, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with an unrelated deferred tax asset. This new standard did not have a significant impact on our consolidated financial statements.
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the requirements for reporting discontinued operations. The update requires that only those disposals which represent a strategic shift that will have a major effect on the Company’s operations and financial results be reported as discontinued operations. The new standard is effective for all disposals occurring within annual periods beginning on or after December 15, 2014 and interim periods within annual periods beginning on or after December 15, 2015. Early adoption is permitted for disposals that have not yet been reported in financial statements previously issued or available for issuance. We adopted this ASU in the third quarter of fiscal 2014. The adoption of this new guidance did not have a significant impact on our consolidated financial statements.
Note 2 - Inventories
Inventories consisted of the following:
The impact on merchandise cost of goods sold of LIFO inventory liquidations was not material for fiscal 2014, 2013 and 2012.
Note 3 - Property and Equipment
Property and equipment consisted of the following:
Depreciation expense included in Depreciation and amortization in the Consolidated Statement of Operations was $111.8 million, $117.2 million and $118.9 million for fiscal 2014, 2013 and 2012, respectively.
Note 4 - Goodwill and Other Intangible Assets
The following table reflects goodwill balances and activity as of September 25, 2014 and September 26, 2013:
We conducted our annual goodwill impairment assessment in the second quarter of fiscal 2014. Our market capitalization was greater than our book value at our annual testing date. We determined in step one of the annual impairment test that fair value of our one reporting unit was substantially in excess of the book value and concluded there was no impairment of our goodwill. No impairment charges related to goodwill were recognized during fiscal 2014, 2013 and 2012.
The following table reflects other intangible asset balances and activity as of September 25, 2014 and September 26, 2013:
There were no impairment charges related to intangible assets for fiscal 2014, 2013 and 2012.
Amortization expense included in Depreciation and amortization in the Consolidated Statement of Operations related to intangible assets was approximately $354 thousand, $425 thousand and $611 thousand in fiscal 2014, 2013 and 2012, respectively.
The estimated future amortization expense for customer agreements and non-compete agreements is as follows:
Note 5 - Impairment Charges
During fiscal 2014, 2013 and 2012, we recorded the following asset impairment charges:
Operating stores. We test our operating stores for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We compared the carrying amount of these operating store assets to their estimated future undiscounted cash flows to determine recoverability. If the sum of the estimated undiscounted cash flows did not exceed the carrying value, we then estimated the fair value of these operating stores to measure the impairment, if any. We recorded impairment charges related to operating stores as detailed in the table above. There were no operating stores classified as held for sale as of September 25, 2014 and September 26, 2013.
Surplus Properties. We test our surplus properties for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Periodically management determines that certain surplus properties should be classified as held for sale because of a change in facts and circumstances, including increased marketing and bid activity. We estimate the fair value of these and other surplus properties where events or changes in circumstances indicated, based on marketing and bid activity, that the carrying amount of the assets may not be recoverable. Based on these estimates,
we determined that the carrying values of certain surplus properties exceeded fair value resulting in the impairment charges as detailed above. Surplus properties classified as held for sale and included in prepaid expenses and other current assets on our Consolidated Balance Sheets were $2.3 million and $4.7 million as of September 25, 2014 and September 26, 2013, respectively.
The impairment evaluation process requires management to make estimates and assumptions with regard to fair value. Actual values may differ significantly from these estimates. Such differences could result in future impairment that could have a material impact on our consolidated financial statements.
Note 6 - Debt
Long-term debt consisted of the following:
We are party to the Fourth Amended and Restated Credit Agreement, as amended, which provides for a $480.0 million senior secured credit facility ("credit facility"). Our credit facility includes a $225.0 million senior secured revolving credit facility which expires in 2017 and a $255.0 million senior secured term loan which matures in 2019. In addition, the credit facility provides for the ability to incur additional term loans and increases in the secured revolving credit facility in an aggregate principal amount of up to $200.0 million provided certain conditions are satisfied. Interest payments on our credit facility are payable in quarterly installments until maturity. The interest rate on borrowings under the revolving credit facility is dependent on our consolidated total leverage ratio, and at our option, is either the base rate (generally the applicable prime lending rate of Wells Fargo Bank, National Association, as announced from time to time) plus 250 to 350 basis points or LIBOR plus 350 to 450 basis points. Our current interest rate under the revolving credit facility is, at our option, either the base rate plus 325 basis points or LIBOR plus 425 basis points, with an unused commitment fee of 50 basis points. The interest rate on the senior secured term loan is also dependent on our consolidated total leverage ratio and ranges between LIBOR plus 350 to 375 basis points, with a LIBOR floor of 100 basis points. Based on our current consolidated leverage ratio, the interest rate on the senior secured term loan is LIBOR plus 375 basis points with a LIBOR floor of 100 basis points.
Borrowings under our senior secured term loan are required to be paid in equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount, with the remainder due on the maturity date. In addition, borrowings under our credit facility are required to be prepaid with: (a) 100% of the net cash proceeds of the issuance or incurrence of debt by the Company or any of its subsidiaries, subject to certain exceptions; (b) 100% of the net cash proceeds of all asset sales, insurance and condemnation recoveries and other asset dispositions by the Company or its subsidiaries, if any, subject to reinvestment provisions and certain other exceptions; and (c) to the extent the total leverage ratio is greater than 3.5 to 1.0 at the end of any fiscal year, the lesser of (i) 50% of excess cash flow during such fiscal year minus voluntary prepayments of our senior secured term loan or senior unsecured notes or (ii) the amount of prepayment necessary to lower the total leverage ratio to 3.5 to 1.0, after giving pro forma effect to such prepayment.
Our credit facility is secured by substantially all of our assets and is required to be fully and unconditionally guaranteed by any material, direct and indirect, domestic subsidiaries. Our credit facility contains customary affirmative and negative covenants for financings of its type, including the following financial covenants: maximum total adjusted leverage ratio and minimum interest coverage ratio (as defined in our credit agreement). Additionally, our credit facility contains restrictive covenants regarding our ability to incur indebtedness, make capital expenditures, enter into mergers, acquisitions, and joint ventures, pay dividends or change our line of business, among other things. If we are able to satisfy a leverage ratio incurrence test and no default under our credit facility is continuing or would result therefrom, we are permitted under the credit facility to pay dividends in an aggregate amount not to exceed $35.0 million per fiscal year, plus the sum of (i) any unused amount from preceding years beginning with fiscal year 2012 and (ii) the amount of excess cash flow, if any, not required to be utilized to prepay outstanding amounts under our credit facility for the previous fiscal year.
In addition, a change of control of our company, which includes among other things, the majority of the directors on our Board consisting of new directors whose nomination was not recommended by a majority of our current directors, a person acquiring beneficial ownership of a certain amount of our equity securities or a change of control occurring under the indenture governing our senior unsecured notes, would constitute an event of default, upon which, the lenders holding a majority of the outstanding term loans and revolving credit commitments under the credit facility would be able to accelerate any unpaid loan amounts requiring us to immediately repay all such amounts (plus accrued interest to the date of repayment).
As of September 25, 2014, we had approximately $84.9 million of standby letters of credit issued under the credit facility. After taking into account outstanding letters of credit and the consolidated total adjusted leverage ratio constraint to availability, approximately $140.1 million was available for future borrowing under the revolving credit facility, of which $75.1 million was available for the issuances of letters of credit. The standby letters of credit primarily relate to vendor contracts, self-insurance programs and regulatory requirements.
We have outstanding $250.0 million of 8.375% senior unsecured notes ("senior notes") maturing in 2020. Interest on the senior notes is payable semi-annually in February and August until maturity. If a change of control occurs under the indenture governing our senior notes, which includes among other things, the majority of the directors on our Board consisting of new directors whose election or nomination for election was not approved by a majority of our current directors, a person acquiring beneficial ownership of a certain amount of our equity securities, certain mergers or consolidations, and the sale of all or substantially all of our assets, we must give holders of the senior notes an opportunity to sell their senior notes to us at a purchase price equal to 101% of the principal amount of the senior notes, plus accrued and unpaid interest, if any, to the purchase date, subject to certain conditions. Failure to make or comply with the repurchase offer would be an event of default under the indenture governing our senior notes, which would also trigger a cross-default under our credit facility. Additionally, an event of default under our credit facility that results in the acceleration of indebtedness thereunder would result in an event of default under the indenture governing our senior notes. Upon an event of default under the indenture governing our senior notes, the requisite noteholders would be able to accelerate and require us to immediately repay all unpaid senior unsecured note amounts (plus accrued interest to the date of repayment).
