<PAGE>
As filed with the Securities and Exchange Commission on April 2, 1999
Registration No. 333-74221
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
THE PANTRY, INC.
(Exact name of registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 5411 56-1574463
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
P.O. Box 1410
1801 Douglas Drive
Sanford, North Carolina 27331-1410
(919) 774-6700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
WILLIAM T. FLYG
Chief Financial Officer
P.O. Box 1410
1801 Douglas Drive
Sanford, North Carolina 27331-1410
(919) 774-6700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
CYNTHIA M. DUNNETT, ESQ. VALERIE FORD JACOB, ESQ.
CARRIE WALKER, ESQ. Fried, Frank, Harris, Shriver & Jacobson
Riordan & McKinzie One New York Plaza
300 South Grand Avenue, Twenty-Ninth Floor New York, New York 10004
Los Angeles, California 90071 (212) 859-8000
(213) 629-4824
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
-----------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
-----------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated April 2, 1999
PROSPECTUS
Shares
The Pantry, Inc.
Common Stock
-------------
This is The Pantry's initial public offering of common stock. All of the
shares of common stock are being sold by The Pantry.
The Pantry expects the public offering price to be between $ and $ per
share. Currently, no public market exists for the shares. We will apply to have
the common stock quoted on the Nasdaq National Market under the symbol "PTRY."
Investing in our common stock involves risks which are described in the
"Risk Factors" section beginning on page 12 of this prospectus.
-------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price........................... $ $
Underwriting discount........................... $ $
Proceeds, before expenses, to The Pantry........ $ $
</TABLE>
The underwriters may also purchase up to an additional shares from The
Pantry, at the public offering price less the underwriting discount, within 30
days from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
-------------
Merrill Lynch & Co. NationsBanc Montgomery Securities LLC
-------------
The date of this prospectus is , 1999.
<PAGE>
1. Map of southeast region showing store locations
2. Interior/exterior pictures of convenience stores
3. Financial performance graphs depicting
quarterly revenues, quarterly EBITDA
and store growth
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 5
Risk Factors............................................................. 12
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial Data.................................................. 22
Unaudited Pro Forma Financial Data....................................... 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 35
Industry Overview........................................................ 54
Business................................................................. 56
Management............................................................... 71
Certain Relationships and Related Transactions........................... 78
Security Ownership of Certain Beneficial Owners and Management........... 79
Description of Capital Stock............................................. 81
Shares Eligible for Future Sale.......................................... 82
Material U.S. Tax Considerations Applicable to Non-U.S. Holders of the
Common Stock............................................................ 84
Underwriting............................................................. 88
Legal Matters............................................................ 91
Experts.................................................................. 91
Additional Information................................................... 92
Index to Financial Statements............................................ F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
----------------
Industry data included in this prospectus is derived primarily from the
National Association of Convenience Stores 1998 State of the Industry report
and other sources generally relied upon within the convenience store industry.
The Pantry has not independently verified this data.
3
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
4
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including the
"Risk Factors" section and our consolidated financial statements. Unless
otherwise indicated, all information in this prospectus reflects our for
stock split which will occur prior to the completion of the offering and
assumes that the underwriters will not exercise their over-allotment option.
The Pantry
The Pantry is a leading convenience store operator in the southeastern
United States and the third largest independently operated convenience store
chain in the country. Our stores offer a broad selection of merchandise and
gasoline as well as ancillary services designed to appeal to the convenience
needs of our customers. Since the arrival of our current management team in
1996, we have experienced significant growth through a combination of
management initiatives and strategic acquisitions. As of February 28, 1999, we
operated 1,151 stores located in Florida, North Carolina, South Carolina,
Kentucky, Indiana, Tennessee and Virginia.
Our stores are generally situated in suburban areas of rapidly growing
markets, coastal/resort areas and smaller towns. Over 90% of our stores are
located in northern and central Florida, North Carolina and South Carolina,
which are among the fastest growing states in terms of population, employment
and gross state product. We believe that we have the number one market share in
each of our principal regions based on number of stores. On a pro forma basis
for fiscal 1998 we generated total revenue of $1.7 billion and EBITDA of $92.2
million.
Industry Overview
The United States convenience store industry is large and growing. In
1997 over 95,700 convenience stores operating throughout the United States
generated sales of $156.2 billion. The convenience store industry is larger in
size than many other retail sectors, including the home improvement, drug store
and department store sectors, which had 1997 sales of approximately $150
billion, $100 billion and $76 billion, respectively. Over the last ten years,
industry sales have grown at a 6.4% compound annual growth rate (CAGR),
outpacing the 3.1% CAGR in the consumer price index, a measure of retail
inflation. We believe the convenience store industry exhibits several
characteristics that have historically tended to insulate it from seasonality
and global and domestic economic trends. These characteristics include: (1) a
high percentage of sales from necessity items, including gasoline, consumables
and food, (2) a small average transaction size and (3) the industry's
convenience format.
The convenience store industry provides opportunities for a large, well-
managed operator to realize economies of scale and increase sales and
profitability due to the industry's high degree of fragmentation, lack of
merchandising focus and insufficient capital investment. Since the arrival of
our current management team in 1996, we have capitalized on these opportunities
and have grown from 379 stores in fiscal 1996 to 1,151 stores as of February
28, 1999 and from $384.8 million in total revenue in fiscal 1996 to $1.7
billion in total pro forma revenue for fiscal 1998.
5
<PAGE>
Operating Strategy
In February 1996, Freeman Spogli, our majority shareholder, recruited our
current management team headed by Peter Sodini, an experienced food retailing
executive. Mr. Sodini and his team, with an average of 32 years of food
retailing experience, implemented an operating strategy that contributed to the
following financial results:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------
Sept. 26, Sept. 25, Sept. 24,
1996 1997 1998 CAGR
--------- --------- --------- -----
<S> <C> <C> <C> <C>
Total revenue (in millions)............. $384.8 $427.4 $984.9 60.0%
EBITDA(a) (in millions)................. $ 16.3 $ 20.3 $ 60.5 93.0%
Income from operations (in millions).... $ 1.9 $ 10.8 $ 31.8 312.2%
EBITDA margin........................... 4.2% 4.7% 6.1% --
Operating margin........................ 0.5% 2.5% 3.2% --
Average merchandise sales per store (in
thousands)............................. $479.8 $525.8 $532.1 5.3%
Average gallons sold per store (in
thousands)............................. 448.8 501.2 582.8 14.0%
Same store merchandise sales growth..... 2.8% 8.5% 5.3% --
Same store gasoline gallon growth....... (4.3)% 7.2% 4.8% --
Number of stores (end of period)........ 379 390 953 --
</TABLE>
- --------
(a) EBITDA represents income from operations before depreciation and
amortization, merger integration costs, restructuring charges and
impairment of long-lived assets.
We have achieved these results through implementation of a five-pronged
operating strategy. Specific elements of our operating strategy include the
following:
Focus on Merchandise. Since 1996, we have increased same store
merchandise sales and gross profit dollars by focusing on four key areas:
. increasing the merchandise SKU count in stores from 3,900 to 4,750
currently
. keeping fully stocked positions of and prominently displaying brand
name, high volume destination items
. adding impulse items that carry higher than average margins
. improving promotional displays, signage and overall store presentation
Improve Gasoline Offering. We believe that gasoline is an essential
product offering and have implemented a number of initiatives that have
increased gasoline volume and gasoline gross profit dollars. These initiatives
include:
. increasing the competitiveness of our gasoline pricing while
maintaining acceptable profit margins
. upgrading gasoline facilities and equipment
. consolidating our gasoline purchases with a concentrated group of
suppliers
. optimizing our mix of locations selling branded and unbranded gasoline
. entering into strategic branding agreements that provide volume rebates
and vendor allowances
6
<PAGE>
Reduce Expenses Through Strengthened Vendor Relationships and Tightened
Expense Controls. We have developed strong relationships with our merchandise
and gasoline suppliers. As a result, we have reduced our purchasing costs and
received greater allowances for retail displays, targeted marketing and
facility and gasoline equipment upgrades. In addition, since 1996, we have
adhered to a disciplined cost-savings program that has allowed us to reduce
operating expenses without sacrificing customer service. Total operating
expenses as a percentage of total revenue have declined from 23.2% in fiscal
1996 to 20.5% in fiscal 1998.
Increase Capital Expenditures. Since fiscal 1996, we have implemented a
capital expenditure program focused on upgrading store facilities and gasoline
equipment. Based on data from more than 100 of our stores that have been
remodeled, average merchandise sales increased 10.3%, gasoline gallons
increased 17.8% and EBITDA increased 35.3% during the twelve months following
remodeling. In addition, we are currently upgrading our management information
systems, including store, corporate accounting and management reporting
systems. We have also invested approximately $12.8 million since fiscal 1995 to
comply with environmental requirements and are in substantial compliance with
EPA requirements and regulations.
Grow Through Acquisitions and New Store Development. From April 1997
through February 1999, we acquired 892 convenience stores in 11 major and
numerous smaller transactions. We have materially improved the results of
operations in our acquired stores and believe there are opportunities to
continue to improve results at these locations. Our acquisition strategy is
complemented by a disciplined new store development program in select markets.
Growth Strategy
We believe that there is significant opportunity to continue to increase
sales, productivity and profitability through both the continued implementation
of our operating strategy at existing and newly acquired stores and our
strategy to double our store base in existing markets and expand into
contiguous markets. Specific elements of our growth strategy include the
following:
Improve Same Store Merchandise Sales and Gasoline Volume Growth. We focus
on continuous improvement of same store sales and profit growth at existing and
newly acquired stores through (1) key merchandising initiatives, (2)
competitive gasoline prices, (3) upgraded facilities, (4) new service
offerings, (5) improved technology, (6) improved customer service and (7)
targeted cost savings initiatives. Our merchandise and gasoline gallon sales
also benefit from the location of our operations, which are largely in some of
the fastest growing demographic markets in the United States.
Invest in Technology and Store Automation. Over the next two years, we
will invest over $15 million on new technology in three areas: (1) at the
gasoline pump, (2) in the store and (3) in our corporate offices. We believe
these investments will increase transaction speed at the pump and in the store
and improve customer transaction information which will allow us to optimize
merchandise mix, gross margin and inventory control at each of our stores.
Pursue Acquisitions and New Store Growth. The Pantry believes that growth
through acquisition is currently more economically attractive than growth
through new store development because: (1) acquired stores provide an instant
installed base of revenue and cash flow, (2) we are
7
<PAGE>
able to grow more rapidly, thus providing increased benefits of economies of
scale, (3) we are able to enter new markets without adding merchandise square
footage or additional gasoline outlets to these markets, (4) acquisitions
provide access to established high quality locations and to markets that
restrict new store development through stringent environmental and zoning
regulations and (5) acquiring stores is a lower cost alternative to developing
new stores.
We believe there are enough attractive acquisition opportunities in our
markets to double our store base in existing markets and expand into contiguous
markets. There are approximately 25,000 convenience stores operating in our
existing and contiguous markets. From April 1997 through February 1999, we have
acquired 892 convenience stores whose results should improve as we continue to
implement our operating strategy at these stores. We also believe that the
creation of a public market for our common stock through this offering will
enable us to offer our common stock as consideration for acquisitions and will
further enhance our ability to make acquisitions on favorable terms.
Our strategy is to continue to realize significant growth and cost
savings from acquisitions through (1) remerchandising acquired stores, (2)
upgrading store facilities and gasoline equipment, (3) selectively rebranding
sites, (4) negotiating better terms with our suppliers and (5) leveraging our
existing infrastructure to realize economies of scale and eliminate duplicative
overhead.
Our acquisition strategy is complemented by a new store development
program in existing and contiguous markets. In opening new stores, we have
focused on selecting store sites on highly traveled roads in coastal/resort and
suburban markets or near highway exit and entrance ramps that provide
convenient access to store locations. We opened seven new stores in fiscal 1998
and expect to open eight to ten new stores annually.
Recent Developments
ETNA Acquisition. On February 25, 1999, we acquired 60 convenience stores
operated under the trade name ETNA located throughout North Carolina and
Virginia. Many of these convenience stores are located in markets where we are
underrepresented, including Virginia. Gasoline is sold at all locations with 50
stores offering unbranded gasoline and 10 selling gasoline under the CITGO
brand.
Handy Way Acquisition. On January 28, 1999, we acquired 121 convenience
stores operated under the name Handy Way located in central Florida. The stores
are strategically located in rural and urban fringe market areas with
relatively limited competition from major convenience store chains and
supermarkets. Gasoline is sold at all Handy Way stores under the brand name
CITGO. In addition, Handy Way has developed a food service operation, including
82 quick service restaurants with nationally branded food franchises such as
Subway, Church's, Taco Bell and Hardee's.
----------------
The Pantry was founded in North Carolina in 1967. Affiliates of Freeman
Spogli & Co. Incorporated and affiliates of Chase Manhattan Capital, L.P.
acquired interests in our equity securities in November 1995, and have made
several subsequent equity investments. Our principal executive offices are
located at 1801 Douglas Drive, Sanford, North Carolina 27331-1410. Our
telephone number is (919) 774-6700.
8
<PAGE>
The Offering
Common stock offered by
The Pantry.............
shares
Shares outstanding
after the offering..... shares(a)
Use of proceeds......... We estimate that the net proceeds from the offering
will be approximately $ million. We intend to use
these net proceeds to:
. repay outstanding debt
. redeem outstanding preferred stock and pay accrued
dividends
Risk factors............ See "Risk Factors" and the other information included
in this prospectus for a discussion of factors you
should carefully consider before deciding to invest
in shares of the common stock.
Proposed Nasdaq
National Market
symbol................. PTRY
- --------
(a) Excludes shares of our common stock reserved for issuance pursuant to
options outstanding under our stock option and stock subscription plans, of
which shares were subject to outstanding options as of December 24,
1998, and shares of our common stock reserved for issuance pursuant to
warrants held by certain of our stockholders. This number also assumes that
the underwriters do not exercise their over-allotment option. If the over-
allotment option is exercised in full, we will issue and sell an additional
shares.
9
<PAGE>
Summary Financial Data
The following table presents summary consolidated financial and store
operating data which is derived from our consolidated financial statements. Our
financial results in the periods presented below reflect the operating strategy
implemented by our current management team that joined The Pantry in 1996. The
summary pro forma financial data gives effect to the redemption of our senior
notes, certain acquisitions and the application of the proceeds of the offering
as if these events occurred on December 24, 1998 with respect to pro forma
balance sheet items and at the beginning of the pro forma period for the
statement of operations items. The financial position and results of operations
for the quarters ended December 25, 1997 and December 24, 1998 have been
derived from The Pantry's unaudited financial statements and, in our opinion,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation. They are not necessarily indicative of the
results that may occur for the full fiscal year. Since the information in this
table is only a summary, you should read "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Unaudited Pro Forma
Financial Data" and our consolidated financial statements and related notes.
<TABLE>
<CAPTION>
Fiscal Year Ended Quarter Ended
--------------------------------------------- ------------------------------
Pro Forma Pro Forma
Sept. Sept. Sept. 24, Sept. 24, Dec. 25, Dec. 24, Dec. 24,
26, 1996 25, 1997 1998 1998 1997 1998 1998
-------- -------- --------- ---------- --------- -------- ---------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenue........... $384,807 $427,393 $ 984,884 $1,659,695 $ 195,171 $315,607 $413,149
Gross profit............ 91,218 97,279 233,351 364,090 45,365 72,380 94,406
Income from operations.. 1,874(a) 10,771 31,843(a) 49,502(a) 4,877 10,493 13,497
Interest expense........ (11,992) (13,039) (28,946) (37,369) (5,817) (8,912) (9,477)
Net income (loss) before
extraordinary item..... (8,114) (975) 4,673 8,885 (89) 1,065 2,356(a)
Extraordinary loss(b)... -- -- (7,998) -- (6,800) --
Net income (loss)....... (8,114) (975) (3,325) -- (6,889) 1,065
Earnings per share
before extraordinary
loss(c):
Basic..................
Diluted................
Weighted-average number
of shares outstanding
(c):
Basic..................
Diluted................
Other Financial Data:
EBITDA(d)............... $ 16,250 $ 20,275 $ 60,501 $ 92,213 $ 10,028 $ 18,683 $ 24,028
Net cash provided by
(used in):
Operating activities... $ 5,415 $ 7,338 $ 48,032 -- $ (928) $ (3,510) --
Investing activities... (7,204) (25,079) (286,493) -- (139,103) (34,508) --
Financing activities... (3,872) 15,750 269,518 -- 168,506 18,683 --
Store operating expenses
as a percentage of
sales.................. 15.0% 14.1% 14.2% 13.3% 14.4% 13.9% 13.8%
General and
administrative expenses
as a percentage of
sales.................. 4.5% 3.9% 3.3% 3.1% 3.7% 3.2% 3.2%
Operating income as a
percentage of sales.... 0.5% 2.5% 3.2% 3.0% 2.5% 3.3% 3.3%
Store Operating Data:
Number of stores (end of
period)................ 379 390 953 -- 867 973 --
Average sales per store:
Merchandise sales...... $ 479.8 $ 525.8 $ 532.1 -- $ 123.1 $ 144.7 --
Gasoline gallons (in
thousands)............ 448.8 501.2 582.8 -- 132.2 184.5 --
Comparable store sales
growth(e):
Merchandise sales...... 2.8% 8.5% 5.3% -- 3.6% 10.5% --
Gasoline gallons....... (4.3)% 7.2% 4.8% -- 7.9% 5.1% --
</TABLE>
(continued on following page)
10
<PAGE>
<TABLE>
<CAPTION>
December 24, 1998
------------------------
Actual As Adjusted(f)
-------- --------------
(dollars in thousands)
<S> <C> <C>
Balance Sheet Data:
Working capital (deficiency)........................... $(18,120) $(16,058)
Total assets........................................... 568,560 711,045
Total debt and capital lease obligations............... 358,345 409,953
Shareholders' equity................................... 40,745 112,001
</TABLE>
- --------
(a) During fiscal 1996, we recorded restructuring charges of $2.2 million
pursuant to a formal plan to restructure our corporate offices and
impairment of assets of $3.0 million. During fiscal 1998, we recorded an
integration charge of approximately $1.0 million for costs of combining our
existing business with the acquired business of Lil' Champ.
(b) During the year ended September 24, 1998, The Pantry incurred an
extraordinary loss of $8.0 million, $6.8 million of which was incurred in
the quarter ended December 25, 1997. This loss related to the cost of the
redemption of $51.0 million of senior notes and related consent fee
payments and write-off of deferred financing costs. Pro forma net income
before extraordinary loss for the year ended September 24, 1998 and for the
quarter ended December 24, 1998, excludes an extraordinary loss of
approximately $3.2 million (net of a tax benefit of $2.2 million) related
to the refinancing of existing bank debt and the redemption of $49.0
million of senior notes.
(c) Amounts exclude shares of common stock reserved for issuance under our
stock option and stock subscription plans, of which shares were subject
to outstanding options as of December 24, 1998, and shares of common
stock reserved for issuance pursuant to warrants held by certain of our
shareholders.
(d) EBITDA represents income from operations before depreciation and
amortization, merger integration costs, restructuring charges and
impairment of long-lived assets. EBITDA is not a measure of performance
under generally accepted accounting principles, and should not be
considered as a substitute for net income, cash flows from operating
activities and other income or cash flow statement data prepared in
accordance with generally accepted accounting principles, or as a measure
of profitability or liquidity. The Pantry has included information
concerning EBITDA as one measure of our historical ability to service debt.
EBITDA should not be considered as an alternative to, or more meaningful
than, income from operations or cash flow as an indication of our operating
performance. EDITDA as defined may not be comparable to similarly-titled
measures reported by other companies.
(e) The stores included in calculating comparable store sales growth are stores
that were under our management and in operation for both fiscal periods
during the comparable period.
(f) As adjusted reflects (1) all acquisitions completed after December 24,
1998, (2) redemption of our senior notes on January 28, 1999, (3)
borrowings under our bank credit facility and (4) the application of the
net proceeds of the offering, which are expected to be approximately $92
million.
11
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties not presently known to
us, or that we currently deem immaterial, may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In that case, the trading price of our common stock could decline,
and you may lose all or part of your investment.