The indenture governing our senior notes contains restrictive covenants that are similar to those contained in our credit facility. If we are able to satisfy a fixed charge coverage ratio incurrence test and no default under our indenture is continuing or would result therefrom, we are permitted to pay dividends, subject to certain exceptions and qualifications, not exceeding 50% of our consolidated net income (as defined in our indenture) from June 29, 2012 to the end of our most recently ended fiscal quarter, plus proceeds received from certain equity issuances and returns or dispositions of certain investments made from August 3, 2012, less the aggregate amount of dividends or other restricted payments made under this provision and the amount of certain other restricted payments that our indenture permits us to make. Notwithstanding the indenture provision described in the prior sentence, so long as no default under our indenture is continuing or would result therefrom, we are permitted to pay dividends in an aggregate amount not to exceed $20.0 million since August 3, 2012.
In fiscal 2013, we filed a prospectus with the Securities and Exchange Commission ("SEC") in which we offered to exchange our $250.0 million outstanding 8.375% senior notes due in 2020 ("old notes") for $250.0 million registered 8.375% senior notes due in 2020 with substantially identical terms and conditions. All old notes were validly tendered for exchange. We accepted all of the old notes tendered for exchange. This exchange had no impact on our financial position, results of operations or cash flows.
The maximum total adjusted leverage ratio (generally the ratio of our consolidated debt to specified earnings) decreased from 6.25 to 6.0 for the fiscal quarter ending December 26, 2013 and the minimum interest coverage ratio (generally the ratio of specified earnings to interest expense) increased from 2.0 to 2.25 for the fiscal quarter ending September 25, 2014 and each fiscal quarter ending thereafter. We believe that we will be able to continue to satisfy these ratios; however, certain factors could result in our failure to comply with our covenants. In the event we are unable to comply with our covenants, or our performance suggests an impending inability to comply, we would attempt to negotiate with our lenders to obtain loan modifications or, if necessary, waivers of compliance with required ratios under our credit facility.
As of September 25, 2014, we were in compliance with all covenants and restrictions. Our ability to access our credit facility is subject to our compliance with the terms and conditions of the credit agreement governing our credit facility, including financial and negative covenants.
After giving effect to the applicable restrictions on the payment of dividends under our credit facility and indenture, subject to compliance with applicable law, as of September 25, 2014, there was $20.0 million free of restriction, which was available for the payment of dividends. We do not expect to pay dividends in the foreseeable future.
The carrying amounts and the related estimated fair value of our long-term debt is disclosed in Note 15, Fair Value Measurements.
The remaining principal payments of our long-term debt as of September 25, 2014 are as follows:
Note 7 - Lease Obligations
We lease certain facilities under capital leases and through sale-leaseback arrangements accounted for as a financing. The net book values of assets under capital leases and lease finance obligations, which are included in Note 3, Property and Equipment, are summarized as follows:
Following are the future minimum lease payments, including interest, for all non-cancelable leases in effect as of September 25, 2014:
Rental expense for operating leases was approximately $66.6 million, $69.5 million and $70.0 million for fiscal 2014, 2013 and 2012, respectively. We have facility leases with non-level rent provisions, capital improvement funding and other forms of lease concessions. We record non-level rent provisions and lease concessions on a straight-line basis over the minimum lease term. Some of our leases require contingent rental payments; such amounts are not material for the fiscal years presented.
Note 8 - Asset Retirement Obligations
We record an asset retirement obligation for the estimated future cost to remove underground storage tanks. The asset retirement obligation liabilities are discounted using rates ranging from 5.2% to 10.8% which were determined at inception of each obligation. Revisions to the liabilities could occur due to changes in tank removal costs, tank useful lives or if federal and/or state regulators enact new guidance on the removal of such tanks. There were no material changes in our estimated costs to remove tanks during fiscal 2014. We include asset retirement obligations in other noncurrent liabilities on the Consolidated Balance Sheets.
A reconciliation of the changes in our liability is as follows:
Note 9 - Interest Expense
The components of interest expense are as follows:
Note 10 - Income Taxes
The components of income tax expense (benefit) are summarized below:
Deferred income tax (liabilities) and assets are comprised of the following:
As of September 25, 2014 and September 26, 2013, net current deferred income tax assets totaled $35.8 million and $26.2 million, respectively, and net noncurrent deferred income tax liabilities totaled $83.5 million and $66.7 million, respectively.
Reconciliations of income taxes at the federal statutory rate (35% in fiscal 2014, 2013 and 2012) to actual income tax expense (benefit) for each of the periods presented are as follows:
As of September 25, 2014, we had federal and state net operating loss ("NOL") carryforwards and federal tax credit carryforwards that can be used to offset future federal and state income taxes. The benefit of these carryforwards is recognized as a deferred income tax asset. Loss carryforward and credit carryforward amounts as of September 25, 2014 have the following expiration dates:
No uncertain tax positions were recorded during fiscal 2014, 2013, and 2012. There were no accrued interest and penalties related to unrecognized tax benefits during fiscal 2014 and 2013. We do not expect that the total amounts of unrecognized tax benefits will significantly increase or decrease over the next 12 months.
The examination by the Internal Revenue Service for fiscal years 2007 through 2010 was completed in fiscal 2012 resulting in $12.8 million in federal tax refunds. The statute of limitations remains open for fiscal years 2011 and forward. We believe our consolidated financial statements include appropriate provisions for all outstanding issues in all jurisdictions and all open years.
On September 13, 2013, the U.S. Department of the Treasury issued final regulations that provide guidance on capitalization of tangible property. These regulations will result in our adoption of certain mandatory and elective accounting methods with respect to property and equipment, inventory and supplies. We are currently analyzing these accounting method changes, which will be adopted during the fiscal 2015 tax year, but we do not believe they will have a material impact on the consolidated financial statements.
Note 11 - Commitments and Contingencies
As of September 25, 2014, we were contingently liable for outstanding letters of credit in the amount of $84.9 million primarily related to several self-insurance programs, vendor contracts and regulatory requirements. The letters of credit are not to be drawn against unless we default on the timely payment of related liabilities.
Legal and Regulatory Matters
We are party to various legal actions in the ordinary course of our business. We believe these actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty,
management’s present judgment is that the resolution of these matters will not have a material impact on our business, financial condition, results of operations and cash flows. If, however, our assessment of these actions is inaccurate, or there are any significant adverse developments in these actions, our business, financial condition, results of operations and cash flows could be materially affected.
Our Board of Directors has approved employment agreements for our executives, which create certain liabilities in the event of the termination of these executives, including termination following a change of control. These agreements have original terms of at least one year and specify the executive’s current compensation, benefits and perquisites, the executive’s entitlements upon termination of employment and other employment rights and responsibilities.
Environmental Liabilities and Contingencies
We are subject to various federal, state and local environmental laws and regulations. We make financial expenditures in order to comply with regulations governing underground storage tanks adopted by federal, state and local regulatory agencies. In particular, at the federal level, the Resource Conservation and Recovery Act of 1976, as amended, requires the U.S. Environmental Protection Agency ("EPA") to establish a comprehensive regulatory program for the detection, prevention and cleanup of leaking underground storage tanks (e.g., overfills, spills and underground storage tank releases).
Federal and state laws and regulations require us to provide and maintain evidence that we are taking financial responsibility for corrective action and compensating third parties in the event of a release from our underground storage tank systems. In order to comply with these requirements, as of September 25, 2014, we maintained letters of credit in the aggregate amount of $1.4 million in favor of state environmental agencies in North Carolina, South Carolina, Virginia, Georgia, Indiana, Tennessee, Kentucky, Louisiana and Kansas.
We also rely upon the reimbursement provisions of applicable state trust funds. In Florida, we meet our financial responsibility requirements by state trust fund coverage for releases occurring through December 31, 1998 and meet such requirements for releases thereafter through private commercial liability insurance. In Georgia, we meet our financial responsibility requirements by a combination of state trust fund coverage, private commercial liability insurance and a letter of credit.
Regulations enacted by the EPA in 1988 established requirements for:
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Installing underground storage tank systems;
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Upgrading underground storage tank systems;
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Taking corrective action in response to releases;
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Closing underground storage tank systems;
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Keeping appropriate records; and
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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 that are at least as stringent as the federal standards. In 1998, Florida developed its own regulatory program, which incorporated requirements more stringent than the 1988 EPA regulations. At this time, we believe our facilities in Florida meet or exceed those regulations developed by Florida in 1998. We believe all company-owned underground storage tank systems are in material compliance with these 1988 EPA regulations and all applicable state environmental regulations.
All states in which we operate or have 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 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 fuel taxes to each state where we operate to participate in these trust fund programs. We have filed claims and received reimbursements in North Carolina, South Carolina, Kentucky, Indiana, Georgia, Florida, Tennessee, Alabama, Mississippi, Louisiana and Virginia. The coverage afforded by each state trust fund varies but generally provides up 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:
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The per-site deductible;
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Costs incurred in connection with releases occurring or reported to trust funds prior to their inception;
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Removal and disposal of underground storage tank systems; and
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Costs incurred in connection with sites otherwise ineligible for reimbursement from the trust funds.
The state trust funds generally require us to pay deductibles ranging from zero dollars to $200 thousand per occurrence depending on the upgrade status of our underground storage tank system, the date the release is discovered and/or 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 obtained private insurance coverage related to certain remediation costs and third-party claims arising out of releases that occurred in Florida and were reported after December 31, 1998. We believe that this coverage complies with federal and Florida financial responsibility regulations. In Georgia, we opted not to participate in the state trust fund effective December 30, 1999, except for certain sites, including sites where our lease requires us to participate in the Georgia trust fund. For all such sites where we have opted not to participate in the Georgia trust fund, we have obtained private insurance coverage related to certain remediation costs and third-party claims. We believe that this coverage complies with federal and Georgia financial responsibility regulations.
A substantial amount of our environmental liabilities will be expended for remediation on behalf of us 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 anticipated by us, we will be obligated to make such payments, which could materially 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 state trust funds.
As of September 25, 2014, environmental liabilities of approximately $5.1 million and $73.4 million are included in other accrued liabilities and other noncurrent liabilities, respectively. As of September 26, 2013, environmental liabilities of approximately $5.2 million and $66.2 million are included in other accrued liabilities and other noncurrent liabilities, respectively. These environmental liabilities represent our estimates for future expenditures for remediation associated with 548 and 582 known contaminated sites as of September 25, 2014 and September 26, 2013, respectively, 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. We estimate that approximately $70.3 million of our environmental obligations will be funded by state trust funds and third-party insurance; as a result we estimate we will spend up to approximately $8.2 million for remediation. As of September 25, 2014, anticipated reimbursements of $2.0 million are recorded as current receivables and $70.3 million are recorded as other noncurrent assets related to all sites. As of September 26, 2013, anticipated reimbursements of $2.4 million are recorded as current receivables and $63.6 million are recorded as other noncurrent assets. Remediation costs for known sites are expected to be incurred over the next one to ten years. Environmental liabilities have been established with remediation costs based on internal and external estimates for each site. There are no sites for which the timing and amounts for future remediation are fixed or reliably determinable.
Although we anticipate that we will be reimbursed for certain expenditures from state trust funds and private insurance, until such time as a claim for reimbursement has been formally accepted for coverage and payment, there is a risk of our reimbursement claims being rejected by a state trust fund or insurer. In Florida, remediation of such contamination reported before January 1, 1999 will be performed by the state (or state approved independent contractors) and substantially all of the remediation costs, less any applicable deductibles, will be paid by the state trust fund. We will perform remediation in other states through independent contractor firms engaged by us. For certain sites, the state 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 or private insurance.
As of September 25, 2014 and September 26, 2013, there are 107 and 147 sites, respectively, identified as contaminated that are being remediated by third parties who have indemnified us as to responsibility for cleanup matters. These sites are not included in our environmental liabilities. Additionally, we are awaiting closure notices on several other locations that will release us from responsibility related to known contamination at those sites. These sites continue to be considered in our environmental liabilities until a final closure notice is received.
Unamortized Liabilities Associated with Vendor Payments
Service and supply allowances are amortized over the life of each service or supply agreement, respectively, in accordance with the agreement’s specific terms. At September 25, 2014, other accrued liabilities and deferred vendor rebates included the unamortized liabilities associated with these payments of $2.6 million and $8.6 million, respectively. At September 26, 2013, other accrued liabilities and deferred vendor rebates included the unamortized liabilities associated with these payments of $1.3 million and $10.2 million, respectively.
During fiscal 2014, we purchased over 50% of our general merchandise from a single wholesaler, McLane Company, Inc. (“McLane”). During the second quarter of fiscal 2014 we entered into a new distribution service agreement with McLane that expires December 31, 2019. The new distribution service agreement replaced the distribution service agreement dated August 1, 2008, as amended, between the parties.
We have entered into product brand imaging agreements with numerous oil companies to buy fuel at market prices. The initial terms of these agreements have expiration dates ranging from 2015 to 2019 as of September 25, 2014. In connection with these agreements, we may receive upfront vendor allowances, volume incentive payments and other vendor assistance payments. If we default under the terms of any contract or terminate any supply agreement prior to the end of the initial term, we must reimburse the respective oil company for the unearned, unamortized portion of the payments received to date. These payments are amortized and recognized as a reduction to fuel cost of goods sold using the specific amortization periods based on the terms of each agreement, either using the straight-line method or based on fuel volume purchased. Therefore, the contractual obligation we must reimburse the respective oil company if we default may be different than the unamortized balance recorded as deferred vendor rebates.
Fuel Contractual Contingencies
Our Product Supply Agreement, Guaranteed Supply Agreement and Master Conversion Agreement with Marathon provides for Marathon to supply, and us to purchase, certain minimum amounts of motor fuel for our specified convenience store locations. Subject to certain adjustments, Marathon may terminate the agreements if we do not purchase a minimum volume of a combination of Marathon branded and unbranded gasoline and distillates annually. Based on current forecasts, we anticipate attaining the annual minimum fuel requirements. If Marathon terminates our agreement due to a failure to purchase the annual minimum amounts, Marathon is entitled to receive the unamortized balance of the investment provided for under the Master Conversion Agreement. The agreement expires on December 31, 2017.
Our Branded Jobber Contract with BP provides for BP to supply, and us to purchase, certain minimum amounts of motor fuel for our specified convenience store locations. Our obligation to purchase a minimum volume of BP branded fuel is measured each year over a one-year period during the remaining term of the agreement. Subject to certain adjustments, in any year in which we fail to meet our minimum volume purchase obligation, we have agreed to pay BP two cents per gallon times the difference between the actual volume of BP branded product purchased and the minimum volume requirement. Based on current forecasts, we anticipate attaining the minimum volume requirements for the one-year period ending December 31, 2014. The agreement expires on December 31, 2019.
We have agreements with other fuel suppliers that contain minimum volume provisions. A failure to purchase the minimum volumes could result in an increase in our fuel costs and/or other remedies available to the supplier. Based on our current forecasts, we do not expect these requirements to have a material effect on our results of operations, financial position or cash flows.
Note 12 - Defined Contribution Plan
We sponsor a 401(k) Employee Retirement Savings Plan for eligible employees. In 2014, employees are eligible to participate in the plan immediately and may contribute up to the lesser of 100% of their annual compensation or the Internal Revenue Service annual contribution limit. Employees that have been employed for one year are eligible for Company match on the basis of 100% of the first 3% and 50% of the next 2% contributed. Matching contribution expense was $2.2 million, $2.1 million, and $2.0 million for fiscal 2014, 2013 and 2012, respectively.