Our dependence on gasoline sales makes us susceptible to interruptions in the
supply of gasoline and to increases in the cost of gasoline
Gasoline revenue has increased as a percentage of our total revenue over
the past three fiscal years and has averaged 51.4% of our total revenue during
this period. As a result, gasoline profit margins have a significant impact on
our earnings. The volume of gasoline sold by us and our gasoline profit margins
are affected by numerous factors outside of our control, including the supply
and demand for gasoline, volatility in the wholesale gasoline market and the
pricing policies of competitors in local markets.
We typically have no more than a seven-day supply of gasoline. Our
gasoline contracts do not guarantee an uninterrupted, unlimited supply in the
event of a shortage. These contracts do provide that we would receive the same
percentage of our normal supply as any other customer of a particular oil
company. We have not to date experienced a serious interruption in the supply
of gasoline. Although we can rapidly adjust our pump prices to reflect higher
gasoline costs, we can be adversely affected by a material, sudden increase in
the cost of gasoline if gasoline sales volume is reduced. A material increase
in the price of gasoline could adversely affect demand for gasoline. Reductions
in volume of gasoline sold or our gasoline profit margins could have a material
adverse effect on our results of operations. In addition, gasoline sales
generate customer traffic to our stores and as a result decreases in gasoline
sales could impact merchandise sales.
We depend on tobacco sales and may not be able to pass along price increases to
customers
Sales of tobacco products have averaged approximately 13% of our total
revenue over the past three fiscal years. National and local campaigns to
discourage smoking in the United States, as well as increases in taxes on
cigarettes and other tobacco products, may have a material impact on our sales
of tobacco products. The consumer price index for fiscal 1998 on tobacco
products increased approximately 15%. In November 1998, major cigarette
manufacturers that supply The Pantry increased prices by $0.45 per pack.
However, during December 1998, major cigarette manufacturers offered a rebate
to retailers of $0.45 per pack to offset the November 1998 price increase. We
passed along this rebate to our customers. Major cigarette manufacturers
offered no rebate in January 1999 and a $0.30 per pack rebate in February 1999.
In addition, these manufacturers announced a $0.55 per pack rebate for March
1999. We cannot assure you that major cigarette manufacturers will continue to
offer these rebates or that any resulting increase in prices to our customers
will not have a material adverse effect on our cigarette sales and gross profit
dollars. A reduction in the amount of cigarettes sold by The Pantry could
adversely affect our results. See "Business--Our Operations--Merchandise
Sales."
12
<PAGE>
Our acquisition strategy may not succeed due to competition for convenience
stores and lack of financing
A significant part of The Pantry's growth strategy is to acquire other
convenience stores that complement our existing stores or that broaden our
geographic presence. From April 1997 through February 1999, we acquired 892
convenience stores in 11 major and numerous smaller transactions. We expect to
continue to acquire convenience stores as an element of our growth strategy.
Acquisitions involve certain risks that could cause our actual growth or
operating results to differ from our expectations or the expectations of
security analysts. For example:
. We may not be able to identify suitable acquisition candidates or
acquire additional convenience stores on favorable terms. We compete
with others to acquire convenience stores. We believe that this
competition may increase and could result in decreased availability
or increased price for suitable acquisition candidates. It may be
difficult to anticipate the timing and availability of acquisition
candidates.
. We may not be able to obtain the necessary financing, on favorable
terms or at all, to finance any of our potential acquisitions.
. We may fail to successfully integrate or manage acquired convenience
stores.
. Acquired convenience stores may not perform as we expect or we may
not be able to obtain the cost savings and financial improvements we
anticipate.
In addition, during the acquisition process we may fail or be unable to
discover some of the liabilities of companies or businesses which we acquire.
These liabilities may result from a prior owner's noncompliance with applicable
federal, state or local laws. While we will try to minimize our potential
exposure by conducting investigations during the acquisition process, we cannot
assure you that we will identify all existing or potential liabilities.
Restrictive covenants contained in our existing bank credit facility and
indenture could limit our ability to finance future acquisitions, new locations
and other expansion of our operations. Credit facilities entered into in the
future likely will contain similar restrictive covenants. These covenants
require us to achieve specific financial ratios and to obtain lender consent
prior to completing certain acquisitions. Any of these covenants could become
more restrictive in the future. Our ability to respond to changing business
conditions and to secure additional financing may be significantly restricted
by these covenants. We may be prevented from engaging in transactions including
acquisitions which are important to our growth strategy. Any breach of these
covenants could cause a default under our debt obligations and result in our
debt becoming immediately due and payable.
Our rapid growth since 1996 presents management, administrative and operational
challenges
The Pantry is growing rapidly. We have grown from total revenue of $384.8
million in fiscal 1996 to total pro forma revenue of $1.7 billion in fiscal
1998. Our growth presents numerous managerial, administrative, operational and
other challenges. Our ability to manage the growth of our operations will
require us to continue to improve our operational, financial and human resource
management information systems and our other internal systems and controls.
The Pantry is in the process of upgrading its management information
systems. The new systems will fully automate our inventory and management
reporting processes. We expect that this upgrade will cost approximately $9
million over the next two fiscal years. We expect that the upgrade will be
completed prior to the end of fiscal 2000. Any failure to complete our
transition to these new systems may inhibit our growth plans.
13
<PAGE>
In addition, our growth will increase our need to attract, develop,
motivate and retain both our management and professional employees. The
inability of our management to manage our growth effectively, or the inability
of our employees to achieve anticipated performance or utilization levels,
could have a material adverse effect on our business.
We depend on one principal wholesaler for the majority of our merchandise
The Pantry purchases over 50% of its general merchandise, including most
tobacco products and grocery items, from a single wholesale grocer, McLane
Company, Inc., a wholly-owned subsidiary of Wal-Mart. In addition, McLane
supplies health and beauty aids, toys and seasonal items to all of our stores.
We have a contract with McLane until 2003, and we may not be able to renew the
contract upon expiration. We believe that our arrangements with vendors,
including McLane, have enabled us to decrease the operating expenses of
acquired companies after we complete an acquisition. Although we believe there
are adequate alternative supply sources, a change of suppliers could have a
material adverse affect on our cost of goods and results of operations.
Competition is intense in the convenience store and retail gasoline industries,
including competition with major oil companies
The convenience store and retail gasoline industries are highly
competitive. Changes in traffic patterns and the type, number and location of
competing stores could affect the performance of individual stores. Major
competitive factors include, among others, location, ease of access, gasoline
brands, pricing, product and service selections, customer service, store
appearance, cleanliness and safety. In addition, inflation, increased labor and
benefit costs and the lack of availability of experienced management and hourly
employees may adversely affect the convenience store industry.
The Pantry competes with numerous other convenience stores and
supermarkets. In addition, our stores offering self-service gasoline compete
with gasoline service stations, including service stations operated by major
oil companies and, more recently, supermarkets. Our stores also compete to some
extent with supermarket chains, drug stores, fast food operations and other
similar retail outlets. In some of our markets, certain competitors,
particularly major oil companies, have been in existence longer and have
substantially greater financial, marketing and other resources than us.
All of our stores are located in the southeastern United States, making us
dependent on the economic health of that region
Substantially all of our stores are located in the Southeast region of
the United States. As a result, our results of operations are subject to
general economic conditions in that region. In the event of an economic
downturn in the Southeast, our financial condition could be adversely impacted.
We depend on favorable weather conditions in the spring and summer months
Weather conditions in our operating area have a significant effect on our
operating results. During the spring and summer vacation season, customers are
more likely to purchase higher profit margin items at our stores, such as fast
foods, fountain drinks and other beverages, and more gasoline at our gasoline
locations. As a result, we typically generate higher revenues and gross margins
during warmer weather months in the Southeast, which fall within our third and
fourth quarters. If weather conditions are not favorable during these periods,
our operating results and cash flow from operations
14
<PAGE>
could be adversely affected. In addition, we have a significant number
(approximately 37%) of stores concentrated in coastal areas in the southeastern
United States, and are therefore exposed to damages associated with hurricanes,
tropical storms and other weather conditions in these areas. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Quarterly Results of Operations."
We have a history of losses
We have experienced losses during the most recent three fiscal years. Our
net losses were $8.1 million in fiscal 1996, $1.0 million in fiscal 1997 and
$3.3 million in fiscal 1998. We incurred interest expense of $12.0 million in
fiscal 1996, $13.0 million in fiscal 1997 and $28.9 million in fiscal 1998. We
also incurred an extraordinary loss of $8.0 million in fiscal 1998 related to
the early extinguishment of debt. We had net income of $1.1 million in the
first fiscal quarter of 1999. We cannot assure you that we will be profitable
in future periods or that we will not realize significant losses.
We are subject to extensive environmental regulation, including laws governing
underground storage tanks
Our business is subject to extensive environmental requirements,
particularly environmental laws regulating underground storage tanks or USTs.
Federal, state and local regulatory authorities have adopted regulations
governing USTs, a portion of which were phased in over a period ending in
December 1998. These regulations required us to make significant expenditures
for compliance with corrosion protection and leak detection requirements and
required spill/overfill equipment by December 1998. We are in substantial
compliance with the December 1998 upgrade requirements. Failure to comply with
any such laws or regulations could have a material adverse effect on us.
Under various federal, state and local laws, ordinances and regulations,
we may, as the owner or operator of our locations, be liable for the costs of
removal or remediation of contamination at these or our former locations,
whether or not we knew of, or were responsible for, the presence of such
contamination. The failure to properly remediate such contamination may subject
us to liability to third parties and may adversely affect our ability to sell
or rent such property or to borrow money using such property as collateral.
Additionally, persons who arrange for the disposal or treatment of certain
hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at sites where they are located, whether or not
such site is owned or operated by such person. Although we do not typically
arrange for the treatment or disposal of such hazardous substances, we may be
considered as having arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, may be liable for removal or remediation
costs, as well as certain other related costs, including governmental fines,
and injuries to persons, property and natural resources.
We estimate that our future expenditures for remediation of current
locations (net of reimbursements) will be approximately $4.5 million for which
reserves have been established on our financial statements. In addition, a
substantial amount will be expended for remediation on our behalf by state
trust funds established in our operating areas or other responsible third
parties (including insurers). To the extent third parties do not pay for
remediation as we anticipate, we will be obligated to make these payments,
which could materially adversely affect our financial condition and results of
operations. Reimbursements from state trust funds will be dependent on the
continued viability of these funds. The State of Florida trust fund ceased
accepting new claims for reimbursement for releases discovered after December
31, 1998. However, the State of Florida trust fund will continue
15
<PAGE>
to reimburse claims for remedial work performed on sites that were accepted
into its program before December 31, 1998. We have obtained private coverage
for remediation and third party claims arising out of releases reported after
December 31, 1998. We meet federal and Florida financial responsibility
requirements with respect to USTs in Florida through a combination of private
insurance and qualified self insurance.
As of December 24, 1998, The Pantry had a net reserve of $4.5 million to
address anticipated remediation obligations at its current facilities. However,
we may incur additional substantial expenditures for remediation of
contamination that has not been discovered at existing locations or locations
which we may acquire in the future. We cannot assure you that we have
identified all environmental liabilities at all of our current and former
locations; that material environmental conditions not known to us do not exist;
that future laws, ordinances or regulations will not impose material
environmental liability on us; or that a material environmental condition does
not otherwise exist as to any one or more of our locations. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Liquidity and Capital Resources" and "Business--Government Regulation and
Environmental Matters."
Government regulation could adversely impact wage rates and other aspects of
our business
Convenience stores, including stores that sell tobacco and alcohol
products, are subject to federal and state laws governing such matters as wage
rates, overtime, working conditions, citizenship requirements and alcohol and
tobacco sales. At the federal level, there are proposals under consideration
from time to time to increase minimum wage rates and to introduce a system of
mandated health insurance. A violation or change of these laws, or adoption of
any these proposals, could have a material adverse effect on our financial
condition. See "Business--Government Regulation and Environmental Matters."
The Pantry is controlled by one principal stockholder
After this offering, Freeman Spogli will control approximately % of our
common stock on a fully diluted basis ( % if the underwriters exercise their
over-allotment option). Freeman Spogli has and will continue to have the
ability to control our management, policies and financing decisions. The
interests of Freeman Spogli as a majority shareholder could in the future
conflict with the interest of our public or minority shareholders, including
with respect to our ability to effect a change in control. See "Management."
We depend on certain key personnel and would be materially affected if senior
management left The Pantry
We depend to a large extent on our ability to attract, motivate and
retain an adequate labor force, including management, sales, merchandising and
other personnel. We are also dependent on the continued efforts of our senior
management team, including our President and Chief Executive Officer, Peter
Sodini. Mr. Sodini's employment contract terminates in September 2000. If, for
any reason, our senior executives do not continue to be active in management,
our operations could be materially adversely affected. We cannot assure you
that we will be able to attract and retain additional qualified personnel as
needed in the future. We do not maintain key personnel life insurance on our
senior executives and other key employees.
16
<PAGE>
The price of common stock in the current market may be volatile
The securities markets have fluctuated significantly in price and volume.
Investors may be unable to resell their shares of our common stock at or above
the initial public offering price. In the past, companies with volatile stock
prices have been the object of securities class action litigation. If we were
the object of securities class action litigation, it could be costly and divert
management's attention and resources.
Future sales of additional shares into the market may adversely affect the
market price of the common stock
If our existing shareholders sell substantial amounts of our common stock
in the public market following the offering, including shares issued upon the
exercise of outstanding options and warrants, or if the market perceives such
sales could occur, the market price of our common stock could fall. These sales
also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate or to use
equity as a portion of the consideration for future acquisitions.
Upon completion of the offering, we will have outstanding shares of
common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants. Of these shares, the
shares sold in the offering are freely tradable. Of the remaining shares,
shares are held by Freeman Spogli and Chase Capital, who may be deemed to be
affiliates of The Pantry. Pursuant to Rule 144 under the Securities Act,
affiliates of The Pantry can resell up to 1% of the aggregate outstanding
common stock during any three month period. For more details, see "Shares
Eligible for Future Sale."
No market currently exists for the common stock
There was no public market for the common stock prior to the offering,
and an active public market for the common stock may not develop or be
sustained after the offering. Negotiations between us and representatives of
the underwriters will determine the initial public offering price. The price at
which the common stock will trade after the offering may be unrelated to the
initial public offering price. You may not be able to resell your common stock
at favorable prices. The price at which the common stock will trade will depend
upon a number of factors, including, but not limited to, our historical and
anticipated quarterly and annual operating results, variations between such
results and analyst and investor expectations, investor perceptions of us and
comparable public companies, changes in the industries in which we operate or
in the industries of our significant suppliers, and general market and economic
conditions. Some of these factors are beyond our control. In addition, the
stock market has from time to time experienced extreme price and volume
fluctuations.
Purchasers of our common stock will experience immediate and substantial
dilution in the book value of the common stock
If you purchase common stock in the offering, you will experience
immediate and substantial dilution of $ per share in the net tangible book
value of the common stock from the initial public offering price. See
"Dilution."
17
<PAGE>
We do not expect to pay dividends and are prohibited from paying dividends by
the instruments governing our indebtedness
We do not expect to pay dividends in the foreseeable future. In addition,
the terms of our outstanding indebtedness restrict our ability to pay dividends
on the common stock. See "Dividend Policy."
Our charter includes provisions which may have the effect of preventing or
hindering a change in control
Our certificate of incorporation gives our board of directors the
authority to issue up to million shares of preferred stock and to determine
the rights and preferences of the preferred stock without obtaining shareholder
approval. The existence of this preferred stock could make more difficult or
discourage an attempt to obtain control of The Pantry by means of a tender
offer, merger, proxy contest or otherwise. Furthermore, this preferred stock
could be issued with other rights, including economic rights, senior to our
common stock, and, therefore, issuance of the preferred stock could have an
adverse effect on the market price of our common stock. We have no present
plans to issue any shares of our preferred stock.
We may, in the future, adopt other measures that may have the effect of
delaying, deferring or preventing an unsolicited takeover, even if such a
change in control were at a premium price or favored by a majority of
unaffiliated shareholders. Certain of these measures may be adopted without any
further vote or action by our shareholders.
The failure of The Pantry, third party vendors or acquired entities to be Year
2000 compliant could adversely impact our operations
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
We use a combination of hardware devices run by computers at our support
centers and retail locations to process transactions and other data which are
essential to our business operations. We have completed the assessment phase of
our Year 2000 vulnerability with respect to these systems. We also conducted a
formal assessment of Year 2000 issues of third parties critical to our
operations. Based on this assessment, we believe all system modifications,
hardware and software replacements or upgrades, as well as related testing,
will be completed with respect to our internal systems in September 1999. We
believe that once these actions are completed our major internal systems will
be Year 2000 compliant. However, because of the overall complexity of the Year
2000 issues and the uncertainty surrounding third party responses to Year 2000
issues, we may experience material unanticipated negative consequences and/or
material costs caused by undetected errors or defects in our or third party
systems or by our failure to adequately prepare for the results of such errors
or defects, including costs of related litigation.
We believe that the worst case scenario in the event of a Year 2000-
related failure would be delays in the receipt of payment from credit card
processing companies utilized by us and a return to manual accounting
processing at our individual stores. The impact of such consequences could have
a material adverse effect on our business, financial condition or results of
operations. For more details see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Initiative."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock at
an assumed price of $ per share are estimated to be approximately $
million, after deducting the underwriting discount and estimated offering
expenses payable by us. Net proceeds will be $ million if the over-allotment
option is exercised in full.
We expect to use the net proceeds of the offering to repay indebtedness
under our bank credit facilities ($ million) and to redeem our outstanding
preferred stock (including accrued dividends) ($ million). The $ million
used to repay indebtedness under the bank credit facility will be applied to
the Tranche A term loan facility ($ million), the Tranche B term loan
facility ($ million) and the acquisition term facility ($ million). The
Tranche A term loan and acquisition term facilities each have a maturity of
January 2004 and the acquisition Tranche B term loan facility matures in 2006.
Borrowings under the Tranche A term loan facility, the Tranche B term loan
facility and the acquisition term facility bear interest, as of March 1, 1999,
at rates of 7.94%, 8.44% and 7.94%, respectively. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Liquidity and
Capital Resources."
DIVIDEND POLICY
We do not expect to pay cash dividends on our common stock for the
foreseeable future. We intend to retain earnings to support operations and to
finance expansion. The payment of cash dividends in the future will depend upon
our earnings, operations, capital requirements, financial condition and other
factors deemed relevant by the board of directors. The payment of any cash
dividends is prohibited by the indenture relating to the senior subordinated
notes and our bank credit facility.
19
<PAGE>
CAPITALIZATION
The following table describes our capitalization as of December 24, 1998
(1) on an actual basis, (2) on a pro forma basis to reflect the acquisitions
and related financings made subsequent to December 24, 1998 and (3) on a pro
forma as adjusted basis to reflect our receipt of the estimated net proceeds
from the sale of shares of common stock by us at the assumed price of $
per share. The following should be read together with our consolidated
financial statements and related notes, "Unaudited Pro Forma Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
At December 24, 1998
-----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Current debt:
Current maturities of long-term debt....... $ 39 $ 39 $ 39
Current maturities of capital lease
obligations............................... 1,240 1,240 1,240
Revolving credit .......................... 2,000 7,000 7,000
-------- -------- --------
Total current debt...................... 3,279 8,279 8,279
-------- -------- --------
Long-term debt:
Senior notes............................... 48,995 -- --
Senior subordinated notes.................. 200,000 200,000 200,000
Bank credit facility....................... 94,000 259,000 189,603
Other long-term debt....................... 265 265 265
Capital lease obligations.................. 11,806 11,806 11,806
-------- -------- --------
Total long-term debt.................... 355,066 471,071 401,674
-------- -------- --------
Total debt............................ 358,345 479,350 409,953
Shareholders' equity:
Series B preferred stock, par value $.01
per share; 150,000 shares authorized,
17,500 issued and outstanding, actual and
pro forma; no shares issued and
outstanding, pro forma as adjusted....... -- -- --
Common stock, par value $.01 per share;
300,000 shares authorized, actual and pro
forma; shares authorized pro forma
as adjusted; 232,701 shares issued and
outstanding, actual and pro forma;
shares issued and outstanding, pro forma
as adjusted(a)........................... 2 2 2
Additional paid-in capital................ 69,925 69,925 144,425
Shareholder loans......................... (937) (937) (937)
Retained earnings (deficit)............... (28,245) (31,489)(b) (31,489)
-------- -------- --------
Total shareholders' equity.............. 40,745 37,501 112,001
-------- -------- --------
Total capitalization.................. $399,090 $516,851 $521,954
======== ======== ========
</TABLE>
- --------
(a) Does not include shares issuable upon exercise of outstanding stock
options or warrants.