Note 13 - Stock Compensation Plans
The Compensation and Organization Committee of the Board of Directors has the authority to grant stock-based awards under The Pantry, Inc. 2007 Omnibus Plan (the “Omnibus Plan”). The Omnibus Plan permits the award of cash incentives and equity incentive grants for employees and non-employees covering 2.4 million shares of our common stock, plus shares subject to outstanding options under our 1999 Stock Option Plan that are forfeited or that otherwise cease to be outstanding after March 29, 2007 other than by reason of their having been exercised for, or settled in, vested and non-forfeitable shares. Awards made under the Omnibus Plan may take the form of stock options (including both incentive stock options and nonqualified stock options), stock appreciation rights, restricted stock and restricted stock units, performance shares and performance units, annual incentive awards, cash-based awards and other stock-based awards.
We recognize compensation expense on a straight-line basis over the requisite service period of each award. For performance-based restricted stock, the expense recognized each period is dependent upon our estimate of the number of shares that will ultimately vest. For all employee share-based payment awards, the expense recognized has been adjusted for estimated forfeitures. Estimated forfeiture rates are developed based on our analysis of historical forfeiture data.
Total share-based compensation expense, which is included in general and administrative expense in the Consolidated Statements of Operations, was $3.3 million, $2.7 million and $2.8 million in fiscal 2014, 2013 and 2012, respectively. The related income tax benefit was $1.3 million, $1.1 million and $1.2 million in fiscal 2014, 2013 and 2012, respectively. As of September 25, 2014 we have approximately 1.3 million shares available for equity grants.
Stock Option Awards
All options granted vest over a three-year period, with one-third of each grant vesting on the anniversary of the initial grant and have contractual lives of seven years. Additionally, the terms and conditions of awards under the plans may differ from one grant to another. Under the Omnibus Plan, 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.
A summary of the status of stock options under our plans and changes during fiscal 2014 is presented in the table below:
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model, which uses the assumptions noted in the following table. Expected volatility is based on the historical volatility of our common stock price. We use historical data to estimate option exercises and employee terminations used in the model. The expected term of options granted is based on historical experience and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
The weighted average assumptions used in the Black-Scholes-Merton option pricing model for options issued in fiscal 2014, 2013 and 2012 are as follows:
The weighted average grant date fair value of options granted during fiscal 2014, 2013 and 2012 was $574 thousand, $579 thousand and $660 thousand, respectively.
Stock options exercised during fiscal 2014 and 2013 were not material. There were no stock options exercised during fiscal 2012.
The total fair value of options that vested during fiscal 2014, 2013 and 2012 was $369 thousand, $323 thousand and $283 thousand, respectively. At September 25, 2014, there was $645 thousand of total unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted average period of 1.8 years.
Restricted Stock Awards
Restricted stock awards and restricted stock units are valued at the market price of a share of our common stock on the date of grant. In general, employee awards vest in equal annual installments at the end of each fiscal year of a three-year period from the date of grant. We also issue restricted stock awards and units to our Board of Directors annually, which vests over a one-year period. The weighted average fair value for restricted stock awards was $13.60 in fiscal 2014, $12.07 in fiscal 2013 and $12.89 in fiscal 2012. The weighted average fair value for restricted stock units was $15.44 in fiscal 2014 and $12.14 in fiscal 2013.There were no grants of restricted stock units in fiscal 2012. Transactions related to restricted stock awards and restricted stock units issued under the Omnibus Plan for the year ended September 25, 2014 are summarized as follows:
The total fair value of restricted stock awards that vested was approximately $2.8 million, $2.1 million and $1.5 million in fiscal 2014, 2013 and 2012, respectively. The total fair value of restricted stock units that vested was approximately $178 thousand in fiscal 2014. There were no vested restricted stock units in fiscal 2013 and 2012. The remaining unrecognized compensation expense related to unvested restricted stock awards at September 25, 2014 was $2.3 million, which is expected to be recognized over a weighted-average period of 1.6 years. The remaining unrecognized compensation expense related to unvested restricted stock units at September 25, 2014 was $65 thousand, which is expected to be recognized over a weighted-average period of 0.5 years.
Performance-based Restricted Stock Awards
During fiscal 2014, we granted restricted stock awards that have performance conditions that will be measured at the end of the employee’s requisite service period, which provide a range of vesting possibilities from 0% to 150%. The performance-based restricted awards generally vest in three annual installments commencing on the first anniversary of the grant date. These awards are expensed based on the probability of achieving performance metrics. If the performance metric is not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. The weighted average fair value for performance-based restricted stock was $14.94 in fiscal 2014, $11.92 in fiscal 2013 and $13.32 in fiscal 2012. Transactions related to performance-based restricted stock awards issued under the Omnibus Plan for the year ended September 25, 2014 are summarized as follows:
The total fair value of performance-based restricted stock awards that vested was approximately $62 thousand in fiscal 2013. No performance-based restricted stock vested in fiscal 2014 and 2012. The remaining unrecognized compensation expense related to unvested performance-based restricted stock awards at September 25, 2014 was $2.5 million, which is expected to be recognized over a weighted-average period of 1.5 years.
Note 14 - Earnings (Loss) per Share
Basic earnings (loss) per share is computed on the basis of the weighted-average number of common shares available to common shareholders. Diluted earnings (loss) per share is computed on the basis of the weighted-average number of common shares available to common shareholders, plus the effect of stock options and restricted stock using the "treasury stock" method.
In periods in which a net loss is incurred, no common stock equivalents are included since they are anti-dilutive. As such, all stock options and restricted stock outstanding are excluded from the computation of diluted net loss per share in those periods. Options and restricted stock representing 1.4 million shares for fiscal 2013 and 2012, respectively, have been excluded from diluted loss per share. Options to purchase shares of common stock and restricted stock that were not included in the computation of diluted earnings per share, because their inclusion would have been anti-dilutive, were 481 thousand for fiscal 2014.
The following table reflects the calculation of basic and diluted earnings (loss) per share:
Note 15 - Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance for accounting for fair value measurements established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels of inputs are defined as follows:
Our only financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, receivables, accounts payable, accrued liabilities and long-term debt and are reflected in the Consolidated Balance Sheets at cost. With the exception of long-term debt, cost approximates fair value for these items due to their short-term nature. We believe the fair value determination of these short-term financial instruments is a level 1 measure. Estimated fair values for long-term debt have been determined using available market information, including reported trades and benchmark yields. The fair value of our indebtedness was approximately $513.5 million and $522.5 million at September 25, 2014 and September 26, 2013, respectively. We believe the fair value determination of long-term debt is a Level 2 measure.
Significant measurements of assets or liabilities at fair value on a nonrecurring basis subsequent to their initial recognition included long-lived tangible assets as described in Note 5, Impairment Charges.
In determining the impairment of operating stores and surplus properties, we determined the fair values by estimating selling prices of the assets. We generally determine the estimated selling prices using information from comparable sales of similar assets and assumptions about demand in the market for these assets. Significant judgment was required to select certain inputs from observed market data. We believe the fair value determination of surplus properties and operating stores are a Level 2 measure.
For non-financial assets and liabilities measured at fair value on a non-recurring basis, quantitative disclosure of the fair value for each major category and any resulting realized losses included in earnings is presented below. Because these assets are not measured at fair value on a recurring basis, certain carrying amounts and fair value measurements presented in the table below may reflect values at earlier measurement dates and may no longer represent their fair values at September 25, 2014.
Note 16 - Quarterly Results (Unaudited)
The following table sets forth certain unaudited financial and operating data for each fiscal quarter during fiscal 2014 and 2013. The unaudited quarterly information includes all normal recurring adjustments that we consider necessary for a fair presentation of the information shown. Due to the nature of our business and our reliance, in part, on consumer spending patterns in coastal,
resort and tourist markets, we typically generate higher revenues and gross profits during warm weather months in the southeastern United States, which fall within our third and fourth fiscal quarters.
(1) We compute gross profit exclusive of depreciation and allocation of store operating and general and administrative expenses.
(2) We present fuel gross profit inclusive of credit card processing fees, environmental remediation expenses and cost of repairs and maintenance on fuel equipment.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)) under the Exchange Act that are designed to provide reasonable assurance that the information that we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that, because of inherent limitations, our disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met.
As required by paragraph (b) of Rules 13a-15(f) and 15d-15(f) under the Exchange Act, our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded, as of the end of the period covered by this report, that our disclosure controls and procedures were effective in that they provide reasonable assurance that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process that is designed under the supervision of our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Management has conducted its evaluation of the effectiveness of our internal control over financial reporting as of September 25, 2014 based on the framework in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing the operational effectiveness of our internal control over financial reporting. Management reviewed the results of the assessment with the Audit Committee of our Board of Directors. Based on its assessment, management determined that, as of September 25, 2014, we maintained effective internal control over financial reporting.
Our independent registered public accounting firm, Deloitte & Touche LLP, was engaged to audit the effectiveness of our internal control over financial reporting, as stated in their report, which is included in Item 9A of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the fourth quarter of fiscal 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time, we make changes to our internal control over financial reporting that are intended to enhance its effectiveness and which do not have a material effect on our overall internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
The Pantry, Inc.
Cary, North Carolina
We have audited the internal control over financial reporting of The Pantry, Inc. (the "Company") as of September 25, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 25, 2014, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the fiscal year ended September 25, 2014 of the Company and our report dated December 9, 2014 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
December 9, 2014
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
Information concerning our executive officers is included in the section entitled "Executive Officers of the Registrant" in Part I of this report. Information concerning our directors and the filing of certain reports of beneficial ownership is incorporated by reference from the sections entitled "Proposal 1: Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive proxy statement to be filed with respect to the Annual Meeting of Stockholders to be held March 12, 2015.
All employees, officers and directors, including our Chief Executive Officer and Principal Financial Officer, are required to abide by The Pantry, Inc. Code of Business Conduct and Ethics (the "Code"). The Code is designed to ensure that our business is conducted in a legal and ethical manner. A full text of the Code can be found at www.thepantry.com, under "Investors" and "Corporate Governance" captions. Information about our code of ethics is incorporated by reference from the section entitled "Information About Our Board of Directors - Code of Ethics" in our definitive proxy statement to be filed with respect to the Annual Meeting of Stockholders to be held March 12, 2015.
Information concerning the Audit Committee of our Board of Directors is incorporated by reference from the section entitled "Information About Our Board of Directors - Board Committees - Audit Committee" in our definitive proxy statement to be filed with respect to the Annual Meeting of Stockholders to be held March 12, 2015.
There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors since the date of our proxy statement for the Annual Meeting of Stockholders held March 13, 2014.
Item 11.
Item 11. Executive Compensation.
This information is incorporated by reference from the sections entitled "Executive Compensation", "Executive Compensation - Compensation Committee Interlocks and Insider Participation" and "Executive Compensation - Compensation Committee Report" in our definitive proxy statement to be filed with respect to the Annual Meeting of Stockholders to be held March 12, 2015.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
This information is incorporated by reference from the sections entitled "Principal Stockholders" and "Executive Compensation - Equity Compensation Plan Information" in our definitive proxy statement to be filed with respect to the Annual Meeting of Stockholders to be held March 12, 2015.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
This information is incorporated by reference from the sections entitled "Transactions with Affiliates" and "Information About Our Board of Directors - General" in our definitive proxy statement to be filed with respect to the Annual Meeting of Stockholders to be held March 12, 2015.
Item 14.
Item 14. Principal Accounting Fees and Services.
This information is incorporated by reference from the section entitled "Ratification of Appointment of Independent Public Accountants - Principal Accountant Fees and Services" in our definitive proxy statement to be filed with respect to the Annual Meeting of Stockholders to be held March 12, 2015.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
The following information required under this item is filed as part of this report:
(a)
1. Financial Statements
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements;
Consolidated Balance Sheets at September 25, 2014 and September 26, 2013;
Consolidated Statements of Operations for the fiscal years ended September 25, 2014, September 26, 2013 and September 27, 2012;
Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended September 25, 2014, September 26, 2013 and September 27, 2012;
Consolidated Statements of Shareholders’ Equity for the fiscal years ended September 25, 2014, September 26, 2013 and September 27, 2012;
Consolidated Statements of Cash Flows for the fiscal years ended September 25, 2014, September 26, 2013 and September 27, 2012;
Notes to Consolidated Financial Statements.
2. Exhibits
Exhibit Exhibit Description
2.1 Asset Purchase Agreement dated January 5, 2007 between The Pantry, Inc. ("The Pantry") and Petro Express, Inc. (incorporated by reference to Exhibit 2.1 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended March 29, 2007).†
3.1 Amended and Restated Certificate of Incorporation of The Pantry (incorporated by reference to Exhibit 3.3 to The Pantry’s Registration Statement on Form S-1, as amended (Registration No. 333-74221)).
3.2 Amended and Restated by-Laws of The Pantry (incorporated by reference to Exhibit 3.2 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 25, 2009).
4.1 Indenture dated August 3, 2012 by The Pantry and U.S. Bank National Association, as Trustee, with respect to the 8.375% Senior Notes due 2020 (incorporated by reference to Exhibit 4.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
4.2 Form of 8.375 Senior Notes due 2020 (incorporated by reference to Exhibit 4.2 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
4.3 Supplemental Indenture dated August 3, 2012 dated August 3, 2012 among The Pantry and U.S. Bank National Association, as Trustee, with respect to the 7.75% Senior Subordinated Notes due 2014 (incorporated by reference to Exhibit 4.3 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
4.4
Supplemental Indenture dated April 23, 2013 by The Pantry and U.S. Bank National Association, as Trustee, with respect to the 8.375% Senior Notes due 2020 (incorporated by reference to Exhibit 4.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2013).
10.1 Fourth Amended and Restated Credit Agreement dated as of August 3, 2012 among The Pantry, certain domestic subsidiaries of The Pantry from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC, BMO Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets, LLC, and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint bookrunners, Royal Bank of Canada as syndication agent, Bank of America, N.A., BMO Harris Financing, Inc., Cooperative Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland,” New York Branch and SunTrust Bank, as co-documentation agents, and the several other banks and financial institutions signatory thereto (incorporated by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
10.2
First Amendment to Fourth Amended and Restated Credit Agreement dated as of August 15, 2013 among The Pantry, Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC, BMO Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets, LLC, and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint bookrunners, Royal Bank of Canada as syndication agent, Bank of America, N.A., BMO Harris Financing, Inc., Cooperative Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland,” New York Branch and SunTrust Bank, as co-documentation agents, and the several other banks and financial institutions signatory thereto (incorporated by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 20, 2013).
10.3
Second Amendment to Fourth Amended and Restated Credit Agreement dated as of December 20, 2013 among The Pantry, Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC, BMO Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets, LLC, and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint bookrunners, Royal Bank of Canada as syndication agent, Bank of America, N.A., BMO Harris Financing, Inc., Cooperative Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland,” New York Branch and SunTrust Bank, as co-documentation agents, and the several other banks and financial institutions signatory thereto. (incorporated by reference to Exhibit 10.1 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 26, 2013).
10.4
Third Amendment to Fourth Amended and Restated Credit Agreement dated as of January 14, 2014 among The Pantry, Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC, BMO Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets, LLC, and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint bookrunners, Royal Bank of Canada as syndication agent, Bank of America, N.A., BMO Harris Financing, Inc., Cooperative Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland,” New York Branch and SunTrust Bank, as co-documentation agents, and the several other banks and financial institutions signatory thereto. (incorporated by reference to Exhibit 10.2 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 26, 2013).
10.5 Registration Rights Agreement dated August 3, 2012 among The Pantry and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC as Representatives of the Initial Purchasers (incorporated by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
10.6 Fourth Amended and Restated Pledge Agreement dated as of August 3, 2012 by and among The Pantry, certain domestic subsidiaries of The Pantry from time to time party thereto, and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.3 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
10.7 Fourth Amended and Restated Security Agreement dated as of August 3, 2012 by and among The Pantry, certain domestic subsidiaries of The Pantry from time to time party thereto, and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.4 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
10.8 Form of Lease Agreement between The Pantry and certain parties to the Purchase and Sale Agreement dated October 9, 2003 by and among The Pantry, RI TN 1, LLC, RI TN 2, LLC, RI GA 1, LLC, and Crestnet 1, LLC (incorporated by reference to Exhibit 2.5 to The Pantry’s Current Report on Form 8-K, as amended, filed with the Securities and Exchange Commission on October 31, 2003).