(b) Includes an extraordinary charge of approximately $3,244, net of income tax
benefit of $2,162, related to the redemption of $48,995 of our senior notes
and the amendment of our bank credit facility.
20
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 24, 1998 was a
deficit of $39.5 million or $( ) per share of common stock. Pro forma net
tangible book value per share represents the amount of our pro forma total
tangible assets (which excludes pro forma goodwill of $151.5 million) less our
pro forma total liabilities, divided by the total number of outstanding shares
of common stock outstanding after giving effect to the Handy Way and ETNA
acquisitions and the 1999 financing transactions as described in "Unaudited Pro
Forma Financial Data" as if these transactions had occurred on December 24,
1998.
After giving effect to the sale of shares at an assumed initial public
offering price of $ per share and the receipt and application of the net
proceeds (after deducting the underwriting discount and offering expenses) our
adjusted pro forma net tangible book value as of December 24, 1998 would have
been approximately $ million or approximately $ per share. This represents
an immediate increase in such pro forma net tangible book value of $ per
share to existing shareholders and an immediate dilution of $ per share to
new shareholders purchasing shares in the offering. If the initial public
offering price is higher or lower, the dilution to the new shareholders will be
greater or less. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
Pro forma net tangible book value per share as of December 24,
1998............................................................... $
Increase per share attributable to new shareholders.................
----
Adjusted pro forma net tangible book value per share as of December
24, 1998 after the offering........................................
----
Dilution per share to new investors................................. $
====
</TABLE>
The calculations in the table set forth above assume that the
underwriters will not exercise their over-allotment option. The calculations do
not reflect shares of common stock reserved for issuance pursuant to options
outstanding under our stock option plan and shares of common stock reserved
for issuance pursuant to common stock warrants issued to Freeman Spogli. See
"Certain Relationships and Related Transactions" and "Management--Stock Option
Plan."
The following table describes, as of December 24, 1998, the difference
between the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid by the existing
shareholders and by the new investors, before deducting the underwriting
discount and estimated offering expenses payable by us, at the assumed initial
public offering price of $ per share.
<TABLE>
<CAPTION>
Shares Purchased Average Price
----------------- Total Consideration --------------------
Number Percentage Paid (in thousands) Percentage Per Share
------ ---------- ------------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders... % $ % $
New investors(a)........
--- ----- ---- -----
Total................. 100.0% $ 100.0%
=== ===== ==== =====
</TABLE>
- --------
(a) The number of shares held by new public investors will be or
approximately % of the total number of shares outstanding after the
offering. If the underwriters exercise their over-allotment option in
full, public investors will own shares, or approximately % of the
total number of shares of common stock outstanding after the offering.
21
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial
data and store operating data that is derived from our consolidated financial
statements. Our financial results for the 1996 fiscal year and subsequent
periods reflect the operating strategy implemented by our current management
team in 1996. The financial position and results of operations for the quarters
ended December 25, 1997 and December 24, 1998 have been derived from our
unaudited financial statements and, in our opinion, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation. They are not necessarily indicative of the results that may occur
for the full fiscal year. Since this table contains only selected financial
data, you should read "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes.
<TABLE>
<CAPTION>
Fiscal Year Ended Quarter Ended
---------------------------------------------------------- ----------------------
Sept. Sept. Sept. Sept. Sept. 24, Dec. 25, Dec. 24,
29, 1994 28, 1995 26, 1996 25, 1997 1998 1997 1998
-------- -------- -------- -------- --------- --------- --------
(dollars in thousands, except operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Merchandise sales...... $189,244 $187,380 $188,091 $202,440 $ 460,798 $ 89,360 $139,390
Gasoline sales......... 175,083 187,165 192,737 220,166 509,958 103,022 171,789
Commissions............ 4,466 4,516 3,979 4,787 14,128 2,789 4,428
-------- -------- -------- -------- --------- --------- --------
Total revenue........... 368,793 379,061 384,807 427,393 984,884 195,171 315,607
Cost of sales:
Merchandise............ 123,142 121,976 125,979 132,846 303,968 58,897 94,453
Gasoline............... 153,476 161,179 167,610 197,268 447,565 90,909 148,774
-------- -------- -------- -------- --------- --------- --------
Gross profit............ 92,175 95,906 91,218 97,279 233,351 45,365 72,380
Store operating
expense................ 53,201 56,206 57,841 60,208 140,089 28,165 43,729
General and
administrative
expenses............... 17,893 18,159 17,127 16,796 32,761 7,172 9,968
Unusual charges......... -- -- 5,218 (a) -- 1,016 (b) -- --
Depreciation and
amortization........... 10,164 11,470 9,158 9,504 27,642 5,151 8,190
-------- -------- -------- -------- --------- --------- --------
Income from operations.. 10,917 10,071 1,874 10,771 31,843 4,877 10,493
Interest expense........ (12,047) (13,240) (11,992) (13,039) (28,946) (5,817) (8,912)
Income (loss) before
income taxes and other
items.................. (181) (3,639) (10,778) (975) 4,673 (501) 1,397
Income (loss) before
other items............ 191 (3,285) (8,114) (975) 4,673 (89) 1,065
Extraordinary loss...... -- -- -- -- (7,998)(c) (6,800)(c) --
Net income (loss)....... $ (480)(d) $ (4,245)(e) $ (8,114) $ (975) $ (3,325)(c) $ (6,889)(c) $ 1,065
Earnings Per Share
Before Extraordinary
Loss(f):
Basic..................
Diluted................
Weighted-Average Number
of Shares
Outstanding(f):
Basic..................
Diluted................
Other Financial Data:
EBITDA(g)............... $ 21,081 $ 21,541 $ 16,250 $ 20,275 $ 60,501 $ 10,028 $ 18,683
Net cash provided by
(used in):
Operating activities... $ (4,120) $ 11,903 $ 5,415 $ 7,338 $ 48,032 $ (928) $ (3,510)
Investing activities... (10,612) (15,281) (7,204) (25,079) (286,493) (139,103) (34,508)
Financing activities... 25,955 (950) (3,872) 15,750 269,518 168,506 18,683
Capital
expenditures(h)........ 9,862 16,650 7,084 14,749 43,153 5,932 9,540
</TABLE>
(continued on following page)
22
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended Quarter Ended
------------------------------------------------ -----------------
Sept. Sept. Sept. Sept. Sept. Dec. 25, Dec. 24,
29, 1994 28, 1995 26, 1996 25, 1997 24, 1998 1997 1998
-------- -------- -------- -------- -------- -------- --------
(dollars in thousands, except operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
Store Operating Data:
Number of stores (end of
period)................ 406 403 379 390 953 867 973
Average sales per store:
Merchandise sales....... $ 460.4 $ 462.7 $ 479.8 $ 525.8 $ 532.1 $ 123.1 $ 144.7
Gasoline gallons (in
thousands)............. 423.7 440.3 448.8 501.2 582.8 132.2 184.5
Comparable store sales
growth(i):
Merchandise............ 3.3% (0.8)% 2.8% 8.5% 5.3% 3.6% 10.5%
Gasoline gallons....... 5.2% 0.2% (4.3)% 7.2% 4.8% 7.9% 5.1%
Operating Data:
Merchandise gross
margin................. 34.9% 34.9% 33.0% 34.4% 34.0% 34.1% 32.2%
Gasoline gallons sold
(in millions).......... 158.5 160.3 160.7 179.4 466.8 87.5 169.0
Average retail gasoline
price per gallon....... $ 1.10 $ 1.17 $ 1.20 $ 1.23 $ 1.09 $1.18 $ 1.02
Average gasoline gross
profit per gallon...... $ 0.136 $ 0.162 $ 0.156 $ 0.128 $ 0.134 $0.138 $ 0.136
Store expenses as a
percentage of sales.... 14.4% 14.8% 15.0% 14.1% 14.2% 14.4% 13.9%
General and
administrative expenses
as a percentage of
sales.................. 4.9% 4.8% 4.5% 3.9% 3.3% 3.7% 3.2%
Operating income as a
percentage of sales.... 3.0% 2.7% 0.5% 2.5% 3.2% 2.5% 3.3%
Balance Sheet Data (end
of period):
Working capital......... $ 6,652 $ (761) $ (6,513) $ (8,245) $ (8,983) $ 5,758 $(18,120)
Total assets............ 124,015 127,720 120,880 142,799 554,828 383,549 568,560
Total debt and capital
lease obligations...... 102,382 101,798 101,431 101,302 340,683 262,818 358,345
Shareholders' equity
(deficit).............. (12,087) (16,332) (27,547) (17,873) 39,304 12,744 40,745
</TABLE>
- --------
(a) During 1996, we recorded restructuring charges of $2.2 million pursuant to
a formal plan to restructure our corporate offices. The costs include: $1.4
million for employee severance; $0.4 million for employee moving costs; and
$0.4 million for charges associated with the investment by Freeman Spogli
and Chase Capital. Substantially all of these amounts were expended during
fiscal 1996. Also during fiscal 1996, we early-adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Pursuant to SFAS No. 121, we evaluated our long-
lived assets for impairment on a store-by-store basis by comparing the sum
of the projected future undiscounted cash flows attributable to each store
to the carrying value of the long-lived assets (including an allocation of
goodwill, if appropriate) of that store. Based on this evaluation, we
determined that certain long-lived assets were impaired and recorded an
impairment loss of (1) $0.4 million for property and equipment and (2)
$2.6 million for goodwill.
(b) During 1998, we recorded an integration charge of approximately $1.0
million for costs of combining our existing business with the acquired
business of Lil' Champ. The charge includes $0.3 million for relocation
costs and $0.7 million for consolidation and related expenses.
(c) On October 23, 1997 in connection with the Lil' Champ acquisition, we
completed the offering of our senior subordinated notes and, in a related
transaction, redeemed $51.0 million in principal amount of our senior notes
at a purchase price of 110% of the aggregate principal amount plus accrued
and unpaid interest, a consent fee and other related fees. In connection
with this redemption, we incurred an extraordinary loss of $8.0 million
during the year ended September 24, 1998, $6.8 million of which was
incurred during the quarter ended December 25, 1997, related to the cost of
the redemption of $51.0 million of our senior notes and related consent fee
payments and write-off of deferred financing costs.
(d) In fiscal 1994, we recorded an extraordinary loss of $0.7 million, net of
taxes, related to the early extinguishment of debt.
(e) In fiscal 1995, we adopted SFAS No. 112, "Employer's Accounting for Post
Retirement Benefits," and as a result, recorded a cumulative effect for a
change in accounting principle of $1.0 million, net of taxes.
(f) Amounts exclude shares of common stock reserved for issuance under our
stock option and stock subscription plans, of which shares were subject
to outstanding options as of December 24, 1998, and shares of common
stock reserved for issuance pursuant to warrants held by certain of our
shareholders.
23
<PAGE>
(g) EBITDA represents income from operations before depreciation and
amortization, merger integration costs, restructuring charges, impairment
of long-lived assets and extraordinary loss. EBITDA is not a measure of
performance under generally accepted accounting principles, and should not
be considered as a substitute for net income, cash flows from operating
activities and other income or cash flow statement data prepared in
accordance with generally accepted accounting principles, or as a measure
of profitability or liquidity. We have included information concerning
EBITDA as one measure of a company's historical ability to service debt.
EBITDA should not be considered as an alternative to, or more meaningful
than, income from operations or cash flow as an indication of our operating
performance. EDITDA as defined may not be comparable to similarly-titled
meaures reported by other companies.
(h) Purchases of assets to be held for sale are excluded from these amounts.
(i) The stores included in calculating same store sales growth are stores that
were under our management and in operation for both comparable fiscal years
or both comparable fiscal quarters.
24
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma consolidated financial data have been
derived by the application of pro forma adjustments to the historical financial
statements of The Pantry for the periods indicated. The adjustments are
described in the accompanying notes.
The unaudited pro forma financial data give effect to the following:
Fiscal 1998 Acquisitions:
<TABLE>
<CAPTION>
Number
of
Date Acquired Company Locations Stores
------------- ---------- ------------------------------------------------ ------
<S> <C> <C> <C>
July 15, 1998 Zip Mart Central North Carolina, Virginia 42
July 2, 1998 Quick Stop Southeast North Carolina, Coastal South Carolina 75
April 3, 1998 Sprint Gainesville, Florida 10
March 19, 1998 Kwik Mart Eastern North Carolina 23
October 23, 1997 Lil' Champ Northeast Florida 441(a)
</TABLE>
--------
(a) Net of the disposition of 48 convenience stores located throughout
eastern Georgia.
The aggregate cost of these acquisitions was $240 million, and was funded
with:
. proceeds from the issuance of our senior subordinated notes
. borrowings under our bank credit facility
. equity investments by existing shareholders
. cash on hand
Fiscal 1998 Financing Transactions:
. October 23, 1997--we issued $200.0 million of senior subordinated
notes at an interest rate of 10 1/4%
. October 23, 1997--we repurchased $51.0 million of senior notes and
paid related costs including a 10% repurchase premium, consent fee,
accrued interest and other expenses
. March 19, 1998 through July 15, 1998--we borrowed $78.0 million under
our bank credit facility
Fiscal 1999 Acquisitions:
<TABLE>
<CAPTION>
Number
of
Date Acquired Company Locations Stores
------------- ------------ ------------------------------------------------ ------
<S> <C> <C> <C>
February 25, 1999 ETNA North Carolina, Virginia 60
January 28, 1999 Handy Way North-central Florida 121
November 5, 1998 Express Stop Southeast North Carolina, Eastern South Carolina 22
October 22, 1998 Dash-N East-central North Carolina 10
</TABLE>
The aggregate cost of these acquisitions was $140 million and was funded
with borrowings under our bank credit facility and cash on hand.
25
<PAGE>
Fiscal 1999 Financing Transactions:
. January 28, 1999--we amended our bank credit facility and used the
proceeds to (1) refinance $94.0 million of existing bank debt, (2)
redeem $49.0 million of senior notes and pay approximately $2.0
million of related premium costs, (3) finance the fiscal 1999
acquisitions and (4) pay related fees and accrued and unpaid
interest.
Pro Forma Adjustments:
The unaudited pro forma balance sheet gives effect to the Handy Way and
ETNA acquisitions and the fiscal 1999 financing transactions. The fiscal 1998
acquisitions, the Dash-N and Express Stop acquisitions and the 1998 financing
transactions are reflected in our historical unaudited balance sheet data as of
December 24, 1998.
The unaudited pro forma statement of operations for the quarter ended
December 24, 1998 gives effect to the fiscal 1999 acquisitions and the fiscal
1999 financing transactions as if such events occurred at the beginning of
fiscal 1998. The fiscal 1998 acquisitions and fiscal 1998 financing
transactions are included in our historical results of operations for the
quarter.
The unaudited pro forma statement of operations for the year ended
September 24, 1998 gives effect to the 1998 acquisitions and disposition, the
1998 financing transactions, the fiscal 1999 acquisitions and the fiscal 1999
financing as if such events occurred at the beginning of fiscal 1998.
The unaudited pro forma financial data are provided for informational
purposes only and do not represent our results of operations or financial
position had the transactions occurred on such dates, nor are they indicative
of our results of operations or financial position as of any future date or
period.
The unaudited pro forma financial data and accompanying notes should be
read in conjunction with the financial statements and accompanying notes
thereto and the other financial information included elsewhere in this
prospectus. The financial statements of certain immaterial acquired entities
were not audited or reviewed by independent public accountants, and, therefore,
the information relating to these immaterial acquired entities is generally
based on internally prepared financial statements by the entity.
26
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET DATA
December 24, 1998
<TABLE>
<CAPTION>
Historical
-------------------------
The Pantry ETNA and 1999 ETNA and
December 24, Handy Way Financing Handy Way IPO Total
1998 Acquisitions Adjustments Adjustments Adjustments Pro Forma
------------ ------------ ----------- ----------- ----------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents........... $ 15,069 $ 13,672 $95,711 (a) $(95,000)(c) $ -- $ 22,906
(3,046)(d)
(3,500)(d)
Receivables, net....... 13,393 6,225 -- (443)(d) -- 19,175
Inventories............ 53,546 8,569 -- -- -- 62,115
Prepaid expenses....... 1,338 1,510 -- (158)(d) -- 2,690
Property held for
sale.................. 2,971 -- -- -- -- 2,971
Deferred income taxes.. 3,521 491 -- -- -- 4,012
-------- -------- ------- -------- ----- --------
Total current
assets............... 89,838 30,467 95,711 (102,147) -- 113,869
-------- -------- ------- -------- ----- --------
Property and equipment,
net.................... 328,037 90,964 -- (5,964)(d) -- 413,037
Other assets:
Goodwill, net.......... 119,534 -- -- 31,996 (e) -- 151,530
Deferred lease cost,
net................... 258 -- -- -- -- 258
Deferred financing
cost, net............. 14,025 -- 3,210 (a) -- -- 13,829
(3,406)(b)
Environmental
receivables, net...... 12,783 -- -- -- -- 12,783
Other.................. 4,085 14,003 -- (12,349)(d) -- 5,739
-------- -------- ------- -------- ----- --------
Total other assets.... 150,685 14,003 (196) 19,647 -- 184,139
-------- -------- ------- -------- ----- --------
Total assets........ $568,560 $135,434 $95,515 $(88,464) $ -- $711,045
======== ======== ======= ======== ===== ========
</TABLE>
See Notes to Unaudited Pro Forma Balance Sheet Data
27
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET DATA
December 24, 1998
<TABLE>
<CAPTION>
Historical
-------------------------
The Pantry ETNA and 1999 ETNA and
December 24, Handy Way Financing Handy Way IPO Total
1998 Acquisitions Adjustments Adjustments Adjustments Pro Forma
------------ ------------ ----------- ----------- ----------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Liabilities and
Shareholders' Equity
Current liabilities:
Current maturities of
long-term debt......... $ 39 $ 1,822 $ -- $ (1,822)(d) $ -- $ 39
Current maturities of
capital lease
obligations............ 1,240 -- -- -- -- 1,240
Revolving credit........ 2,000 -- 5,000 (a) -- -- 7,000
Accounts payable........ 55,320 14,875 -- (2,680)(d) -- 67,515
Accrued expenses........ 49,359 9,723 (630)(a) (1,703)(d) -- 54,133
(454)(a)
(2,162)(f)
-------- -------- -------- -------- -------- --------
Total current
liabilities........... 107,958 26,420 1,754 (6,205) -- 129,927
-------- -------- -------- -------- -------- --------
Senior subordinated
notes.................. 200,000 -- -- -- -- 200,000
Senior notes payable ... 48,995 -- (48,995)(a) -- -- --
Credit facility......... 94,000 -- (94,000)(a) -- -- --
Amended credit
facility............... -- -- 240,000 (a) 19,000 (c) (69,397)(g) 189,603
Other long-term debt.... 265 11,694 -- (11,694)(d) -- 265
-------- -------- -------- -------- -------- --------
Total long-term debt... 343,260 11,694 97,005 7,306 (69,397) 389,868
-------- -------- -------- -------- -------- --------
Other non-current
liabilities:
Environmental reserve... 17,291 -- -- -- -- 17,291
Capital lease
obligations............ 11,806 -- -- -- -- 11,806
Employment obligations.. 842 -- -- -- -- 842
Accrued dividends on
preferred stock........ 5,103 -- -- -- (5,103)(g) --
Deferred income taxes... 19,927 3,785 -- -- -- 23,712
Other non-current
liabilities............ 21,628 3,970 -- -- -- 25,598
-------- -------- -------- -------- -------- --------
Total other non-current
liabilities........... 76,597 7,755 -- -- (5,103) 79,249
-------- -------- -------- -------- -------- --------
Shareholders' equity:
Preferred stock......... -- -- -- -- -- --
Common stock............ 2 5,831 -- (5,831) -- 2
Additional paid-in
capital................ 69,925 2,383 -- (2,383) 92,000 (g) 144,425
(17,500)(g)
Shareholder loan........ (937) -- -- -- -- (937)
Retained earnings....... (28,245) 81,351 (2,000)(a) (81,351) -- (31,489)
(3,406)(b)
2,162 (f)
-------- -------- -------- -------- -------- --------
Total shareholders'
equity................ 40,745 89,565 (3,244) (89,565)(e) 74,500 112,001
-------- -------- -------- -------- -------- --------
Total liabilities and
shareholders' equity.. $568,560 $135,434 $ 95,515 $(88,464) $ -- $711,045
======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Balance Sheet Data
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET DATA
(dollars in thousands)
(a) Sources and Uses
<TABLE>
<S> <C>
Sources:
Revolving credit ................................................. $ 5,000
Amended credit facility........................................... 240,000
--------
Total sources.................................................... $245,000
========
Uses:
Redemption of senior notes........................................ $ 48,995
Refinance credit facility......................................... 94,000
Accrued interest--senior notes.................................... 630
Accrued interest--credit facility................................. 454
Redemption premium................................................ 2,000
Deferred financing cost........................................... 3,210
--------
Total uses...................................................... $149,289
========
Increase in cash and cash equivalents............................. $ 95,711
========
</TABLE>
(b) Write-off of $3,406 of unamortized deferred financing costs related to our
bank credit facility and our senior notes.
(c) Reflects acquisition costs funded by cash of $95,000 and borrowings under
our bank credit facility of $19,000 (see note a).
(d) Reflects the elimination of certain assets and liabilities we did not
acquire in connection with the ETNA and Handy Way acquisitions:
<TABLE>
<S> <C>
Cash............................................................. $ (3,046)
Receivables...................................................... (443)
Prepaid expenses................................................. (158)
Property and equipment........................................... (5,964)
Other assets..................................................... (12,349)
Current maturities of long-term debt............................. 1,822
Accounts payable................................................. 2,680
Other accrued liabilities........................................ 1,703
Other long-term debt............................................. 11,694
--------
Total.......................................................... $ (4,061)
========
Additionally, we used approximately $3,500 of cash on hand to partially
fund the ETNA and Handy Way acquisitions.
(e) Goodwill related to the ETNA and Handy Way acquisitions has been determined
as follows:
Aggregate purchase price......................................... $117,500
Less shareholders' equity........................................ (89,565)
Elimination of certain net assets not acquired by The Pantry (see
note d)......................................................... 4,061
--------
Total.......................................................... $ 31,996
========
</TABLE>
(f) Reflects a $2,162 tax benefit related to the premium paid in connection
with the redemption of our senior notes and the write-off of unamortized
deferred financing costs (see notes a and b).
(g) Reflects estimated net proceeds from the offering of $92,000 and the
application of such proceeds to (1) repay outstanding indebtedness under
our bank credit facility of $69,397 and (2) redeem preferred stock of
$17,500 and pay accrued dividends of $5,103.
29
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
Quarter Ended December 24, 1998
<TABLE>
<CAPTION>
Historical
-------------------------
Quarter
Ended Acquisition
December 24, Fiscal and
1998 1999 Financing IPO Total
The Pantry Acquisitions Adjustments Adjustments Pro Forma
------------ ------------ ----------- ----------- ---------
(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales...... $139,390 $36,863 $ -- $ -- $176,253
Gasoline sales......... 171,789 59,859 -- -- 231,648
Commissions............ 4,428 820 -- -- 5,248
-------- ------- ------- ------ --------
Total revenue......... 315,607 97,542 -- -- 413,149
-------- ------- ------- ------ --------
Cost of Sales:
Merchandise............ 94,453 23,037 -- -- 117,490
Gasoline............... 148,774 52,479 -- -- 201,253
-------- ------- ------- ------ --------
Total cost of sales... 243,227 75,516 -- -- 318,743
-------- ------- ------- ------ --------
Gross profit............ 72,380 22,026 -- -- 94,406
-------- ------- ------- ------ --------
Store operating
expenses............... 43,729 14,570 (1,106)(k) -- 57,193
General and
administrative
expenses............... 9,968 3,379 (162)(1) -- 13,185
Impairment of long-lived
assets................. -- 55 -- -- 55
Depreciation and
amortization........... 8,190 1,513 414 (b) -- 10,476
421 (c)
(62)(d)
-------- ------- ------- ------ --------
Total operating
expense............... 61,887 19,517 (495) -- 80,909
-------- ------- ------- ------ --------
Income from operations.. 10,493 2,509 495 -- 13,497
-------- ------- ------- ------ --------
Other Income (Expense):
Interest............... (8,912) (109) (2,341)(e) 1,418 (h) (9,477)
531 (e)
(64)(e)
Miscellaneous.......... (184) 104 (13)(a) -- (93)
-------- ------- ------- ------ --------
Total other expense... (9,096) (5) (1,887) 1,418 (9,570)
-------- ------- ------- ------ --------
Income (loss) before
income taxes........... 1,397 2,504 (1,392) 1,418 3,927
Income tax expense
(benefit).............. 332 385 287 (f) 567 (f) 1,571
-------- ------- ------- ------ --------
Net income (loss) before
extraordinary item..... $ 1,065 $ 2,119 $(1,679)(g) $ 851 $ 2,356
======== ======= ======= ====== ========
Earnings Per Share
Before Extraordinary
Loss(g):
Basic.................. $
========
Diluted................ $
========
Weighted-Average Number
of Shares Outstanding:
Basic..................
========
Diluted................
========
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations Data
30
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
Year Ended September 24, 1998
<TABLE>
<CAPTION>
Historical
---------------------------------------
Year Ended 1998
September 24, Acquisitions Fiscal Acquisition and
1998 and 1999 Financing IPO Total
The Pantry Disposition Acquisitions Adjustments Adjustments Pro Forma
------------- ------------ ------------ --------------- ----------- ----------
(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales...... $460,798 $ 75,593 $156,227 $ (402)(a) $ -- $ 692,216
Gasoline sales......... 509,958 181,814 269,019 (15,823)(a) -- 944,968
Commissions............ 14,128 3,633 5,217 (467)(a) -- 22,511
-------- -------- -------- -------- ------ ----------
Total revenues...... 984,884 261,040 430,463 (16,692) -- 1,659,695
-------- -------- -------- -------- ------ ----------
Cost of Sales:
Merchandise............ 303,968 54,219 103,097 (207)(a) -- 461,077
Gasoline............... 447,565 161,074 238,893 (13,004)(a) -- 834,528
-------- -------- -------- -------- ------ ----------
Total cost of
sales.............. 751,533 215,293 341,990 (13,211) -- 1,295,605
-------- -------- -------- -------- ------ ----------
Gross profit............ 233,351 45,747 88,473 (3,481) -- 364,090
-------- -------- -------- -------- ------ ----------
Store operating
expenses............... 140,089 27,164 59,996 (3,015)(a) -- 220,098
(4,424)(k)
288 (i)
General and
administrative
expenses............... 32,761 7,506 12,171 (356)(a) -- 51,779
(42)(j)
(261)(1)
Restructuring charges... 1,016 -- -- -- -- 1,016
Impairment of long-lived
assets................. -- -- 219 -- -- 219
Depreciation and
amortization........... 27,642 5,189 6,104 (169)(a) -- 41,476
3,136 (b)
144 (b)
(389)(c)
(181)(d)
-------- -------- -------- -------- ------ ----------
Total operating
expense................ 201,508 39,859 78,490 (5,269) -- 314,588
-------- -------- -------- -------- ------ ----------
Income from operations.. 31,843 5,888 9,983 1,788 -- 49,502
-------- -------- -------- -------- ------ ----------
Other Income (Expense):
Interest............... (28,946) (1,687) (485) (13,787)(e) 5,670 (h) (37,369)
2,122 (e)
(256)(e)
Miscellaneous.......... 1,776 137 955 (193)(a) -- 2,675
-------- -------- -------- -------- ------ ----------
Total other
expense............ (27,170) (1,550) 470 (12,114) 5,670 (34,694)
-------- -------- -------- -------- ------ ----------
Income (loss) before
income taxes........... 4,673 4,338 10,453 (10,326) 5,670 14,808
Income tax expense...... -- 364 915 2,376 (f) 2,268 (f) 5,923
-------- -------- -------- -------- ------ ----------
Net income (loss) before
extraordinary item..... $ 4,673 $ 3,974 $ 9,538 $(12,702)(g) $3,402 $ 8,885
======== ======== ======== ======== ====== ==========
Earnings Per Share
Before Extraordinary
Loss (g):
Basic.................. $
==========
Diluted................ $
==========
Weighted-Average Number
of Shares Outstanding:
Basic..................
==========
Diluted................
==========
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations Data
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
(dollars in thousands)
(a) Reflects the elimination of certain operations not acquired as follows:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
December 24, September 24,
1998 1998
------------------ ------------------
Decrease in expenses (decrease in income)
<S> <C> <C> <C>
Fiscal 1998 Acquisitions:
Merchandise sales.......... $ -- $ (402)
Gasoline sales............. -- (15,823)
Commissions................ -- (467)
Merchandise cost of sales.. -- 207
Gasoline cost of sales..... -- 13,004
Store operating expenses... -- 3,015
General and administrative
expenses.................. -- 356
Depreciation and
amortization.............. -- 169
Fiscal 1999 Acquisitions:
Miscellaneous income....... (13) (193)
</TABLE>
(b) The 1998 and 1999 acquisitions have been accounted for using the purchase
method of accounting. Purchase price allocations for the Lil' Champ
acquisition, the Kwik Mart acquisition, and the Sprint acquisition have
been finalized. Purchase price allocations for the Quick Stop acquisition,
the Zip Mart acquisition, the Dash-N acquisition, the Express Stop
acquisition, the Handy Way acquisition, and the ETNA acquisition are based
on available information and certain assumptions we believe are reasonable.
For each acquisition, the purchase price will be allocated to the tangible
and intangible assets acquired and liabilities assumed based upon their
respective fair values as of the time the acquisitions were consummated
pending completion of appraisals of property and equipment acquired; the
excess of the purchase price over the historical basis of the net assets
acquired has not been allocated in the accompanying unaudited pro forma
financial data. The actual allocation of the purchase cost, however, and
the resulting effect on income from operations may differ significantly
from the pro forma amounts included herein. For purposes of the pro forma
information, the excess of the purchase price over the historical net
assets acquired has been considered to be goodwill and other intangible
assets, pending the completion of appraisals and other purchase price
allocation adjustments. The following table summarizes the additional
amortization expense to be incurred in connection with the various 1998 and
1999 transactions described above:
32
<PAGE>
<TABLE>
<CAPTION>
Estimated Quarter Ended Year Ended
Recorded Useful Life December 24, September 24,
Acquisitions Goodwill (years) 1998 1998
------------ -------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
1998 acquisitions.......... $101,567 30 $ -- $1,527
1999 acquisitions.......... 50,040 30 414 1,669
---- ------
Subtotal.................. 414 3,196
Less historical recorded
predecessor amounts....... -- 60
---- ------
Adjustment................. $414 $3,136
==== ======
</TABLE>
Additionally, depreciation and amortization for the year ended September
24, 1998 includes $144 for deferred loan cost amortization related to the
issuance of our $200,000 senior subordinated notes and our bank credit
facility entered into in October 1997.
(c) Reflects additional depreciation expense in connection with the various
1998 and 1999 acquisition and financing transactions as follows:
<TABLE>
<CAPTION>
Recorded
Fair Value of
Property and Estimated Quarter Ended Year Ended
Equipment Useful Life December 24, September 24,
Acquisitions Acquired (in years) 1998 1998
------------ ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
1998 acquisitions....... $203,695 10-35 $ -- $ 3,454
1999 acquisitions....... 89,750 10-35 1,924 7,130
------ -------
Subtotal............... 1,924 10,584
Less historical recorded
amounts................ 1,503 10,973
------ -------
Adjustment.............. $ 421 $ (389)
====== =======
</TABLE>
(d) Reflects reduction in amortization of deferred financing costs related to
our bank credit facility, net of amortization recorded related to our
senior notes and our bank credit facility, of $62 for the three months
ended December 24, 1998 and $181 for the year ended September 24, 1998. The
financing costs, which approximate $3,210, are being amortized over the
weighted-average life of our bank credit facility of 6 years.
(e) Reflects additional interest expense in connection with the various 1998
and 1999 financing and acquisitions transactions as follows:
<TABLE>
<CAPTION>
Quarter
Principal Interest Ended Year Ended
Borrowed Rate December 24, September 24,
Acquisition/Financing (Retired) (per annum) 1998 1998
--------------------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Issuance of senior
subordinated notes........ $200,000 10.25% $ -- $ 1,708
Redemption of senior
notes..................... (51,000) 12.50 -- (531)
1998 acquisitions.......... 78,000 8.17 -- 4,148
1999 acquisitions.......... 130,000 8.17-8.19 2,437 10,621
------ -------
Subtotal.................. 2,437 15,946
Less historical recorded
amounts related to
indebtedness not assumed.. 96 2,159
------ -------
Adjustment................. $2,341 $13,787
====== =======
</TABLE>
Also reflects additional interest expense related to the cost of the
financing transactions of $64 for the quarter ended December 24, 1998 and
$256 for the year ended September 24, 1998.
Additionally, reflects reduction in interest expense related to the
redemption of our senior notes of $531 for the quarter ended December 24,
1998 and $2,122 for the year ended September 24, 1998.
33
<PAGE>
Assuming a 0.125% increase or decrease in the variable rate bank credit
facility, interest expense, net of taxes, would increase or decrease by $60
for the quarter ended December 24, 1998 and $240 for the year ended
September 24, 1998.
(f) Adjusts income tax expense for an assumed tax rate of 40% for each of the
periods presented.
(g) For each period presented, net income (loss) excludes extraordinary charges
of approximately $3,244, net of income tax benefit of $2,162, related to
the redemption of $48,995 of senior notes and the amendment of our bank
credit facility. Net income (loss) before extraordinary items for the year
ended September 24, 1998 excludes charges of approximately $7,998 incurred
related to the costs of the redemption of $51,000 of senior notes.
(h) Reflects the application of net proceeds of approximately $69,397 to repay
outstanding indebtedness at the weighted-average rate of 8.17%.
(i) Reflects an increase in store rental expense of $288 for the year ended
September 24, 1998 in connection with an obligation to lease certain stores
from the former owners of Quick Stop, a fiscal 1998 acquisition. The rent
increase was effective concurrent with the Quick Stop acquisition.
(j) Historically, Lil' Champ paid Docks U.S.A., Inc., Lil' Champ's parent
company, service agreement fees. The service agreement was terminated
concurrent with the acquisition of Lil' Champ. Consequently, $42 of service
agreement fees have been eliminated for the year ended September 24, 1998.
(k) Historically, Handy Way incurred rental expense related to stores leased
from its affiliates. These stores were acquired by us in connection with
the Handy Way acquisition and all leases with Handy Way affiliates were
terminated. As a result, rental expenses of $1,106 for the quarter ended
December 24, 1998 and $4,424 for the year ended September 24, 1998 have
been eliminated.
(l) Reflects the elimination of transaction costs incurred by Handy Way in
connection with the Handy Way acquisition of $162 for the quarter ended
December 24, 1998 and $261 for the year ended September 24, 1998.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Pantry is a leading convenience store operator in the southeastern
United States and the third largest independently operated convenience store
chain in the country. Our stores offer a broad selection of merchandise and
gasoline as well as ancillary services designed to appeal to the convenience
needs of our customers.
Since the arrival of our current management team in fiscal 1996, we have
experienced significant growth through a combination of management initiatives
and strategic acquisitions including:
. enhancing our merchandising to increase same store merchandise sales
growth and margins
. improving our gasoline offering in order to increase customer traffic
and same store gasoline volume growth
. reducing expenses through strengthened vendor relationships and
tightened expense controls
. increasing expenditures for facilities improvement and store
automation
. growing through acquisitions and new store development
As a result, we have experienced increases in total revenue, same store
merchandise sales and gasoline volume growth and income from operations.
Additionally, we have expanded the geographic scope of our operations which we
believe will result in less seasonality from period to period. We intend to
continue our acquisition strategy and, accordingly, future results may not be
necessarily comparable to historic results.
We believe that there is significant opportunity to continue to increase
profitability at our existing and new stores. We continue to focus on same
store sales and profit growth through upgraded facilities, improved technology,
new service offerings, competitive merchandise and gasoline prices and cost
savings initiatives. We are upgrading our management information systems and
continue to remodel our stores. Finally, we continue to seek acquisitions and
believe that there is a large number of attractive acquisition opportunities in
our markets.
Acquisition History
Our acquisition strategy focuses on acquiring convenience stores within
or contiguous to our existing market areas. We believe acquiring locations with
demonstrated revenue volumes involves lower risk and is an economically
attractive alternative to traditional site selection and new store development.
35
<PAGE>
The table below provides certain information concerning the eleven
largest acquisitions we have completed since fiscal 1996:
<TABLE>
<CAPTION>
Number of
Date Acquired Company Locations Stores
----------------- ------------ --------------------------------- ---------
<C> <C> <S> <C>
February 25, 1999 ETNA North Carolina, Virginia 60
January 28, 1999 Handy Way North-central Florida 121
November 5, 1998 Express Stop Southeast North Carolina, Eastern 22
South Carolina
October 22, 1998 Dash-N East-central North Carolina 10
July 15, 1998 Zip Mart Central North Carolina, Virginia 42
July 2, 1998 Quick Stop Southeast North Carolina, Coastal 75
South Carolina
April 3, 1998 Sprint Gainesville, Florida 10
March 19, 1998 Kwik Mart Eastern North Carolina 23
October 23, 1997 Lil' Champ Northeast Florida 441(a)
June 12, 1997 Freshway Eastern North Carolina 15
April 17, 1997 Gregorie Oil Charleston, South Carolina 15
</TABLE>
- --------
(a) Net of the disposition of 48 convenience stores located throughout eastern
Georgia.
We seek to improve the productivity and profitability of acquired stores
by implementing our merchandising and gasoline initiatives, eliminating
duplicative costs, reducing overhead and centralizing certain functions such as
purchasing and information technology. For example, at Lil' Champ, we have,
among other things, expanded the merchandise offered at each store, upgraded
store and gasoline facilities and centralized merchandise purchasing. These
improvements have contributed to an increase in same store EBITDA of 44.1% and
a decrease in same store operating expenses of 6.3% at Lil' Champ stores during
the twelve month period following the Lil' Champ acquisition. We believe it
takes six to twelve months to fully integrate and achieve operational and
financial improvements at acquired locations. There can be no assurance,
however, that revenue increases or cost savings can be achieved with respect to
any acquisition.
Quarterly Results of Operations
The following table presents the unaudited quarterly net sales and
operating income for each of our fiscal quarters in fiscal 1996, 1997 and 1998.
In the opinion of our management, this quarterly information has been prepared
on the same basis as the audited consolidated financial statements appearing
elsewhere in this prospectus and includes all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the unaudited
quarterly results set forth herein.