10.9 Form of Lease Agreement between The Pantry and National Retail Properties, LP (incorporated by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2007).
10.10 Independent Director Compensation Program, Fifth Amendment January 2010 (incorporated by reference to Exhibit 10.1 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended December 24, 2009).*
10.11
Independent Director Compensation Program, Sixth Amendment January 2014 (incorporated by reference to Exhibit 10.4 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended March 27, 2014).*
10.12 The Pantry, Inc. 1999 Stock Option Plan, as amended and restated as of October 17, 2007 (incorporated by reference to Exhibit 10.27 to The Pantry's Annual Report on Form 10-K for the year ended September 27, 2007).*
10.13 Form of Incentive Stock Option Agreement to The Pantry, Inc. 1999 Stock Option Plan (incorporated by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2004).*
10.14 The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 3, 2007).*
10.15 The Pantry, Inc. Annual Incentive Program, as amended, under The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.26 to The Pantry's Annual Report on Form 10-K for the year ended September 29, 2011).*
10.16
The Pantry, Inc. Annual Incentive Program, as amended, under The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.1 to The Pantry's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 9, 2012).*
10.17 Form of Award Agreement (Awarding Nonqualified Stock Option to Non-Employee Director) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.3 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 25, 2008).*
10.18 Form of Award Agreement (Awarding Restricted Stock to Non-Employee Director) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.4 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 25, 2008).*
10.19 Form of Award Agreement (Awarding RSUs to Non-Employee Director) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.5 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 25, 2008).*
10.20 Form of Award Agreement (Awarding Performance-Based Restricted Stock to Employee for Multi-Year Performance Period) (incorporated by reference to Exhibit 10.2 to The Pantry's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 24, 2010).*
10.21 Form of Award Agreement (Awarding Restricted Stock to Employee) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.40 to The Pantry’s Annual Report on Form 10-K for the year ended September 29, 2011).*
10.22 Form of Award Agreement (Awarding Performance-Based Restricted Stock to Employee for Multi-Year Performance Period) (incorporated by reference to Exhibit 10.41 to The Pantry’s Annual Report on Form 10-K for the year ended September 29, 2011).*
10.23
Form of Award Agreement (Awarding Performance-Based Restricted Stock to Employee) (incorporated by reference to Exhibit 10.2 to The Pantry's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 9, 2012).*
10.24
Form of Award Agreement (Awarding Restricted Stock to Employee) for The Pantry, Inc. 2007 Omnibus Plan(incorporated by reference to Exhibit 10.1 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended June 26, 2014).*
10.25
Form of Award Agreement (Awarding Performance-Based Restricted Stock to Employee) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.2 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended June 26, 2014).*
10.26 Form of Award Agreement (Awarding Restricted Stock to Employee for Retention) (incorporated by reference to Exhibit 10.1 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2011).*
10.27 Form of Award Agreement (Awarding Non-Qualified Stock Option to Dennis Hatchell) (incorporated by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2012).*
10.28 Form of Award Agreement (Awarding Initial Time Restricted Stock to Dennis Hatchell) (incorporated by reference to Exhibit 10.3 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2012).*
10.29 Form of Award Agreement (Awarding Time Restricted Stock to Dennis Hatchell) (incorporated by reference to Exhibit 10.4 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2012).*
10.30 Form of Award Agreement (Awarding Performance-Based Restricted Stock to Dennis Hatchell). (incorporated by reference to Exhibit 10.5 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2012).*
10.31
The Pantry, Inc. Fiscal 2014 RooMax Incentive Award Program (incorporated by reference to Exhibit 10.1 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended March 27, 2014).*
10.32 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.29 to The Pantry’s Registration Statement on Form S-1, as amended (Registration No. 333-74221)).*
10.33 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K filed with the Securities Exchange Commission on September 19, 2011).
10.34 Amended and Restated Employment Agreement made and entered into as of January 10, 2012 by and between Keith A. Oreson and the Company (incorporated by reference to Exhibit 10.2 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2011).*
10.35 Amended and Restated Employment Agreement made and entered into as of January 10, 2012 by and between Thomas D. Carney and the Company (incorporated by reference to Exhibit 10.3 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2011).*
10.36 Amended and Restated Employment Agreement made and entered into as of January 10, 2012 by and between Keith S. Bell and the Company (incorporated by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 13, 2012).*
10.37 Employment Agreement effective as of March 5, 2012 by and between Dennis G. Hatchell and the Company (incorporated by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2012).*
10.38 Severance Agreement effective as of December 15, 2011 by and between Berry L. Epley and the Company (incorporated by reference to Exhibit 10.43 to The Pantry’s Annual Report on Form 10-K for the year ended September 27, 2012).*
10.39
Employment Agreement effective as of February 7, 2013 by and between B. Clyde Preslar and the Company (incorporated by reference to Exhibit 10.1 to The Pantry's Current Report on Form 8-K filed with the Securities and Exchange Commission on January, 11, 2013).*
10.40
Employment Agreement effective as of June 3, 2013 by and between Boris Zelmanovich and the Company (incorporated by reference to Exhibit 10.3 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 27, 2013).*
10.41
Employment Agreement effective as of January 14, 2014 by and between David Zodikoff and the Company (incorporated by reference to Exhibit 10.3 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 26, 2013).*
10.42
Employment Agreement effective as of April 17, 2014 by and between Gordon Schmidt and the Company (incorporated by reference to Exhibit 10.3 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 26, 2014).*
10.43
Distribution Service Agreement by and between The Pantry and McLane Company, Inc. dated March 25, 2014 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.2 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended March 27, 2014).
10.44 Master Conversion Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated July 26, 2010, (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.71 to The Pantry’s Annual Report on Form 10-K for the year ended September 30, 2010).
10.45 First Amendment to Master Conversion Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated February 14, 2011, (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.79 to The Pantry’s Annual Report on Form 10-K for the year ended September 29, 2011).
10.46 Second Amendment to Master Conversion Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated August 15, 2011, (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.80 to The Pantry’s Annual Report on Form 10-K for the year ended September 29, 2011).
10.47 Third Amendment to Master Conversion Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated October 3, 2011, (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.81 to The Pantry’s Annual Report on Form 10-K for the year ended September 29, 2011).
10.48 Fourth Amendment to Master Conversion Agreement by and between The Pantry and Marathon Petroleum Company LP dated June 4, 2012 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.2 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 28, 2012).
10.49
Fifth Amendment to Master Conversion Agreement by and between the Pantry and Marathon Petroleum Company LP dated May 13, 2013 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.1 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 27, 2013).
10.50
Amended and Restated Master Conversion Agreement by and between the Pantry and Marathon Petroleum Company LP dated June 27, 2013 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.4 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 27, 2013).
10.51
Side Letter to Amended and Restated Master Conversion Agreement and Amended and Restated Guaranteed Supply Agreement by and between The Pantry and Marathon Petroleum Company LP (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.53 to The Pantry’s Annual Report on Form 10-K for the year ended September 26, 2013).
10.52 Guaranteed Supply Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated July 26, 2010, (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.72 to The Pantry’s Annual Report on Form 10-K for the year ended September 30, 2010).
10.53 First Amendment to Guaranteed Supply Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated February 14, 2010, (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.83 to The Pantry’s Annual Report on Form 10-K for the year ended September 29, 2011).
10.54 Second Amendment to Guaranteed Supply Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated August 15, 2011 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.84 to The Pantry’s Annual Report on Form 10-K for the year ended September 29, 2011).
10.55 Third Amendment to Guaranteed Supply Agreement by and between The Pantry and Marathon Petroleum Company LP dated January 1, 2012 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.3 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 28, 2012).
10.56
Fourth Amendment to Guaranteed Supply Agreement by and between the Pantry and Marathon Petroleum Company LP dated May 13, 2013 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.2 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 27, 2013).