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------------- ------------------------------------- -----------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
------- ------- -------- -------- -------- ------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue... $90,677 $84,278 $103,650 $106,202 $100,331 $95,910 $111,032 $120,120 $195,171 $220,670 $254,577
Income from
operations..... 550 (1,359) 2,139 544 1,346 484 3,808 5,133 4,877 4,615 10,159
Net income
(loss)......... (1,827) (3,397) (1,098) (1,792) (1,383) (1,761) 833 1,336 (6,889) (1,580) 2,509
EBITDA.......... 2,716 1,016 4,472 8,046 3,609 2,719 6,118 7,829 10,028 11,239 16,909
EBITDA margin... 3.0% 1.2% 4.3% 7.6% 3.6% 2.8% 5.5% 6.5% 5.1% 5.1% 6.6%
<CAPTION>
1996 1997 1998
------------------------------------- ------------------------------------- -----------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
------- ------- -------- -------- -------- ------- -------- -------- -------- -------- --------
(percent of annual total)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue... 23.6% 21.9 % 26.9% 27.6% 23.5% 22.4% 26.0% 28.1% 19.8% 22.4% 25.8%
Income from
operations..... 29.3% (72.5)% 114.1% 29.1% 12.5% 4.5% 35.3% 47.7% 15.3% 14.5% 31.9%
EBITDA.......... 16.7% 6.3 % 27.5% 49.5% 17.8% 13.4% 30.2% 38.6% 16.6% 18.6% 27.9%
<CAPTION>
Q4
---------
<S> <C>
Total revenue... $314,466
Income from
operations..... 12,192
Net income
(loss)......... 2,635
EBITDA.......... 22,325
EBITDA margin... 7.1%
<CAPTION>
Q4
---------
<S> <C>
Total revenue... 32.0%
Income from
operations..... 38.3%
EBITDA.......... 36.9%
</TABLE>
36
<PAGE>
Results of Operations
The following table sets forth certain of our results in absolute dollars
and as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended Quarter Ended
------------------------------ -------------------
Sept. Sept. Sept. Dec. 25, Dec. 24,
26, 1996 25, 1997 24, 1998 1997 1998
-------- -------- -------- -------- --------
(unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales..... $188,091 $202,440 $460,798 $ 89,360 $139,390
Gasoline sales........ 192,737 220,166 509,958 103,022 171,789
Commissions........... 3,979 4,787 14,128 2,789 4,428
-------- -------- -------- -------- --------
Total revenue........... $384,807 $427,393 $984,884 $195,171 $315,607
======== ======== ======== ======== ========
Gross profit............ $ 91,218 $ 97,279 $233,351 $ 45,365 $ 72,380
Total operating
expenses............... 80,186 77,004 173,866 35,337 53,697
Depreciation and
amortization........... 9,158 9,504 27,642 5,151 8,190
-------- -------- -------- -------- --------
Income from operations.. $ 1,874 $ 10,771 $ 31,843 $ 4,877 $ 10,493
======== ======== ======== ======== ========
Net income (loss)....... $ (8,114) $ (975) $ (3,325) $ (6,889) $ 1,065
======== ======== ======== ======== ========
<CAPTION>
Fiscal Year Ended Quarter Ended
------------------------------ -------------------
Sept. 26, Sept. 25, Sept. 24, Dec. 25, Dec. 24,
1996 1997 1998 1997 1998
--------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales..... 48.9 % 47.4 % 46.8 % 45.8 % 44.2 %
Gasoline sales........ 50.1 51.5 51.8 52.8 54.4
Commissions........... 1.0 1.1 1.4 1.4 1.4
-------- -------- -------- -------- --------
Total revenue........... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
======== ======== ======== ======== ========
Gross profit............ 23.7 % 22.7 % 23.7 % 23.2 % 22.9 %
Total operating
expenses............... 20.8 18.0 17.7 18.1 17.0
Depreciation and
amortization........... 2.4 2.2 2.8 2.6 2.6
-------- -------- -------- -------- --------
Income from operations.. 0.5 % 2.5 % 3.2 % 2.5 % 3.3 %
======== ======== ======== ======== ========
</TABLE>
The Lil' Champ acquisition and other acquisitions have had a significant
impact on our financial condition and results of operations since their
respective transaction dates. Due to the method of accounting for fiscal 1998
acquisitions, the consolidated statements of operations for the fiscal year
ended September 24, 1998 include results from operations for each of the
acquisitions from the date of each acquisition only. Moreover, the consolidated
balance sheet as of September 24, 1998 and the consolidated statements of
operations for fiscal years ended September 25, 1997 and September 26, 1996 do
not include the assets, liabilities, and results of operations relating to
acquisitions completed during the first fiscal quarter 1999. As a result,
comparisons to prior operating results and prior balance sheets are impacted
materially.
First Quarter Ended December 24, 1998 Compared to the First Quarter Ended
December 25, 1997
Total Revenue. Total revenue for the first fiscal quarter 1999 was $315.6
million compared to $195.2 million during the comparable period ended December
25, 1997 (the "first fiscal quarter
37
<PAGE>
1998" or the "comparable period"), an increase of $120.4 million or 61.7% over
the comparable period. The increase in total revenue is primarily attributable
to the revenue from stores acquired or opened since December 25, 1997, as well
as a full quarter of Lil' Champ revenue and same store merchandise sales and
gasoline gallon growth. In the first fiscal quarter 1999, our gross revenue
increases were partially offset by lower average retail gasoline prices versus
the comparable period.
Merchandise Revenue. Merchandise revenue for the first fiscal quarter
1999 was $139.4 million compared to $89.4 million during the first fiscal
quarter 1998, an increase of $50.0 million or 56.0%. The increase in
merchandise revenue is primarily attributable to the revenue from stores
acquired or opened since December 25, 1997, as well as a full quarter of Lil'
Champ merchandise revenue and same store merchandise sales growth. Same store
merchandise revenue for the first fiscal quarter 1999 increased 10.5% over the
first fiscal quarter 1998. The increase in same store merchandise revenue is
primarily attributable to increased customer traffic, higher average
transaction size and general economic and market conditions. The increases in
store traffic and average transaction size are primarily attributable to store
merchandising, more competitive gasoline pricing, enhanced store appearance and
increased in-store promotional activity.
Gasoline Revenue and Gallons. Gasoline revenue for the first fiscal
quarter 1999 was $171.8 million compared to $103.0 million during the first
fiscal quarter 1998, an increase of $68.8 million or 66.8%. The increase in
gasoline revenue is primarily attributable to the revenue from stores acquired
or opened since December 25, 1997, as well as a full quarter of Lil' Champ
gasoline revenue and same store gallon sales growth. Gasoline revenue growth
was partially offset by a $0.16 or 13.6% decrease in average gasoline retail
prices versus the comparable period.
In the first fiscal quarter 1999, gasoline gallons sold were 169.0
million compared to 87.5 million during the first fiscal quarter 1998, an
increase of 81.5 million gallons or 93.1%. The increase is primarily
attributable to the gasoline gallons sold by stores acquired or opened since
December 25, 1997, as well as a full quarter of Lil' Champ gasoline gallons and
same store gallon growth. Same store gasoline gallon sales for the first fiscal
quarter 1999 increased 5.1% over the comparable period. The same store gallon
increase is primarily attributable to increased customer traffic resulting from
general economic and market conditions, more competitive gasoline pricing,
rebranding and promotional activity, gasoline equipment upgrades and enhanced
store appearance.
Commission Revenue. Commission revenue for the first fiscal quarter 1999
was $4.4 million compared to $2.8 million during the first fiscal quarter 1998,
an increase of $1.6 million or 58.8%. The increase in commission revenue is
primarily attributable to the revenue from stores acquired or opened since
December 25, 1997, as well as a full quarter of Lil' Champ lottery commissions
and same store commission revenue increases. Commission revenue includes
lottery commissions, video gaming income, money order commissions, telephone
income and revenue from other ancillary product and service offerings.
Total Gross Profit. Total gross profit for the first fiscal quarter 1999
was $72.4 million compared to $45.4 million during the first fiscal quarter
1998, an increase of $27.0 million or 59.6%. The increase in gross profit is
primarily attributable to the profits from stores acquired or opened since
December 25, 1997, as well as a full quarter of Lil' Champ gross profit and
same store profit increases.
38
<PAGE>
Merchandise Gross Profit and Margin. Merchandise gross profit was $44.9
million for the first fiscal quarter 1999 compared to $30.5 million for the
first fiscal quarter 1998, an increase of $14.5 million or 47.5%. This increase
is primarily attributable to the profits from stores acquired or opened since
December 25, 1997, as well as a full quarter of Lil' Champ merchandise gross
profit and same store profit increases. The decline in merchandise gross margin
from 34.1% for the first fiscal quarter 1998 to 32.2% for the first fiscal
quarter 1999 is attributable to the addition of several lower margin stores
acquired or opened since December 25, 1997 and lower gross margin on cigarettes
notwithstanding manufacturer rebates and other incentives.
Gasoline Gross Profit and Per Gallon Margin. Gasoline gross profit was
$23.0 million for the first fiscal quarter 1999 compared to $12.1 million for
the first fiscal quarter 1998, an increase of $10.9 million or 90.0%. This
increase is primarily attributable to the profits from stores acquired or
opened since December 25, 1997, as well as a full quarter of Lil' Champ
gasoline gross profit and same store profit increases. The gasoline gross
profit per gallon was $0.138 for the first fiscal quarter 1998 compared to
$0.136 in first fiscal quarter 1999.
Store Operating and General and Administrative Expenses. Store operating
expenses for the first fiscal quarter 1999 were $43.7 million compared to $28.2
million for the first fiscal quarter 1998, an increase of $15.6 million or
55.3%. The increase in store operating expenses is primarily attributable to
the personnel and lease expenses associated with the stores acquired or opened
since December 25, 1997, as well as a full quarter of Lil' Champ store
operating expenses. As a percentage of total revenue, store operating expenses
decreased from 14.4% in the first fiscal quarter 1998 to 13.9% in the first
fiscal quarter 1999.
General and administrative expenses for the first fiscal quarter 1999
were $10.0 million compared to $7.2 million during the first fiscal quarter
1998, an increase of $2.8 million or 39.0%. The increase in general and
administrative expenses is attributable to increased administrative expenses
associated with the stores acquired or opened since December 25, 1997, as well
as a full quarter of Lil' Champ general and administrative expenses. As a
percentage of total revenue, general and administrative expenses decreased from
3.7% in the first fiscal quarter 1998 to 3.2% in the first fiscal quarter 1999.
Income from Operations. Income from operations was $10.5 million for the
first fiscal quarter 1999 compared to $4.9 million during the first fiscal
quarter 1998, an increase of $5.6 million or 115.2% from the comparable period.
The increase is attributable to the factors discussed above and is partially
reduced by the $3.0 million increase in depreciation and amortization. As a
percentage of total revenue, income from operations increased from 2.5% in the
first fiscal quarter 1998 to 3.3% in the first fiscal quarter 1999.
EBITDA. EBITDA represents income from operations before depreciation and
amortization and extraordinary and unusual items. EBITDA for the first fiscal
quarter 1999 was $18.7 million compared to $10.0 million during the first
fiscal quarter 1998, an increase of $8.7 million or 86.3% over the comparable
period. The increase is attributable to the items discussed above.
EBITDA is not a measure of performance under generally accepted
accounting principles, and should not be considered as a substitute for net
income, cash flows from operating activities and other income or cash flow
statement data prepared in accordance with generally accepted accounting
principles, or as a measure of profitability or liquidity. We have included
information concerning EBITDA as one measure of an issuer's historical ability
to service debt. EBITDA should not be
39
<PAGE>
considered as an alternative to, or more meaningful than, income from
operations or cash flow as an indication of our operating performance. EBITDA
as defined may not be comparable to similarly-titled measures reported by other
companies.
Interest Expense. Interest expense is primarily interest on our senior
notes, senior subordinated notes and borrowings under our bank credit facility.
Interest expense for the first fiscal quarter 1999 was $8.9 million compared to
$5.8 million for the first fiscal quarter 1998, an increase of $3.1 million or
53.2%. The increase in interest expense is attributable to a full quarter of
interest on the senior subordinated notes and borrowings under our bank credit
facility, which was partially offset by the (1) interest savings related to the
October 23, 1997 redemption of $51.0 million in principal amount of senior
notes and (2) a 50 basis point reduction in the interest rate on the
$49.0 million outstanding senior notes. Subsequent to December 24, 1998, 100%
of the outstanding senior notes were redeemed and refinanced with proceeds from
term loan facilities under the terms of our bank credit facility.
Income Tax Benefit (Expense). The income tax benefit for the first fiscal
quarter 1998 was $0.4 million compared to income tax expense of $0.3 million
for the first fiscal quarter 1999. This decrease was primarily attributable to
the increase in income for operations. Income tax benefit (expense) is recorded
net of a valuation allowance to reduce federal and state deferred tax assets to
a net amount which we believe more likely than not will be realized based on
estimates of future earnings and the expected timing of temporary difference
reversals.
Extraordinary Item. In the first fiscal quarter 1998, we recognized an
extraordinary loss, net of taxes, of approximately $6.8 million in connection
with the October 23, 1997 redemption of $51.0 million in principal amount of
our outstanding senior notes and related consents obtained from the holders of
the senior notes to amendments and waivers to certain covenants contained in
the indenture. The loss was the sum, net of taxes, of the premium paid for the
early redemption of $51.0 million in principal amount of the senior notes, the
respective portion of the consent fees paid, and the write-off of a respective
portion of the deferred financing cost associated with the senior notes.
Net Income (loss). Net income for the first fiscal quarter 1999 was $1.1
million compared to a net loss of $6.9 million for the first fiscal quarter
1998. In the first fiscal quarter 1998 we recognized an extraordinary loss as
discussed above.
Fiscal 1998 Compared to Fiscal 1997
Total Revenue. Total revenue for fiscal 1998 was $984.9 million compared
to $427.4 million for fiscal 1997, an increase of $557.5 million or 130.4%. The
increase in total revenue is primarily attributable to Lil' Champ revenue of
$462.8 million for the eleven month period ended September 24, 1998, the
revenue from stores acquired or opened in fiscal 1998, a full year of revenue
from stores acquired or opened in fiscal 1997 and same store sales growth.
Merchandise Revenue. Merchandise revenue for fiscal 1998 was $460.8
million compared to $202.4 million for fiscal 1997, an increase of $258.4
million or 127.6%. The increase in merchandise revenue is primarily
attributable to Lil' Champ merchandise revenue of $215.4 million for the eleven
month period ended September 24, 1998, the revenue from stores acquired or
opened in fiscal 1998, a full year of revenue from stores acquired or opened in
fiscal 1997 and same store
40
<PAGE>
sales growth. Fiscal 1998 same store merchandise revenue growth increased 5.3%
over fiscal 1997. Same store sales increases at The Pantry locations are
primarily attributable to increased customer counts and average transaction
size resulting from more competitive gasoline pricing, enhanced store
appearance and store merchandising and increased in-store promotional activity.
Gasoline Revenue and Gallons. Gasoline revenue for fiscal 1998 was $510.0
million compared to $220.2 million for fiscal 1997, an increase of $289.8
million or 131.6%. The increase in gasoline revenue is primarily attributable
to Lil' Champ gasoline revenue of $240.1 million for the eleven month period
ended September 24, 1998, the revenue from stores acquired or opened in fiscal
1998, a full year of revenue from stores acquired or opened in fiscal 1997 and
same store gallon sales growth. Overall, gasoline revenue growth was partially
offset by lower average gasoline retail prices in fiscal 1998 versus fiscal
1997. In fiscal 1998, our average retail price of gasoline was $0.14 lower than
in fiscal 1997. The decrease in average retail price is primarily attributable
to lower wholesale gasoline pricing.
In fiscal 1998, total gasoline gallons were 466.8 million gallons
compared to 179.4 million gallons in fiscal 1997, an increase of 287.4 million
gallons or 160.2%, 212 million of which is attributable to Lil' Champ volume.
Fiscal 1998 same store gallon sales growth was 4.8% and is primarily
attributable to more competitive gasoline pricing, rebranding and promotional
activity, enhanced store appearance and local market and economic conditions.
Commission Revenue. Total commission revenue for fiscal 1998 was $14.1
million compared to $4.8 million for fiscal 1997, an increase of $9.3 million
or 195.1%. The increase in commission revenue is primarily attributable to Lil'
Champ revenue of $7.3 million for the eleven month period ended September 24,
1998 and revenue from stores acquired or opened in fiscal 1998. Lil' Champ's
commission revenue is principally lottery revenue in locations throughout
Florida and Georgia.
Total Gross Profit. Total gross profit for fiscal 1998 was $233.4 million
compared to $97.3 million for fiscal 1997, an increase of $136.1 million or
139.9%. The increase in gross profit is primarily attributable to Lil' Champ
gross profit of $111.7 million for the eleven month period ended September 24,
1998, the gross profit from stores acquired or opened in fiscal 1998, full year
revenue from stores acquired or opened in fiscal 1997 and same store gross
profit increases.
Merchandise Gross Margin. Merchandise gross margins in fiscal 1998
remained relatively constant compared to fiscal 1997, decreasing only 3.4 basis
points despite significant cost inflation in the tobacco category. Excluding
tobacco sales, merchandise gross margins rose due to improved purchasing.
Gasoline Gross Profit per Gallon. The gasoline gross profit per gallon
increased to $0.134 in fiscal 1998 from $0.128 in fiscal 1997 as the result of
general gasoline market conditions in Lil' Champ's markets and improved
gasoline market conditions in our other primary markets. This increase occurred
in spite of decreases in retail gasoline prices to $1.09 in fiscal 1998 from
$1.23 in fiscal 1997.
Store Operating and General and Administrative Expenses. Store operating
expenses for fiscal 1998 were $140.1 million compared to $60.2 million for
fiscal 1997, an increase of $79.9 million or 132.7%. The increase in store
expenses is primarily attributable to Lil' Champ expenses of $66.0 million for
the eleven month period ended September 24, 1998, the personnel and
41
<PAGE>
lease expenses associated with the stores acquired or opened in fiscal 1998 and
a full year of personnel and lease expenses associated with stores acquired or
opened in fiscal 1997. As a percentage of total revenue, store operating
expenses increased to 14.2% in fiscal 1998 from 14.1% in fiscal 1997.
General and administrative expenses for fiscal 1998 were $32.8 million
compared to $16.8 million for fiscal 1997, an increase of $16.0 million or
95.1%. The increase in general and administrative expenses is primarily
attributable to Lil' Champ expenses of $14.3 million for the eleven month
period ended September 24, 1998. Operating, general and administrative expenses
in total decreased as a percentage of total revenue. As a percentage of total
revenue, general and administrative expenses decreased to 3.3% in fiscal 1998
from 3.9% in fiscal 1997.
Income from Operations. Income from operations for fiscal 1998 was $31.8
million compared to $10.8 million for fiscal 1997, an increase of $21.1 million
or 195.6%. The increase is primarily attributable to Lil' Champ income from
operations of $16.6 million, earnings from stores acquired or opened in fiscal
1998, a full year of revenue from stores acquired or opened in fiscal 1997,
same store volume increases, and the margin impact as discussed above. The
increase is partially offset by the personnel and lease expenses associated
with the stores acquired or opened in fiscal 1998 and a full year of expenses
from stores acquired or opened in fiscal 1997. As a percentage of total
revenue, income from operations increased to 3.2% in fiscal 1998 from 2.5% in
fiscal 1997.
EBITDA. EBITDA for fiscal 1998 was $60.5 million compared to $20.3
million for fiscal 1997, an increase of $40.2 million or 198.4%. The increase
is primarily attributable to Lil' Champ EBITDA of $31.4 million for the eleven
month period ended September 24, 1998 and the items discussed above. Excluding
Lil' Champ, EBITDA increased 43.3% in fiscal 1998 compared to fiscal 1997.
Interest Expense. Interest expense in fiscal 1998 was $28.9 million
compared to $13.0 million for fiscal 1997, an increase of $15.9 million or
122.0%. This increase is attributable to interest on our senior notes, our
senior subordinated notes and borrowing under the bank credit facility, which
was partially offset by the interest savings related to the redemption of $51.0
million in principal amount of our senior notes.
Income Tax Benefit (Expense). We did not record an income tax benefit for
fiscal 1998 or fiscal 1997. Income tax benefit (expense) is recorded net of a
valuation allowance to reduce federal and stated deferred tax assets to a net
amount which we believe more likely than not will be realized based on
estimates of future earnings and the expected timing of temporary difference
reversals.
Extraordinary Item. We recognized an extraordinary loss, net of taxes, of
approximately $8.0 million in fiscal 1998 in connection with the redemption of
a portion of our senior notes and related consent solicitation. The loss is the
sum, net of taxes, of the premium paid for the early redemption of
$51.0 million in principal amount of our senior notes, the respective portion
of the consent fees paid, and the write-off of a respective portion of the
deferred financing cost associated with our senior notes.
Net Loss. Net loss for fiscal 1998 was $3.3 million compared to $1.0
million for fiscal 1997, an increase of $2.3 million or 241.0%. The increase is
primarily attributable to the extraordinary loss, net of taxes, of $8.0 million
in connection with the redemption of our senior notes and related consent fees.
42
<PAGE>
Fiscal 1997 Compared to Fiscal 1996
Total Revenue. Total revenue for fiscal 1997 was $427.4 million compared
to $384.8 million for fiscal 1996, an increase of $42.6 million or 11.1%. This
increase is attributable to significant revenue increases in merchandise,
gasoline and commissions despite a reduction in average store count compared to
the prior year.