10.57
Amended and Restated Guaranteed Supply Agreement by and between the Pantry and Marathon Petroleum Company LP dated June 27, 2013 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.5 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 27, 2013).
10.58
First Amendment to Amended and Restated Guaranteed Supply Agreement by and between the Pantry and Marathon Petroleum Company LP dated June 25, 2014 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission).
10.59
Branded Product Supply and Trademark License Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated July 26, 2010 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.70 to The Pantry’s Annual Report on Form 10-K for the year ended September 30, 2010).
10.60 Amendment to Branded Product Supply and Trademark License Agreement by and between The Pantry and Marathon Petroleum Company LP dated May 22, 2012 (incorporated by reference to Exhibit 10.1 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 28, 2012).
10.61
Letter Renewal of the Branded Product Supply & Trademark License Agreement by and between The Pantry and Marathon Petroleum Company LP, dated March 26, 2013 (incorporated by reference to Exhibit 10.1 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 2013).
10.62
Branded Jobber Contract by and between The Pantry and BP® Products North America Inc. dated December 31, 2012 as amended by the Rider to the Branded Jobber Contract dated January 7, 2013 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.1 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 27, 2012).
12.1 Statement regarding Computation of Earnings to Fixed Charges Ratio.
21.1
Subsidiary of The Pantry, Inc.
23.1 Consent of Deloitte & Touche LLP.
31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.].
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.].
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definitions Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
* Management contract or compensation plan or arrangement required to be filed as an exhibit to this Form
10-K.
† Pursuant to Regulation S-K, Item 601(b)(2), the exhibits and schedules have not been filed. The Pantry, Inc. agrees to furnish supplementally a copy of any omitted Exhibit or schedule to the Securities and Exchange Commission upon request, provided; however, the Pantry, Inc. may request confidential treatment of omitted items.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
Exhibit Exhibit Description
2.1 Asset Purchase Agreement dated January 5, 2007 between The Pantry, Inc. ("The Pantry") and Petro Express, Inc. (incorporated by reference to Exhibit 2.1 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended March 29, 2007).†
3.1 Amended and Restated Certificate of Incorporation of The Pantry (incorporated by reference to Exhibit 3.3 to The Pantry’s Registration Statement on Form S-1, as amended (Registration No. 333-74221)).
3.2 Amended and Restated by-Laws of The Pantry (incorporated by reference to Exhibit 3.2 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 25, 2009).
4.1 Indenture dated August 3, 2012 by The Pantry and U.S. Bank National Association, as Trustee, with respect to the 8.375% Senior Notes due 2020 (incorporated by reference to Exhibit 4.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
4.2 Form of 8.375 Senior Notes due 2020 (incorporated by reference to Exhibit 4.2 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
4.3 Supplemental Indenture dated August 3, 2012 dated August 3, 2012 among The Pantry and U.S. Bank National Association, as Trustee, with respect to the 7.75% Senior Subordinated Notes due 2014 (incorporated by reference to Exhibit 4.3 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
4.4
Supplemental Indenture dated April 23, 2013 by The Pantry and U.S. Bank National Association, as Trustee, with respect to the 8.375% Senior Notes due 2020 (incorporated by reference to Exhibit 4.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 24, 2013).
10.1 Fourth Amended and Restated Credit Agreement dated as of August 3, 2012 among The Pantry, certain domestic subsidiaries of The Pantry from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC, BMO Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets, LLC, and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint bookrunners, Royal Bank of Canada as syndication agent, Bank of America, N.A., BMO Harris Financing, Inc., Cooperative Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland,” New York Branch and SunTrust Bank, as co-documentation agents, and the several other banks and financial institutions signatory thereto (incorporated by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
10.2
First Amendment to Fourth Amended and Restated Credit Agreement dated as of August 15, 2013 among The Pantry, Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC, BMO Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets, LLC, and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint bookrunners, Royal Bank of Canada as syndication agent, Bank of America, N.A., BMO Harris Financing, Inc., Cooperative Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland,” New York Branch and SunTrust Bank, as co-documentation agents, and the several other banks and financial institutions signatory thereto (incorporated by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 20, 2013).
10.3
Second Amendment to Fourth Amended and Restated Credit Agreement dated as of December 20, 2013 among The Pantry, Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC, BMO Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets, LLC, and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint bookrunners, Royal Bank of Canada as syndication agent, Bank of America, N.A., BMO Harris Financing, Inc., Cooperative Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland,” New York Branch and SunTrust Bank, as co-documentation agents, and the several other banks and financial institutions signatory thereto. (incorporated by reference to Exhibit 10.1 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 26, 2013).
10.4
Third Amendment to Fourth Amended and Restated Credit Agreement dated as of January 14, 2014 among The Pantry, Wells Fargo Bank, National Association, as administrative agent, Wells Fargo Securities, LLC, BMO Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets, LLC, and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint bookrunners, Royal Bank of Canada as syndication agent, Bank of America, N.A., BMO Harris Financing, Inc., Cooperative Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland,” New York Branch and SunTrust Bank, as co-documentation agents, and the several other banks and financial institutions signatory thereto. (incorporated by reference to Exhibit 10.2 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 26, 2013).
10.5 Registration Rights Agreement dated August 3, 2012 among The Pantry and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC as Representatives of the Initial Purchasers (incorporated by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
10.6 Fourth Amended and Restated Pledge Agreement dated as of August 3, 2012 by and among The Pantry, certain domestic subsidiaries of The Pantry from time to time party thereto, and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.3 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
10.7 Fourth Amended and Restated Security Agreement dated as of August 3, 2012 by and among The Pantry, certain domestic subsidiaries of The Pantry from time to time party thereto, and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.4 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 3, 2012).
10.8 Form of Lease Agreement between The Pantry and certain parties to the Purchase and Sale Agreement dated October 9, 2003 by and among The Pantry, RI TN 1, LLC, RI TN 2, LLC, RI GA 1, LLC, and Crestnet 1, LLC (incorporated by reference to Exhibit 2.5 to The Pantry’s Current Report on Form 8-K, as amended, filed with the Securities and Exchange Commission on October 31, 2003).
10.9 Form of Lease Agreement between The Pantry and National Retail Properties, LP (incorporated by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2007).