Merchandise Revenue. Merchandise revenue for fiscal 1997 was $202.4
million compared to $188.1 million for fiscal 1996, an increase of $14.3
million or 7.6%, due to increased volume in major categories, a general
increase in the price of cigarettes and growth in new merchandising programs
and categories. Same store merchandise sales increased 8.5% over fiscal 1996
and average merchandise sales per store increased as we closed or sold 25 lower
volume stores while acquiring or opening 36 new stores.
Gasoline Revenue and Gallons. Total gasoline revenue for fiscal 1997 was
$220.2 million compared to $192.7 million for fiscal 1996, an increase of $27.4
million or 14.2%, primarily due to our competitive pricing strategy, the
closing of underperforming stores and acquiring or opening 36 new stores with
average gasoline volume greater than our overall average. Additionally, the
average retail price per gallon in fiscal 1997 was $1.23 versus an average
retail price per gallon in fiscal 1996 of $1.20. This average retail price is
indicative of our more competitive gasoline pricing strategy, general gasoline
market conditions and increased price competition from other gasoline marketers
in certain markets. In fiscal 1997 total gasoline gallons were 179.4 million
gallons compared to 160.7 million gallons for fiscal 1996, an increase of 18.8
million gallons or 11.7%. Our same store gasoline volume increase of 7.2% in
fiscal 1997 can be attributed to more competitive pricing and a relatively mild
1996-1997 winter season compared to the prior year.
Commission Revenue. Total commission revenue for fiscal 1997 was $4.8
million compared to $4.0 million for fiscal 1996, an increase of $0.8 million
or 20.3% due to the expansion and enhancement of existing commission related
programs and the introduction of new programs in selected markets.
Total Gross Profit. Total gross profit for fiscal 1997 was $97.3 million
compared to $91.2 million for fiscal 1996, an increase of $6.1 million or 6.6%
as a result of the increases in merchandise, gasoline and commission revenues
discussed above and an increase in merchandise gross profit margin to 34.4% in
fiscal 1997 from 33.0% in fiscal 1996. Overall gross profit margin declined to
22.8% in fiscal 1997 from 23.7% in fiscal 1996 due to the decrease in gasoline
margin per gallon to $0.128 in fiscal 1997 from $0.156 in fiscal 1996. The
decrease in gasoline gross profit margin is attributable to a shift in our
pricing practices and less favorable conditions in the wholesale and retail
gasoline markets.
Store Operating and General and Administrative Expenses. Store operating
expenses in fiscal 1997 were $60.2 million compared to $57.8 million in fiscal
1996, an increase of $2.4 million, or 4.1%, but decreased as a percentage of
merchandise sales. Store expenses increased due to increases in store personnel
related expenses of $1.0 million, real estate lease expense of $0.9 million and
equipment rental expense of $0.5 million. The increase in store personnel
related expenses is attributable to increased customer traffic and transaction
volume. The increase in real estate leases is attributable to the consummation
of several sale/leaseback transactions. The increase in equipment rental
expense is primarily attributable to our roll-out of a frozen drink program to
a majority of stores. As a percentage of total revenue, store operating
expenses decreased to 14.1% in fiscal 1997 from 15.0% in fiscal 1996.
General and administrative expenses for fiscal 1997 were $16.8 million
compared to $17.1 million in fiscal 1996, a decrease of $0.3 million, or 1.9%.
The decrease in both total dollar
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terms and as a percentage of merchandise sales is attributable to improved
fiscal management of major expense categories. As a percentage of total
revenue, general and administrative expenses decreased to 3.9% in fiscal 1997
from 4.5% in fiscal 1996.
Income from Operations. Income from operations for fiscal 1997 was $10.8
million compared to $1.9 million for fiscal 1996, an increase of $8.9 million
or 474.8%. The increase is attributable to the items discussed above, as well
as nonrecurring restructuring charges of $2.2 million and charges for
impairment of long-lived assets of $3.0 million in fiscal 1996 which were not
present in fiscal 1997. As a percentage of total revenue, income from
operations increased to 2.5% in fiscal 1997 from 0.5% in fiscal 1996.
EBITDA. EBITDA for fiscal 1997 was $20.3 million compared to $16.3
million in fiscal 1996, an increase of $4.0 million or 24.8%, due to the items
discussed above.
Interest Expense. Interest expense for fiscal 1997 was $13.0 million
compared to $12.0 million in fiscal 1996, an increase of $1.0 million or 8.7%,
due to (1) a temporary interest rate increase on our senior notes from 12% to
12 1/2% and (2) a nonrecurring decrease of $0.6 million related to an interest
accrual that was reversed in fiscal 1996 and did not occur in fiscal 1997. The
accrual had been recorded related to a potential income tax issue that was
resolved in our favor in fiscal 1996.
Income Tax Benefit (Expense). Our income tax benefit decreased in fiscal
1997 due to a $9.8 million decrease in pre-tax loss compared to the prior year
and the computation of our tax liability for fiscal 1997. Additionally, no
income tax benefit was recorded in fiscal 1997, which was principally
attributable to an increase in the valuation allowance for state deferred
income tax assets of approximately $325,000.
Net Loss. Net loss for fiscal 1997 was $1.0 million compared to $8.1
million for fiscal 1996, a decrease of $7.1 million or 88.0%. The decrease is
attributable to the items discussed above, as well as nonrecurring
restructuring charges of $2.2 million and charges for impairment of long-lived
assets of $3.0 million in fiscal 1996 not present in fiscal 1997.
Liquidity and Capital Resources
Cash Flows from Operations. Due to the nature of our business,
substantially all sales are for cash, and cash provided by operations is our
primary source of liquidity. Capital expenditures, acquisitions and interest
expense represent our primary uses of funds. We rely primarily upon cash
provided by operating activities, supplemented as necessary from time to time
by borrowings under our bank credit facility, sale-leaseback transactions,
asset dispositions and equity investments to finance our operations, pay
interest, and fund capital expenditures and acquisitions. Cash provided by
operating activities was $5.4 million in fiscal 1996, $7.3 million in fiscal
1997 and $48.0 million in fiscal 1998. Cash used in operating activities
increased from $0.9 million for the first fiscal quarter 1998 to $3.5 million
for the first fiscal quarter 1999, due to increases in inventory and
receivables and a decrease in accrued interest. We had $15.1 million of cash
and cash equivalents on hand at December 24, 1998.
1998 Acquisitions and Disposition. In fiscal 1998 we acquired a total of
645 convenience stores in eight transactions for approximately $240 million.
These acquisitions were funded with the proceeds from the sale of our senior
subordinated notes, borrowings under our bank credit facility, equity
investments by existing shareholders and management and cash on hand. In
addition, in
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September 1998, we sold 48 convenience stores, representing all of our
convenience store operations and idle property in Georgia.
1999 Acquisitions. To date in fiscal 1999, we have acquired a total of
214 convenience stores in five transactions for approximately $140 million.
These acquisitions were funded with borrowings under our bank credit facility
and cash on hand.
Capital Expenditures. Capital expenditures (excluding all acquisitions)
for fiscal 1998 were $48.4 million. Capital expenditures (excluding all
acquisitions) were approximately $5.9 million in the first fiscal quarter 1998
and approximately $9.6 million in the first fiscal quarter 1999. Capital
expenditures are primarily expenditures for existing store improvements, store
equipment, new store development, information systems and expenditures to
comply with regulatory statutes, including those related to environmental
matters.
We finance substantially all capital expenditures and new store
development through cash flow from operations, a sale-leaseback program or
similar lease activity, vendor reimbursements and asset dispositions. In fiscal
1998, we received approximately $20.7 million in sale-leaseback and vendor
reimbursements for capital improvements. As a result, net capital expenditures,
excluding all acquisitions, for fiscal 1998 were $27.7 million. In the first
fiscal quarter 1999, we received approximately $2.4 million from sale-
leaseback, asset dispositions, and other reimbursements for capital
improvements. Net capital expenditures, excluding all acquisitions, for the
first fiscal quarter 1999 were $7.2 million. We anticipate capital expenditures
for fiscal 1999 will be approximately $45.0 million.
Long-term Debt. At February 28, 1999, our long-term debt consisted
primarily of $200.0 million of senior subordinated notes and $244.0 million
outstanding under our bank credit facility. We are currently in compliance with
our debt covenants.
In January 1999, we substantially restructured and expanded our bank
credit facility in connection with the Handy Way acquisition and the redemption
of our senior notes. Our current bank credit facility consists of (1) a $45.0
million revolving credit facility available for working capital financing,
general corporate purposes and issuing commercial and standby letters of
credit, $5.0 million of which was drawn in connection with the Handy Way
transaction and under which $15.3 million of letters of credit are outstanding
as of March 1, 1999, (2) an $80.0 million Tranche A term loan facility and a
$160.0 million Tranche B term loan facility, both of which are borrowed, and
(3) a $50.0 million acquisition term facility which is available through
January 31, 2001 to finance acquisitions of related businesses, $19.0 million
of which was drawn in connection with the ETNA acquisition. On February 23,
1999, we repaid $1.0 million borrowed under the term loan facilities with the
proceeds of a sale-leaseback transaction. As of March 1, 1999, we had $20.0
million available for borrowing (or additional letters of credit) under the
revolving credit facility and $31.0 million available for borrowing under the
acquisition term facility.
On January 31, 2001, all amounts then outstanding under the acquisition
term loan facility convert into a three year term loan. The Tranche A and
acquisition term loan facilities mature in January 2004, and the Tranche B term
loan facility matures in January 2006. The Tranche A and Tranche B term loan
facilities require quarterly payments of principal beginning in April 1999,
with annual payments of principal totaling approximately $2.6 million in fiscal
1999, $10.3 million in fiscal 2000, $17.6 million in fiscal 2001, $20.6 million
in fiscal 2002, $23.9 in fiscal 2003, $44.1 million in fiscal 2004, $76.0
million in fiscal 2005, and $43.9 million in fiscal 2006. We are required
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to pay down our bank credit facility as follows: (1) with net proceeds from
asset sales, subject to exceptions for certain sale-leaseback transactions; (2)
with 50% of the proceeds from the issuance of any of our equity securities
other than sales of our equity securities to our management employees; (3) with
all of the proceeds from the issuance of any of our debt securities; and (4)
with 50% of our excess cash flow.The acquisition term facility requires
quarterly payments of principal beginning in April 2001 in an amount equal to
8.33%, or 8.37% with respect to the installment payable in January 2004, of the
aggregate acquisition term loans outstanding at January 31, 2001.
The loans under our bank credit facility are secured by a first priority
security interest in substantially all of our tangible and intangible assets
(including the stock of certain of our subsidiaries), whether we own these
assets now or acquire them in the future. In addition, certain of our
subsidiaries guaranteed our obligations under the bank credit facility and
these guarantees are secured by a first priority security interest in
substantially all of the tangible and intangible assets of each of the
guarantors.
The interest rates we pay on borrowings under our bank credit facility
are variable and are based, at our option, on either a eurodollar rate plus a
certain percentage or a base rate plus a certain percentage. If we choose the
eurodollar base rate, we pay 3.0% per year in addition to the eurodollar base
rate for our revolving credit facility, our acquisition term loan facility, and
our Tranche A term loan facility. For our Tranche B term loan facility, we pay
3.5% per year in addition to the eurodollar base rate. If we opt for the base
rate, we pay 1.5% per year in addition to the base rate for our revolving
credit facility, our acquisition term loan facility, and our Tranche A term
loan facility. For our Tranche B term loan facility, we pay 2.0% per year in
addition to the base rate. On March 2, 1999, we entered into an interest rate
swap arrangement to reduce our exposure to interest rate fluctuations with
respect to $45.0 million of pro rata borrowings under our Tranche A and Tranche
B term loan facilities. The interest rate swap arrangement fixes the interest
rate on these borrowings at 8.62% for the Tranche A facility and 9.12% for the
Tranche B facility for approximately two years.
The bank credit facility contains covenants restricting our ability to,
among other things, (1) incur additional indebtedness; (2) declare dividends or
redeem or repurchase capital stock; (3) prepay, redeem or purchase debt; (4)
incur liens; (5) make loans and investments; (6) make capital expenditures; (7)
engage in mergers, acquisitions or asset sales; and (8) engage in transactions
with affiliates. Our bank credit facility provides that the maximum amount we
can spend on any acquisition is $50 million. This amount includes any
assumption of debt which is part of the consideration for the acquisition. Our
bank credit facility also provides that our revenues and assets related to
gaming may not exceed 4% of our total revenues. Also, our bank credit facility
limits our capital expenditures to $46 million in fiscal 1999 and $34 million
each year thereafter. Our bank credit facility requires us to remain in
compliance with various financial ratios. Our EBITDA for any consecutive four-
quarter period must be at least $82 million in fiscal 1999 (increasing each
year to $100 million in fiscal 2004). Our debt to EBITDA ratio must not exceed
5 to 1 in fiscal 1999 (decreasing each year to 3.25 to 1 in fiscal 2004). Our
ratio of EBITDA plus rental payments, to interest expense plus rental payments,
must be at least 1.5 to 1 in fiscal 1999 (increasing each year to 2 to 1 in
fiscal 2004).
We also have outstanding $200.0 million of 10 1/4% senior subordinated
notes due 2007. Interest on the senior subordinated notes is due on October 15
and April 15 of each year. The senior subordinated notes are unconditionally
guaranteed, on an unsecured basis, as to the payment of principal, premium, if
any, and interest, jointly and severally, by certain of our subsidiaries. The
senior subordinated notes contain covenants that, among other things, restrict
our ability and any restricted subsidiary's ability to: (1) incur additional
indebtedness; (2) pay dividends or make
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distributions; (3) issue stock of subsidiaries; (4) make certain investments;
(5) repurchase stock; (6) create liens; (7) enter into transactions with
affiliates; (8) enter into sale-leaseback transactions and (9) engage in
mergers or consolidations. Our senior subordinated notes also place certain
conditions on the terms of asset sales or transfers and require us either to
reinvest the proceeds of an asset sale or transfer, or, if we do not reinvest
those proceeds, to pay down our bank credit facility or other senior debt or to
offer to redeem our senior subordinated notes with any asset sale proceeds not
so used. Up to 35% of the senior subordinated notes may be redeemed prior to
October 15, 2000 at a redemption price of 110.25% plus accrued interest with
the net proceeds of one or more public equity offerings. All of the senior
subordinated notes may be redeemed after October 15, 2002 at a redemption price
which begins at 105.125% and decreases to 100.0% after October 2005.
On January 28, 1999, we redeemed all remaining $49.0 million of our
senior notes at 104% of their principal amount plus accrued and unpaid
interest. These payments were financed with proceeds from the bank credit
facility. We recognized an extraordinary loss of approximately $5.5 million
resulting from the refinancing of our debt. This loss included the payment of
the call premium, fees paid in connection with the amendment of our bank credit
facility and the write-off of deferred financing costs.
Pro forma for the offering and the application of the net proceeds, our
long-term debt will consist of $200.0 million of senior subordinated notes and
approximately $189.6 million outstanding under our bank credit facility.
Cash Flows From Financing Activities. During fiscal 1998, we financed the
Lil' Champ acquisition purchase price, the refinancing of existing Lil' Champ
debt, the repurchase of a portion of the senior notes, the total purchase price
of all acquisitions and all related fees and expenses with the proceeds from
the offering of the senior subordinated notes, cash on hand and the net
proceeds of approximately $57.0 million from the sale of common stock to our
existing stockholders and management.
The first fiscal quarter 1999 acquisitions were partially financed with
$18.0 million in proceeds from the bank credit facility. In the first quarter
1999, we sold 3,184 shares of common stock for approximately $1.8 million to
certain employees under our stock subscription plan.
Cash Requirements. We believe that cash on hand, together with the
proceeds of this offering, cash flow anticipated to be generated from
operations, short-term borrowing for seasonal working capital and permitted
borrowings under our credit facilities will be sufficient to enable us to
satisfy anticipated cash requirements for operating, investing and financing
activities, including debt service, for the next twelve months.
Shareholders' Equity. As of December 24, 1998, our shareholders' equity
totaled $40.7 million. The increase in shareholders' equity is attributed to
the proceeds from the sale of additional common stock and our net income of
$1.0 million for the first fiscal quarter 1999.
Additional paid-in-capital is impacted by the accounting treatment
applied to the 1987 leveraged buyout of the outstanding common stock of our
predecessor which resulted in a debit to equity of $17.1 million. This debit
had the effect, among others, of offsetting $7.0 million of equity capital
invested by our former shareholders.
The accumulated deficit as of December 24, 1998 includes the cumulative
effect of (1) the accrued dividends on previously outstanding preferred stock
of $5.0 million, (2) the accrued
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dividends on the series B preferred stock of $4.4 million, (3) the net cost of
equity transactions and (4) the cumulative results of operations, which include
extraordinary losses and cumulative effect of accounting changes, interest
expense of $17.2 million on previously outstanding subordinated debentures and
preferred stock obligations. This interest and the related subordinated debt
and these dividends and the related preferred stock were paid or redeemed in
full with a portion of the proceeds from the fiscal 1994 sale of the senior
notes.
Environmental Considerations
We are required by federal and state regulations to maintain evidence of
financial responsibility for taking corrective action and compensating third
parties in the event of a release from our underground storage tank, or UST,
systems. In order to comply with this requirement, we maintain letters of
credit in the aggregate amount of $2.3 million issued by a commercial bank in
favor of state environmental enforcement agencies in the states of North
Carolina, South Carolina, Virginia, Tennessee, Indiana and Kentucky and rely on
reimbursements from applicable state trust funds. In Florida, we meet such
financial responsibility requirements by a combination of state trust fund
coverage and private commercial liability insurance and qualified self-
insurance.
All states in which we operate or have operated UST systems have
established trust funds for the sharing, recovering, and reimbursing of certain
cleanup costs and liabilities incurred as a result of releases from UST
systems. These trust funds, which essentially provide insurance coverage for
the cleanup of environmental damages caused by the operation of UST systems,
are funded by a UST registration fee and a tax on the wholesale purchase of
motor fuels within each state. We have paid UST registration fees and gasoline
taxes to each state where we operate to participate in these programs and have
filed claims and received reimbursement in North Carolina, South Carolina,
Kentucky, Indiana, Georgia, Florida and Tennessee. The coverage afforded by
each state fund varies but generally provides from $150,000 to $1.0 million per
site for the cleanup of environmental contamination, and most provide coverage
for third party liabilities.
Costs for which we do not receive reimbursement include but are not
limited to (1) the per-site deductible; (2) costs incurred in connection with
releases occurring or reported to trust funds prior to their inception; (3)
removal and disposal of UST systems; and (4) costs incurred in connection with
sites otherwise ineligible for reimbursement from the trust funds. The trust
funds require us to pay deductibles ranging from $10,000 to $100,000 per
occurrence depending on the upgrade status of our UST system, the date the
release is discovered/reported and the type of cost for which reimbursement is
sought. The Florida trust fund will not cover releases first reported after
December 31, 1998. We meet Florida financial responsibility requirements for
remediation and third party claims arising out of releases reported after
December 31, 1998 through a combination of private insurance and qualified self
insurance. In addition to immaterial amounts to be spent by us, a substantial
amount will be expended for remediation on our behalf by state trust funds
established in our operating areas and other responsible third parties
(including insurers). To the extent such third parties do not pay for
remediation as we anticipate, we will be obligated to make such payments, which
could materially adversely affect our financial condition and results of
operations. Reimbursement from state trust funds will be dependent upon the
maintenance and continued solvency of the various funds.
Environmental reserves of $17.3 million as of December 24, 1998 represent
estimates for future expenditures for remediation, tank removal and litigation
associated with all known contaminated sites as a result of releases (e.g.,
overfills, spills and underground storage tank releases)
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and are based on current regulations, historical results and certain other
factors. Although we can make no assurances, we anticipate that we will be
reimbursed for a portion of these expenditures from state insurance funds and
private insurance. As of December 24, 1998, these anticipated reimbursements of
$12.8 million are recorded as long-term environmental receivables. In Florida,
remediation of such contamination will be performed by the state and we expect
that substantially all of the costs will be paid by the state trust fund. We
will perform remediation in other states through independent contractor firms
that we have engaged. For certain sites the trust fund does not cover a
deductible or has a co-pay which may be less than the cost of such remediation.
We have reserved $500,000 to cover third party claims that are not
covered by state trust funds or by private insurance. This reserve is based on
management's best estimate of losses that may be incurred over the next several
years based on, among other things, the fact that remediation standards and
expectations are evolving, the legal principles regarding the right to and
proper measure of damages for diminution in real property value, lost profit,
lost opportunity and damage to soil and subsurface water that may be owned by
the state, the absence of controlling authority of the limitation period, if
any, that may be applicable and the possibility that remediation (which will be
funded by state trust funds, private insurance or is included within the
reserve described above for remediation) may be sufficient. Although we are not
aware of releases or contamination at other locations where we currently
operate or have operated stores, any such releases or contamination could
require substantial remediation costs, some or all of which may not be eligible
for reimbursement from state trust funds.
Several of our locations identified as contaminated are being cleaned up
by third parties who have assumed responsibility for such clean up matters.
Additionally, we are awaiting closure notices on several other locations which
will release us from responsibility related to known contamination at those
sites.
Year 2000 Initiative
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year in respective
date fields. We use a combination of hardware devices run by computer programs
at our support centers and retail locations to process transactions and other
data which are essential to our business operations. The Year 2000 issue and
its impact on data integrity could result in system interruptions,
miscalculations or failures causing disruption of operations.
We completed our assessment phase of Year 2000 vulnerability early in
fiscal 1998, after a formal third-party assessment was completed in November
1997. Based on this third-party assessment, internal assessment, and project
results as of January 27, 1999, we believe all system modifications, hardware
and software replacements or upgrades and related testing will be completed by
September 1999. In order to meet this date, we have engaged outside consultants
and contractors to assist in the overall project and remediation effort. In
addition, we are currently reviewing the Handy Way operations for Year 2000
compliance and believe that Handy Way will be Year 2000 compliant by December
1999. We do not believe either the direct or indirect costs of Year 2000
compliance will be material to our operations or operating results.
We have tested, replaced, or plan to replace significant portions of our
existing systems and related hardware which did not properly interpret dates
beyond December 31, 1999. In addition, we have tested, modified, or plan to
modify the remaining systems and related hardware to ensure Year
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2000 compliance. Our testing methodology includes, but is not limited to,
rolling dates forward to critical dates in the future and simulating
transactions, inclusion of several critical date scenarios, and utilizing
software programs which test for compliance on certain equipment. Our
expenditures to date have been immaterial and consist primarily of internal
costs and expenses associated with third-party contractors.
We have initiated communications with our significant vendors, suppliers,
and financial institutions to determine the extent to which we are vulnerable
to those third-parties' failure to be Year 2000 compliant. Based on these
communications and presently available information, we do not anticipate any
material effects related to vendor, supplier, third-party credit card
processing company or financial institution compliance. Additionally, due to
the nature of our business, Year 2000 compliance with respect to our customers
is not relevant. Noncompliance by venders, suppliers, credit card processing
companies and financial institutions utilized by us could result in a material
adverse effect on our financial condition and results of operations. We believe
that the worst case scenario in the event of a Year 2000-related failure would
be delays in the receipt of payment from credit card processing companies and a
return to manual accounting processing at our individual stores.
While we believe our planning efforts are adequate to address our Year
2000 concerns, there can be no assurances that the systems of other companies
on which our systems and operations rely will be converted on a timely basis
and will not have a material impact on us. We are in the process of formulating
a contingency plan to address possible noncompliance by our vendors, suppliers,
financial institutions and credit card processors.
Recently Issued Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for the first fiscal
quarter of fiscal 2000. Earlier application of all of the provisions of SFAS
No. 133 is encouraged. As of December 24, 1998, we have not determined the
effect of SFAS No. 133 on our consolidated financial statements.
Inflation
General inflation has not had a significant impact on The Pantry over the
past three years. As reported by the Bureau of Labor Statistics for the
calendar quarter ended December 31, 1998, the consumer price index increased
less than one percent. For the same period, the producer price index, a measure
of wholesale cost inflation, also increased less than one percent. We do not
expect general inflation to have a significant impact on our results of
operations or financial condition in the foreseeable future.
As reported by the Bureau of Labor Statistics for the calendar quarter
ended December 31, 1998, the consumer price index for the category labeled
"cigarettes" increased approximately 17.8%. For the same period, the producer
price index for the category labeled "cigarettes" increased 31.0%. On November
23, 1998, major cigarette manufacturers that supply The Pantry increased
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prices by $0.45 per pack. During the first fiscal quarter 1999, the cigarette
cost increase was directly offset by cigarette manufacturer support, including
cigarette rebates and other incentives. Since December 24, 1998, these
increases have been passed on in higher retail prices throughout the chain.
Because The Pantry expects to pass cigarette cost increases on to its
customers through higher retail prices, these cost increases are expected to
reduce our gross margin percentage for the cigarette category, but are not
expected to have a material impact on the cigarette category gross profit
dollars. Although it is too early to determine the potential impact on
cigarette unit volume, management believes it can pass along these and other
cost increases to our customers over the long term and, therefore, does not
expect cigarette inflation to have a significant impact on our results of
operations or financial condition in the foreseeable future.
Quantitative and Qualitative Disclosures about Market Risk
Quantitative Disclosures. We are exposed to certain market risks
inherent in our financial instruments. These instruments arise from
transactions entered into in the normal course of business and, in some cases,
relate to our acquisitions of related businesses. Certain of our financial
instruments are fixed rate, short-term investments which are held-to-maturity.
We are subject to interest rate risk on our existing long-term debt (including
without limitation, the senior subordinated notes) and any future financing
requirements. Our fixed rate debt consists primarily of outstanding balances
on our senior subordinated notes and our variable rate debt relates to
borrowings under our bank credit facility.
The following table presents the future principal cash flows and
weighted-average interest
rates expected on our existing long-term debt instruments.
<TABLE>
<CAPTION>
Expected Maturity Date (as of September 24, 1998)
-------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000 Fiscal 2001 Fiscal 2002 Fiscal 2003 Thereafter Total
----------- ----------- ----------- ----------- ----------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt.......... $ 45 $ 45 $49,040 $ 45 $78,045 $200,049 $327,269
Weighted average
interest rate.......... 10.59% 10.29% 10.25% 10.25% 10.25% 10.25%
</TABLE>
<TABLE>
<CAPTION>
Expected Maturity Date (as of December 24, 1998)
-------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000 Fiscal 2001 Fiscal 2002 Fiscal 2003 Thereafter Total
----------- ----------- ----------- ----------- ----------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt.......... $ 39 $ 39 $49,034 $ 39 $94,039 $200,109 $343,299
Short-term debt......... 2,000 -- -- -- -- -- 2,000
Weighted average
interest rate.......... 9.87% 9.88% 9.53% 9.53% 9.53% 10.25%
</TABLE>
On January 28, 1999, we refinanced our senior notes and outstanding
borrowings under our previous bank credit facility with proceeds from new term
loan facilities under our amended bank credit facility. On January 28, 1999 and
in connection with the Handy Way acquisition and debt refinancing, we borrowed
approximately $97.0 million under the term loan facilities and $5.0 million
under the revolving credit facility. The term loan facilities requires
quarterly principal and interest payments with interest based on a spread over
LIBOR, a variable interest rate. This refinancing and the additional borrowings
increased our annual principal and interest requirements. However, the lower
borrowing rates under our term loan facilities reduced our weighted average
interest rate.
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The following table updates the expected principal cash flows and
expected weighted average interest rates for these transactions, as of January
28, 1999.
<TABLE>
<CAPTION>
Expected Maturity Date (as of January 28, 1999)
-------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000 Fiscal 2001 Fiscal 2002 Fiscal 2003 Thereafter Total
----------- ----------- ----------- ----------- ----------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt.......... $2,595 $10,395 $17,645 $20,645 $23,895 $365,134 $440,309
Short-term debt......... 5,000 -- -- -- -- -- 5,000
Weighted average
interest rate.......... 9.19% 9.22% 9.26% 9.32% 9.40% 9.44%
</TABLE>
On March 2, 1999, we entered into an interest rate swap arrangement with
respect to $45.0 million of borrowings under our outstanding Tranche A and
Tranche B term loan facilities. The interest rate swap arrangement fixes the
interest rate on these borrowings at 8.62% for the Tranche A facility and 9.12%
for the Tranche B facility for approximately two years. Also, we expect to use
approximately $69 million in proceeds from this public offering to repay
indebtedness under our bank credit facility with a weighted average interest
rate of 8.96%. The following table updates the expected principal cash flows
and expected weighted average interest rates for the interest rate swap
arrangement and the expected repayments, as of March 2, 1999, assuming
completion of the offering and application of offering proceeds.
<TABLE>
<CAPTION>
Expected Maturity Date (as of March 2, 1999 pro forma for the offering)
-------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000 Fiscal 2001 Fiscal 2002 Fiscal 2003 Thereafter Total
----------- ----------- ----------- ----------- ----------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt.......... $2,595 $10,395 $17,645 $20,645 $18,731 $319,323 $389,334
Weighted average
interest rate.......... 9.62% 9.64% 9.67% 9.73% 9.79% 9.83%
</TABLE>
Qualitative Disclosures. Our primary exposure relates to (1) interest
rate risk on long-term and short-term borrowings, (2) our ability to pay or
refinance long-term borrowings at maturity at market rates, (3) the impact of
interest rate movements on our ability to meet interest expense requirements
and exceed financial covenants and (4) the impact of interest rate movements on
our ability to obtain adequate financing to fund future acquisitions. We manage
interest rate risk on our outstanding long-term and short-term debt through our
use of fixed and variable rate debt. The interest rate swap mentioned above
will reduce our exposure to short-term interest rate fluctuations. While we can
not predict or manage our ability to refinance existing debt or the impact
interest rate movements will have on our existing debt, management evaluates
our financial position on an ongoing basis.
Forward-Looking Statements
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements, which are subject to numerous
risks, uncertainties, and assumptions about The Pantry, include, among other
things:
. our anticipated acquisition and growth strategies, including our
strategy to double our store base,
. anticipated trends in our businesses,
. future expenditures for capital projects including the cost of
environmental compliance,
. our ability to pass along cigarette price increases to our customers
without a decrease in cigarette sales,
52
<PAGE>
. our ability to successfully deal with Year 2000 issues that may arise
in our or third party operations and
. our ability to control costs, including our ability to achieve
significant cost savings in connection with our acquisitions.
These forward-looking statements are subject to numerous risks and
uncertainties, including risks related to our dependance on gasoline and
tobacco sales, our acquisition strategy, our rapid growth since 1996, our
dependence on one principal wholesaler, the intense competition in the
convenience store and retail gasoline industries, our dependence on favorable
weather conditions in spring and summer months, the concentration of our stores
in the southeastern United States, our history of losses, extensive
environmental regulation of our business, governmental regulation, control of
The Pantry by one principal stockholder, our dependence on certain key
personnel, the failure of The Pantry and others to be year 2000 compliant and
other risk factors identified in this prospectus under the caption "Risk
Factors." As a result of these risks actual results may differ from these
forward looking statements included in this prospectus.
53
<PAGE>
INDUSTRY OVERVIEW
The United States convenience store industry is large and growing. In
1997 over 95,700 convenience stores operating throughout the United States
generated sales of $156.2 billion. The convenience store industry is larger in
size than many other retail sectors, including the home improvement, drug store
and department store sectors, which had 1997 sales of approximately $150
billion, $100 billion, and $76 billion, respectively. Over the last ten years,
industry sales have grown at a 6.4% CAGR, outpacing the 3.1% CAGR in the
consumer price index. We believe the convenience store industry exhibits
several characteristics that have historically tended to insulate it from
seasonality and global and domestic economic trends. These characteristics
include: (1) a high percentage of sales from necessity items, including
gasoline, consumables and food, (2) a small average transaction size and (3)
the industry's convenience format.
The convenience store business consists of two primary categories:
merchandise, with 1997 sales of $72.4 billion, and gasoline, with 1997 sales of
$83.8 billion. The trend to combine gasoline, a key necessity item, with
merchandise-selling stores has played an important role in the growth of the
industry. Major merchandise categories include cigarettes, beer, packaged
beverages, food service and candy. Average merchandise margins have remained
relatively stable over the last five years, but have increased approximately 2%
as a percentage of merchandise revenue. The convenience store industry has
steadily increased its market share of gasoline sales from 36.5% in 1988 to
56.6% in 1997. This trend can be attributed to an increase in the number of
convenience stores selling gasoline, consumer preferences and a decrease in the
number of gasoline service stations. Gasoline margins have remained relatively
stable over the past three years despite fluctuations in retail gas prices.
Other sources of revenue at convenience stores include lottery commissions,
money order commissions, and public telephone income.
The convenience store industry provides opportunities for a large, well-
managed operator to realize economies of scale and increase sales and
profitability due to the industry's high degree of fragmentation, lack of
merchandising focus and insufficient capital investment.
. Highly Fragmented Industry. The convenience store industry is highly
fragmented. The five largest operators represent approximately 20% of
the total store base and the 50 largest operators represent
approximately 50% of the total store base. Industry participants have
historically consisted of oil and gas operators, smaller independent
chains, "mom-and-pop" stores and sole proprietorships. Several
factors will continue to drive consolidation in the industry. These
factors include:
. independent operators' desire for liquidity
. oil and gas operators' divestiture of retail assets as a result of
oil industry consolidation
. noncompetitiveness of small operators due to lack of scale as
other industry participants become larger and efficiently leverage
their infrastructure over a greater store base
. increasing environmental regulations that have resulted in higher
capital costs
. higher new-store development costs
. Lack of Merchandising Focus. The background of many convenience store
operators has been in the gasoline business, with little focus on
merchandising. Major oil companies control nine of the ten largest
convenience store operators and are focused primarily on gasoline
sales. Smaller independent chains and "mom-and-pop" operators
54
<PAGE>
generally lack sophisticated merchandising capabilities due to their
limited size, capital constraints and technological limitations.
These smaller chains and operators are further constrained by low
sales volume, which limits their ability to obtain discounts, vendor-
paid store fixtures and promotional displays and vendor advice on
merchandising trends.
. Insufficient Capital Investment. Many convenience store operators
have made only limited capital investments in facility improvements
and technological advances. Such improvements and innovations, which
can increase sales and profits, include:
. Attractive Well-Lit Facilities. Improvements to signage, lighting,
canopies, paint, in-store restrooms, interior decor and fixtures
and overall exterior appearance enhance store visibility and
create a greater sense of security, which attract customers.
. Pay-at-the-Pump Credit Card Readers. Pay-at-the pump credit card
readers enable the customer to refuel and pay automatically at the
pump. We believe that pay-at-the-pump credit card readers improve
customer traffic because of increased safety and convenience and
increase both gasoline and merchandise sales. While pay-at-the-
pump credit card readers have gained popularity with customers,
they were installed at only 37% of convenience stores by 1997.
. Multi-Product Dispensers. Multi-product dispensers allow customers
to access all fuel options at one pump, and consequently increase
traffic throughput and gasoline volume potential. We also believe
that convenience stores with multi-product dispensers typically
sell a higher percentage of higher grade, higher margin gasoline
than other convenience stores.
. Technology and Store Automation. These systems can improve an
operator's ability to optimize merchandise category margin and
mix, monitor inventory levels, implement zone pricing, improve
receiving and pricing accuracy, increase expense control and
management reporting and improve communication between individual
stores, field personnel and headquarters.
The current industry environment has created growth opportunities for a
large industry player with an experienced management team, strong merchandise
focus and access to capital. Since the arrival of the current management team
in 1996, we have capitalized on these opportunities and have grown from 379
stores in fiscal 1996 to 1,151 stores as of February 28, 1999 and from $384.8
million in total revenue in fiscal 1996 to $1.7 billion in total pro forma
revenue for fiscal 1998.
55
<PAGE>
BUSINESS
The Pantry is a leading convenience store operator in the southeastern
United States and the third largest independently operated convenience store
chain in the country. Our stores offer a broad selection of merchandise and
gasoline as well as ancillary services designed to appeal to the convenience
needs of our customers. Since the arrival of our current management team in
1996, we have experienced significant growth through a combination of
management initiatives and strategic acquisitions. As of February 28, 1999, we
operated 1,151 stores located in Florida, North Carolina, South Carolina,
Kentucky, Indiana, Tennessee and Virginia.
Our stores are generally situated in suburban areas of rapidly growing
markets, coastal/resort areas and smaller towns. Over 90% of our stores are
located in northern and central Florida, North Carolina and South Carolina,
which are among the fastest growing states in terms of population, employment
and gross state product. We believe that we have the number one market share in
each of our principal regions based on number of stores. On a pro forma basis
for fiscal 1998 we generated total revenue of $1.7 billion and EBITDA of $92.2
million.
Approximately 34% of our stores are located in Raleigh, Charlotte,
Jacksonville and Orlando, which are four of the ten fastest growing major
Standard Metropolitan Statistical Areas in the United States, as determined by
1997 Census Bureau estimates. Approximately 42% of our stores are strategically
located in coastal/resort areas such as Jacksonville, Orlando/Disney World,
Myrtle Beach, Charleston, St. Augustine, Hilton Head and the North Carolina
Outer Banks. These locations attract a large number of tourists who are prone
to exhibit liberal spending habits, tend to be less price sensitive than the
local populations and value convenience shopping. Furthermore, our locations
generally benefit from limited competition from large convenience store chains
and oil company owned and operated stores.
Operating Strategy
In February 1996, Freeman Spogli recruited our current management team
headed by Peter Sodini, an experienced food retailing executive. Mr. Sodini and
his team, with an average of 32 years of food retailing experience, implemented
a five-pronged operating strategy. This strategy included:
. enhancing our merchandising to increase same store merchandise sales
growth and margins
. improving our gasoline offering in order to increase customer traffic
and same store gasoline volume growth
. reducing expenses through strengthened vendor relationships and
tightened expense controls
. increasing expenditures for facilities improvement and store
automation
. growing through acquisitions and new store development
56
<PAGE>
These initiatives contributed to the following financial results:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------
Sept. 26, Sept. 25, Sept. 24,
1996 1997 1998 CAGR
--------- --------- --------- -----
<S> <C> <C> <C> <C>
Total revenue (in millions)............. $384.8 $427.4 $984.9 60.0%
EBITDA (in millions).................... $ 16.3 $ 20.3 $ 60.5 93.0%
Income from operations (in millions).... $ 1.9 $ 10.8 $ 31.8 312.2%
EBITDA margin........................... 4.2% 4.7% 6.1% --
Operating margin........................ 0.5% 2.5% 3.2% --
Average merchandise sales per store (in
thousands)............................. $479.8 $525.8 $532.1 5.3%
Average gallons sold per store (in
thousands)............................. 448.8 501.2 582.8 14.0%
Same store merchandise sales growth..... 2.8% 8.5% 5.3% --
Same store gasoline gallon growth....... (4.3)% 7.2% 4.8% --
Number of stores (end of period)........ 379 390 953 --
</TABLE>
We have achieved these results through implementation of the following
operating strategies:
Focus on Merchandise. Since 1996, we have increased same store
merchandise sales growth and gross profit dollars by focusing on four key
areas:
. increasing the merchandise SKU count in stores from 3,900 to 4,750
currently
. keeping fully stocked positions of and prominently displaying brand
name, high volume destination items
. adding impulse items that carry higher than average margins
. improving promotional displays, signage and overall store
presentation
We seek to increase customer traffic by providing a greater product
selection than our competitors. Our stores now offer a broader, more locally
defined variety of nationally branded and regionally branded products than is
typically provided by other convenience stores. Our broad product selection is
complemented by a breadth of ancillary products and services such as ATMs,
lottery tickets, video games, public telephones and money orders, which serve
to attract incremental customers into our stores and increase gross profit
dollars.
We also seek to attract customers by consistently stocking brand name,
high volume, destination items such as cigarettes, beer, soft drinks and coffee
at competitive prices. Another important component of our merchandising
strategy is to attract the customer to the store with these destination items,
and then, by offering a broad assortment of high margin, impulse items, to
capture the incremental purchase of these impulse items and increase gross
profit dollars. Finally, we are able to improve customer traffic through
promotional displays and improved signage that enhance the presentation of our
product offerings. Since the implementation of our merchandising strategy, same
store merchandise sales have improved from 2.8% in fiscal 1996 to 8.5% in
fiscal 1997, 5.3% in fiscal 1998 and 10.5% for the first fiscal quarter of
1999. Average gross profit dollars per store have improved from $158,400 in
fiscal 1996 to $181,200 in fiscal 1998.