10.10 Independent Director Compensation Program, Fifth Amendment January 2010 (incorporated by reference to Exhibit 10.1 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended December 24, 2009).*
10.11
Independent Director Compensation Program, Sixth Amendment January 2014 (incorporated by reference to Exhibit 10.4 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended March 27, 2014).*
10.12 The Pantry, Inc. 1999 Stock Option Plan, as amended and restated as of October 17, 2007 (incorporated by reference to Exhibit 10.27 to The Pantry's Annual Report on Form 10-K for the year ended September 27, 2007).*
10.13 Form of Incentive Stock Option Agreement to The Pantry, Inc. 1999 Stock Option Plan (incorporated by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2004).*
10.14 The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 3, 2007).*
10.15 The Pantry, Inc. Annual Incentive Program, as amended, under The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.26 to The Pantry's Annual Report on Form 10-K for the year ended September 29, 2011).*
10.16
The Pantry, Inc. Annual Incentive Program, as amended, under The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.1 to The Pantry's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 9, 2012).*
10.17 Form of Award Agreement (Awarding Nonqualified Stock Option to Non-Employee Director) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.3 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 25, 2008).*
10.18 Form of Award Agreement (Awarding Restricted Stock to Non-Employee Director) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.4 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 25, 2008).*
10.19 Form of Award Agreement (Awarding RSUs to Non-Employee Director) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.5 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 25, 2008).*
10.20 Form of Award Agreement (Awarding Performance-Based Restricted Stock to Employee for Multi-Year Performance Period) (incorporated by reference to Exhibit 10.2 to The Pantry's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 24, 2010).*
10.21 Form of Award Agreement (Awarding Restricted Stock to Employee) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.40 to The Pantry’s Annual Report on Form 10-K for the year ended September 29, 2011).*
10.22 Form of Award Agreement (Awarding Performance-Based Restricted Stock to Employee for Multi-Year Performance Period) (incorporated by reference to Exhibit 10.41 to The Pantry’s Annual Report on Form 10-K for the year ended September 29, 2011).*
10.23
Form of Award Agreement (Awarding Performance-Based Restricted Stock to Employee) (incorporated by reference to Exhibit 10.2 to The Pantry's Current Report on Form 8-K filed with the Securities and Exchange Commission on November 9, 2012).*
10.24
Form of Award Agreement (Awarding Restricted Stock to Employee) for The Pantry, Inc. 2007 Omnibus Plan(incorporated by reference to Exhibit 10.1 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended June 26, 2014).*
10.25
Form of Award Agreement (Awarding Performance-Based Restricted Stock to Employee) for The Pantry, Inc. 2007 Omnibus Plan (incorporated by reference to Exhibit 10.2 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended June 26, 2014).*
10.26 Form of Award Agreement (Awarding Restricted Stock to Employee for Retention) (incorporated by reference to Exhibit 10.1 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2011).*
10.27 Form of Award Agreement (Awarding Non-Qualified Stock Option to Dennis Hatchell) (incorporated by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2012).*
10.28 Form of Award Agreement (Awarding Initial Time Restricted Stock to Dennis Hatchell) (incorporated by reference to Exhibit 10.3 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2012).*
10.29 Form of Award Agreement (Awarding Time Restricted Stock to Dennis Hatchell) (incorporated by reference to Exhibit 10.4 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2012).*
10.30 Form of Award Agreement (Awarding Performance-Based Restricted Stock to Dennis Hatchell). (incorporated by reference to Exhibit 10.5 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2012).*
10.31
The Pantry, Inc. Fiscal 2014 RooMax Incentive Award Program (incorporated by reference to Exhibit 10.1 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended March 27, 2014).*
10.32 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.29 to The Pantry’s Registration Statement on Form S-1, as amended (Registration No. 333-74221)).*
10.33 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K filed with the Securities Exchange Commission on September 19, 2011).
10.34 Amended and Restated Employment Agreement made and entered into as of January 10, 2012 by and between Keith A. Oreson and the Company (incorporated by reference to Exhibit 10.2 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2011).*
10.35 Amended and Restated Employment Agreement made and entered into as of January 10, 2012 by and between Thomas D. Carney and the Company (incorporated by reference to Exhibit 10.3 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2011).*
10.36 Amended and Restated Employment Agreement made and entered into as of January 10, 2012 by and between Keith S. Bell and the Company (incorporated by reference to Exhibit 10.2 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 13, 2012).*
10.37 Employment Agreement effective as of March 5, 2012 by and between Dennis G. Hatchell and the Company (incorporated by reference to Exhibit 10.1 to The Pantry’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 16, 2012).*
10.38 Severance Agreement effective as of December 15, 2011 by and between Berry L. Epley and the Company (incorporated by reference to Exhibit 10.43 to The Pantry’s Annual Report on Form 10-K for the year ended September 27, 2012).*
10.39
Employment Agreement effective as of February 7, 2013 by and between B. Clyde Preslar and the Company (incorporated by reference to Exhibit 10.1 to The Pantry's Current Report on Form 8-K filed with the Securities and Exchange Commission on January, 11, 2013).*
10.40
Employment Agreement effective as of June 3, 2013 by and between Boris Zelmanovich and the Company (incorporated by reference to Exhibit 10.3 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 27, 2013).*
10.41
Employment Agreement effective as of January 14, 2014 by and between David Zodikoff and the Company (incorporated by reference to Exhibit 10.3 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 26, 2013).*
10.42
Employment Agreement effective as of April 17, 2014 by and between Gordon Schmidt and the Company (incorporated by reference to Exhibit 10.3 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 26, 2014).*
10.43
Distribution Service Agreement by and between The Pantry and McLane Company, Inc. dated March 25, 2014 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.2 to The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended March 27, 2014).
10.44 Master Conversion Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated July 26, 2010, (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.71 to The Pantry’s Annual Report on Form 10-K for the year ended September 30, 2010).
10.45 First Amendment to Master Conversion Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated February 14, 2011, (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.79 to The Pantry’s Annual Report on Form 10-K for the year ended September 29, 2011).
10.46 Second Amendment to Master Conversion Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated August 15, 2011, (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.80 to The Pantry’s Annual Report on Form 10-K for the year ended September 29, 2011).
10.47 Third Amendment to Master Conversion Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated October 3, 2011, (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.81 to The Pantry’s Annual Report on Form 10-K for the year ended September 29, 2011).
10.48 Fourth Amendment to Master Conversion Agreement by and between The Pantry and Marathon Petroleum Company LP dated June 4, 2012 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.2 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 28, 2012).
10.49
Fifth Amendment to Master Conversion Agreement by and between the Pantry and Marathon Petroleum Company LP dated May 13, 2013 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.1 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 27, 2013).
10.50
Amended and Restated Master Conversion Agreement by and between the Pantry and Marathon Petroleum Company LP dated June 27, 2013 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.4 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 27, 2013).
10.51
Side Letter to Amended and Restated Master Conversion Agreement and Amended and Restated Guaranteed Supply Agreement by and between The Pantry and Marathon Petroleum Company LP (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.53 to The Pantry’s Annual Report on Form 10-K for the year ended September 26, 2013).
10.52 Guaranteed Supply Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated July 26, 2010, (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.72 to The Pantry’s Annual Report on Form 10-K for the year ended September 30, 2010).
10.53 First Amendment to Guaranteed Supply Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated February 14, 2010, (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.83 to The Pantry’s Annual Report on Form 10-K for the year ended September 29, 2011).
10.54 Second Amendment to Guaranteed Supply Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated August 15, 2011 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.84 to The Pantry’s Annual Report on Form 10-K for the year ended September 29, 2011).
10.55 Third Amendment to Guaranteed Supply Agreement by and between The Pantry and Marathon Petroleum Company LP dated January 1, 2012 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.3 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 28, 2012).
10.56
Fourth Amendment to Guaranteed Supply Agreement by and between the Pantry and Marathon Petroleum Company LP dated May 13, 2013 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.2 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 27, 2013).
10.57
Amended and Restated Guaranteed Supply Agreement by and between the Pantry and Marathon Petroleum Company LP dated June 27, 2013 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.5 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 27, 2013).
10.58
First Amendment to Amended and Restated Guaranteed Supply Agreement by and between the Pantry and Marathon Petroleum Company LP dated June 25, 2014 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission).
10.59
Branded Product Supply and Trademark License Agreement by and between The Pantry and Marathon Petroleum Company, LLC dated July 26, 2010 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.70 to The Pantry’s Annual Report on Form 10-K for the year ended September 30, 2010).
10.60 Amendment to Branded Product Supply and Trademark License Agreement by and between The Pantry and Marathon Petroleum Company LP dated May 22, 2012 (incorporated by reference to Exhibit 10.1 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended June 28, 2012).
10.61
Letter Renewal of the Branded Product Supply & Trademark License Agreement by and between The Pantry and Marathon Petroleum Company LP, dated March 26, 2013 (incorporated by reference to Exhibit 10.1 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 2013).
10.62
Branded Jobber Contract by and between The Pantry and BP® Products North America Inc. dated December 31, 2012 as amended by the Rider to the Branded Jobber Contract dated January 7, 2013 (asterisks located within the exhibit denote information which has been deleted pursuant to a confidential treatment filing with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.1 to The Pantry’s Quarterly Report on Form 10-Q for the quarterly period ended December 27, 2012).
12.1 Statement regarding Computation of Earnings to Fixed Charges Ratio.
21.1
Subsidiary of The Pantry, Inc.
23.1 Consent of Deloitte & Touche LLP.
31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 .
31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.].
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.].
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definitions Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
* Management contract or compensation plan or arrangement required to be filed as an exhibit to this Form
10-K.
† Pursuant to Regulation S-K, Item 601(b)(2), the exhibits and schedules have not been filed. The Pantry, Inc. agrees to furnish supplementally a copy of any omitted Exhibit or schedule to the Securities and Exchange Commission upon request, provided; however, the Pantry, Inc. may request confidential treatment of omitted items.