Improve Gasoline Offering. We believe that gasoline is an essential
product offering and have implemented a number of initiatives that have
increased gasoline volume and gasoline gross profit dollars. These initiatives
involve increasing the competitiveness of our gasoline pricing while
57
<PAGE>
maintaining acceptable profit margins and upgrading gasoline facilities and
equipment. We believe that an attractive gasoline offering increases customer
traffic which positively impacts both gasoline volume and merchandise sales.
We have increased the competitiveness of our gasoline pricing by closely
monitoring gasoline prices across markets and competitors in each market and
giving pricing authority to our regional managers. This permits regional
managers to react more quickly to any changes in their respective markets. We
monitor the gasoline pricing of each of our competitors on a daily basis and
are able to reprice any market or location almost immediately.
We also improve sales and customer traffic by upgrading gasoline
facilities and equipment. Our upgrading program typically includes improving
exterior signage, canopies and lighting, and installing multi-purpose
dispensers and pay-at-the-pump credit card readers. We have funded these
improvements in part by concentrating our gasoline purchases with a more narrow
group of suppliers, including BP-Amoco, Chevron, CITGO and Shell. We have also
entered into strategic branding agreements that provide volume rebates and
vendor allowances for advertising, remodeling and gasoline facility and
equipment upgrades. We also seek to improve our gasoline offering by optimizing
our mix of locations selling branded and unbranded gasoline. These initiatives
have contributed to increases in same store gallon growth from -4.3% in fiscal
1996 to 7.2% in fiscal 1997, 4.8% in fiscal 1998 and 5.1% for the first fiscal
quarter of 1999.
Reduce Expenses Through Strengthened Vendor Relationships and Tightened
Expense Controls. We have developed strong relationships with our merchandise
and gasoline suppliers. We represent an attractive distribution channel to
suppliers because of our geographically concentrated store base and our
demonstrated ability to increase merchandise sales and gasoline volumes. Since
the arrival of our current management team, we have renegotiated purchasing
terms with each of our major vendors to obtain greater allowances for retail
displays, targeted marketing and other promotional rebates. The Pantry selected
McLane as its primary wholesale supplier in 1996 and through ongoing
negotiations has continued to benefit from improved terms and service as its
volume of purchases has increased. We have also reduced gasoline purchasing
costs and received allowances for facility and gasoline equipment upgrades by
concentrating gasoline purchases among a select group of suppliers. As we
continue to grow and expand our store base, we should enhance our ability to
obtain increasingly favorable terms from our key suppliers. Average gross
profit per store has increased 15.8% from $232,700 in fiscal 1996 to $269,500
in fiscal 1998.
Since 1996, we have also adhered to a disciplined cost-savings program
that has allowed us to reduce operating expenses without sacrificing customer
service. We have eliminated redundant overhead expenses, renegotiated supply
and service agreements, improved employee retention, implemented inventory
shrink reduction procedures, reduced insurance and workers compensation costs
and outsourced certain non-core functions to third parties. As a result of
these initiatives, total operating expenses as a percentage of total revenue
have declined from 23.2% in fiscal 1996 to 20.5% in fiscal 1998.
Increase Capital Expenditures. Since fiscal 1996, we have implemented a
capital expenditure program focused on (1) store facility and gasoline
equipment upgrades, (2) technology and store automation improvements and
(3) environmental regulatory compliance.
Our store remodel program, which includes both major and minor projects,
focuses on improvements to interior fixtures and equipment for self-service
food and beverages, interior lighting,
58
<PAGE>
in-store restrooms for customers, exterior lighting and signage, canopies,
pavement and landscape and gasoline equipment upgrades, including the
installation of pay-at-the-pump credit card readers and multi-product
dispensers. Based on data from more than 100 of our stores that have been
remodeled, average merchandise sales increased 10.3%, gasoline gallons
increased 17.8% and EBITDA increased 35.3% during the twelve months following
remodeling. We have remodeled more than 200 stores since fiscal 1996, and
currently approximately 49% of our stores that sell gasoline have pay-at-the-
pump credit card readers and approximately 77% have multi-product dispensers.
The total cost of these remodels and upgrades was $40.1 million, a significant
portion of which was reimbursed by our gasoline suppliers.
We are currently upgrading our management information systems, including
store, corporate accounting and management reporting systems. We have recently
begun implementation of a leading convenience store systems package that has
been used successfully in our Handy Way stores. Implementation of this system
into all of our individual stores will take place in phases through fiscal
2000. We spent $1.8 million on management information system upgrades in fiscal
1998.
The gasoline dispensing business is subject to strict environmental
regulations. We must adhere to various federal, state and local environmental
laws and regulations governing underground petroleum storage tanks. We have
invested approximately $12.8 million since fiscal 1995 to comply with
environmental requirements and do not expect any further significant
unreimbursable environmental expenditures relating to existing locations.
Currently, all our locations that sell gasoline are in substantial compliance
with EPA requirements and regulations.
Grow Through Acquisitions and New Store Development. Beginning in fiscal
1997, the new management team implemented a disciplined and ongoing acquisition
program. From April 1997 through February 1999, we acquired 892 convenience
stores in 11 major and numerous smaller transactions. Acquired stores are
rapidly integrated into our operations with minimal disruption. We have
materially improved the results of operations in our acquired stores and
believe there are opportunities to continue to improve results at these
locations. Our acquisition strategy is complemented by a new store development
program in select markets. In addition, we continuously evaluate store
performance trends to determine whether any particular store should be closed
or sold.
Growth Strategy
We believe that there is significant opportunity to continue to increase
sales, productivity and profitability through both the continued implementation
of our operating strategy at existing and newly acquired stores and our
strategy to double our store base in existing markets and expand into
contiguous markets. Specific elements of our growth strategy include the
following:
Improve Same Store Merchandise Sales and Gasoline Volume Growth. We focus
on continuous improvement of same store sales and profit growth at existing and
newly acquired stores through (1) key merchandising initiatives, (2)
competitive gasoline prices, (3) upgraded facilities, (4) new service
offerings, (5) improved technology, (6) improved customer service and (7)
targeted cost savings initiatives. Our merchandise and gasoline gallon sales
also benefit from the location of our operations, which are largely in some of
the fastest growing demographic markets in the United States. We continue to
add new services to our stores to increase traffic and margins, including ATMs,
lottery tickets, video games, public telephones and money orders. We also plan
to remodel approximately 100 additional stores annually and to continue to
refine our balance of branded and unbranded gasoline sales to increase our
market share in areas where we operate. In addition, since
59
<PAGE>
April 1997 we have acquired a total of 892 stores. We have implemented our
operating strategy in these stores and expect continued improvement in
merchandise sales and gasoline gallon sales.
Invest in Technology and Store Automation. Over the next two years, we
will invest over $15 million on new technology in three areas: (1) at the
gasoline pump, (2) in the store and (3) in our corporate offices. Our
investments in gasoline dispensing technology are targeted at making fueling
faster and increasing overall customer traffic at our stores. Our store and
corporate technology investments include point of sale systems, computer
hardware and computer software programs that provide us with better management
information and the ability to communicate on-line with our individual stores
and field personnel. We expect this technology to be fully implemented by the
end of fiscal 2000. This information will allow us to track product movement
data by location and better control inventory and expenses at the store level.
We believe these investments will increase transaction speed at the pump and in
the store and improve customer transaction information, which will allow us to
continuously optimize merchandise mix, gross margin and inventory at each of
our stores.
Pursue Acquisitions and New Store Growth. We believe that growth through
acquisition is currently more economically attractive than growth through new
store development because: (1) acquired stores provide an instant installed
base of revenue and cash flow, (2) we are able to grow more rapidly, thus
providing increased benefits of economies of scale, (3) we are able to enter
new markets without adding merchandise square footage or additional gasoline
outlets to these markets, (4) acquisitions provide access to established high
quality locations and to markets that restrict new store development through
stringent environmental and zoning regulations and (5) acquiring stores is a
lower cost alternative to developing new stores.
We believe there are enough attractive acquisition opportunities in the
convenience store industry to double our store base in existing markets and
expand into contiguous markets. There are approximately 25,000 convenience
stores operating in our existing and contiguous markets. We also believe that
the creation of a public market for our common stock through this offering will
enable us to offer our common stock as consideration for acquisitions and will
further enhance our ability to make acquisitions on favorable terms. In
addition, the consolidation trend among oil companies continues to result in
divestitures of additional oil company owned and operated convenience stores.
In evaluating potential acquisition candidates, we consider a number of
factors, including (1) strategic fit and desirability of location, (2) price,
(3) ability to improve productivity and profitability of a location through the
implementation of our operating strategy and (4) financial impact.
Our strategy is to continue to realize significant growth and cost
savings from acquisitions through (1) remerchandising acquired stores with more
SKUs and branded merchandise, (2) upgrading store facilities and gasoline
equipment, (3) selectively rebranding sites, (4) negotiating better terms with
our suppliers and (5) leveraging our existing infrastructure to realize
economies of scale and eliminate duplicative overhead and centralize functions
such as purchasing, accounting, payroll and other administrative functions.
These initiatives provide for significant improvement in the performance of
newly acquired stores and typically yield results within the first six to
twelve months following the acquisition. For example, in the twelve month
period following the acquisition of Lil' Champ, we were able to increase same
store gross profit by 3.4%, decrease same store operating expenses as a
percentage of total revenue by 6.3% and increase EBITDA by 44.1%. Since the
beginning of fiscal 1999, we have acquired 214 stores, which are at various
stages of integration and implementation of the key initiatives of our
operating strategy. We believe that our strategy should result in significant
improvements in the performance of these stores.
60
<PAGE>
Our acquisition strategy is complemented by a new store development
program in existing and contiguous markets. In opening new stores, we have
focused on selecting store sites on highly traveled roads in coastal/resort and
suburban markets or near highway exit and entrance ramps that provide
convenient access to store locations. We opened seven new stores in fiscal 1998
and expect to open eight to ten new stores annually.
We are not currently party to any definitive agreements relating to
future acquisitions. However, we are continually investigating and evaluating
acquisition candidates. Some of these candidates may be material.
Our Operations
We operate our stores under a variety of names, including The Pantry in
North Carolina, South Carolina, Virginia, Indiana, Tennessee and Kentucky, and
Lil' Champ and Handy Way in Florida. We also operate in certain markets under
the names Kwik Mart, Sprint, Quick Stop, Zip Mart, Dash-N, Express Stop and
ETNA.
Merchandise Sales
For the year ended September 24, 1998, our merchandise sales, including
commissions from services, were 48.2% of total revenue. The following table
highlights certain information with respect to our merchandise sales for the
last two fiscal years and for the first quarters of fiscal 1998 and 1999:
<TABLE>
<CAPTION>
Fiscal Year Ended Quarter Ended
------------------- ---------------
Dec.
Sept. 25, Sept. 24, Dec. 25, 24,
1997 1998 1997 1998
--------- --------- -------- ------
<S> <C> <C> <C> <C>
Merchandise sales (in millions)........ $202.4 $460.8 $ 89.4 $139.4
Average merchandise sales per store (in
thousands)............................ $525.8 $532.1 $123.1 $144.7
Comparable store merchandise sales..... 8.5% 5.3% 3.6% 10.5%
Merchandise gross margins (after
purchase rebates, mark-downs,
inventory spoilage and inventory
shrinkage)............................ 34.4% 34.0% 34.1% 32.2%
</TABLE>
Our stores generally carry approximately 4,750 SKUs and offer a full line
of convenience products. These products include:
<TABLE>
<S> <C>
. tobacco products . snack foods
. beer . dairy products
. soft drinks . canned goods and groceries
. newspapers and magazines . health and beauty aids
. self-service fast foods, including fountain . other immediate consumables
beverages and coffee
</TABLE>
We have developed an in-house food service program featuring breakfast
biscuits, fried chicken, deli and other hot food offerings. We also operate
approximately 104 quick service restaurants inside our stores with nationally
branded food franchises such as Subway, Church's, Taco Bell and Hardee's. Our
merchandise mix is influenced by the mix of the stores we acquire. The
following table describes our merchandise sales mix for the last two fiscal
years:
61
<PAGE>
Percentage of Merchandise Sales
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------
Sept. 25, 1997 Sept. 24, 1998
-------------- --------------
<S> <C> <C>
Tobacco products.............................. 27.8% 28.1%
Beer.......................................... 15.1 15.9
Soft drinks................................... 13.7 14.6
Self-service fast foods and beverages......... 6.9 6.5
General merchandise........................... 6.4 6.0
Candy......................................... 4.8 4.7
Newspapers and magazines...................... 5.0 4.7
Snack foods................................... 4.6 4.9
Dairy products................................ 2.8 2.4
Bread/cake.................................... 2.1 2.0
Grocery and other............................. 10.8 10.2
----- -----
Total....................................... 100.0% 100.0%
===== =====
</TABLE>
We purchase over 50% of our general merchandise, including most tobacco
products and grocery items, from a single wholesale grocer, McLane. In
addition, McLane supplies health and beauty aids, toys, and seasonal items to
all our stores. However, adequate alternative sources are available to purchase
this merchandise should a change from the current wholesaler become necessary
or desirable. We purchase the balance of our merchandise from a variety of
other distributors.
Since 1997, tobacco prices have increased significantly. The most recent
increase occurred on November 23, 1998, when major cigarette manufacturers
increased prices by $0.45 per pack. However, during December 1998, major
cigarette manufacturers offered a rebate to retailers of $0.45 per pack to
offset the November 1998 price increase. We passed along this rebate to our
customers. Major cigarette manufacturers offered no rebate in January 1999 and
a $0.30 per pack rebate in February 1999. In addition, these manufacturers
announced a $0.55 per pack rebate for March 1999. We cannot assure you that
major cigarette manufacturers will continue to offer these rebates or that any
resulting increase in prices to our customers will not have a material adverse
effect on our cigarette sales and gross profit dollars. Despite increases in
price, which have been passed on for the most part to our customers, we have
increased cigarette unit sales and gross profit dollars. We believe that
convenience stores in general, and The Pantry in particular, will benefit as
customers shift their cigarette buying patterns from less frequent carton
purchases to more frequent pack purchases and as certain competitors exit the
category. We expect that cigarette cost increases will reduce our gross margin
percentage for the cigarette category, but will not have a material impact on
the cigarette category gross profit dollars. Although it is too early to
determine the potential impact on cigarette unit volume, we believe we can
continue to pass along cost increases to our customers over the long term and,
therefore, we do not expect cigarette inflation to have a significant impact on
our results of operations or financial condition in the foreseeable future.
Our commission revenue is derived from ATMs, lottery ticket sales, video
gaming, money orders, public telephones and other ancillary product and service
offerings. This category is an important aspect of our merchandise operations
because it attracts incremental customers and provides additional services for
destination customers.
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<PAGE>
Gasoline Operations
For the year ended September 24, 1998, our revenue from sales of gasoline
were 51.8% of total revenue. The following table highlights certain information
regarding our gasoline operations for the last two fiscal years and the first
quarters of fiscal 1998 and 1999:
<TABLE>
<CAPTION>
Fiscal Year Ended Quarter Ended
------------------- -------------
Dec. Dec.
Sept. 25, Sept. 24, 25, 24,
1997 1998 1997 1998
--------- --------- ------ ------
<S> <C> <C> <C> <C>
Gasoline sales (in millions)................ $220.2 $510.0 $103.0 $171.8
Gasoline gallons sold (in millions)......... 179.4 466.8 87.5 169.0
Average gallons sold per store (in
thousands)................................. 501.2 582.8 132.2 184.5
Average retail price per gallon............. $ 1.23 $ 1.09 $ 1.18 $ 1.02
Average gross profit per gallon............. $0.128 $0.134 $0.138 $0.136
Locations selling gasoline.................. 364 884 792 890
Number of company-owned branded locations... 300 667 499 636
Number of company-owned unbranded
locations.................................. 35 192 263 233
Number of third-party locations (branded and
unbranded)................................. 29 25 30 21
Number of locations with pay-at-the-pump
credit card readers........................ 125 379 188 439
Number of locations with multi-product
dispensers................................. 142 697 412 816
</TABLE>
The increase in gross profit per gallon in fiscal 1998 was primarily due
to the addition of Lil' Champ and the relatively higher gasoline margins in
Florida. Although gasoline gross margins in any particular location or market
may vary from time to time, since fiscal 1997 our gross margins on a
consolidated basis have been relatively stable due to our size and geographic
diversity. Historically, we have not entered into gasoline futures contracts
which may lock in gasoline prices for a period of time or reduce the volatility
in our gasoline costs.
Of the 1,065 stores that sold gasoline as of February 28, 1999, 768 or
72.1% (including third-party locations selling under these brands) were branded
under the Ashland, BP-Amoco, Chevron, Citgo, Exxon, Mobil, Shell or Texaco
brand names. We operate a mix of branded and unbranded locations and evaluate
our gasoline offerings on a local market level.
As of February 28, 1999, we owned the gasoline operations at 1,044
locations and at 21 locations had gasoline operations that were operated under
third-party arrangements. At company-operated locations, we own the gasoline
storage tanks, pumping equipment and canopies and retain 100% of the gross
profit received from gasoline sales. In fiscal 1998, these locations accounted
for approximately 98% of total gallons sold by us. Under third-party
arrangements, an independent gasoline distributor owns and maintains the
gasoline storage tanks and pumping equipment at the site, prices the gasoline
and pays us approximately 50% of the gross profit. In fiscal 1998, third-party
locations accounted for approximately 2% of the total gallons sold by us. We
have been phasing out third-party arrangements because our company owned
operations are more profitable.
We purchase our gasoline from major oil companies and independent
refiners. There are 20 gasoline terminals in our operating areas, enabling us
to choose from more than one distribution point for most of our stores. Our
inventories of both branded and unbranded gasoline turn approximately every
seven days.
63
<PAGE>
Store Locations
As of February 28, 1999, we operated 1,151 convenience stores located
primarily in suburban areas of rapidly growing markets, coastal/resort areas
and smaller towns. Approximately 34% of our stores are located in Raleigh,
Charlotte, Jacksonville and Orlando, which are four of the ten fastest growing
SMSAs in the United States. Approximately 42% of our stores are strategically
located in coastal/resort areas such as Jacksonville, Orlando/Disney World,
Myrtle Beach, Charleston, St. Augustine, Hilton Head and the North Carolina
Outer Banks. Substantially all of our stores are free standing structures
averaging approximately 2,400 square feet and provide ample customer parking.
The following table shows the geographic distribution by state of our stores as
of February 28, 1999:
<TABLE>
<CAPTION>
Number of Percent of
Stores Total Stores
--------- ------------
<S> <C> <C>
Florida............................................ 550 47.8%
North Carolina..................................... 338 29.4
South Carolina..................................... 160 13.9
Kentucky........................................... 46 4.0
Indiana............................................ 20 1.7
Tennessee.......................................... 19 1.7
Virginia........................................... 18 1.5
----- -----
Total.............................................. 1,151 100.0%
===== =====
</TABLE>
Since fiscal 1996, we have developed a limited number of new stores and
closed or sold a substantial number of underperforming stores. Beginning in
1997, we turned our attention from developing new stores to commencing our
acquisition program. The following table summarizes these activities:
<TABLE>
<CAPTION>
Fiscal Year Ended Five Months
--------------------------------------- Ended
Sept. 28, Sept. 24, Sept. 25, Sept. 26, February
1995 1996 1997 1998 28, 1999
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Number of stores at
beginning of period.... 406 403 379 390 953
Acquired or opened...... 10 4 36 650 214
Closed or sold.......... (13) (28) (25) (87) (16)
--- --- --- --- -----
Number of stores at end
of period.............. 403 379 390 953 1,151
=== === === === =====
</TABLE>
We continually evaluate the performance of each of our stores to
determine whether any particular store should be closed or sold based on its
sales trends and profitability. In deciding to close or sell an underperforming
store, we consider such factors as store location, gasoline volumes and
margins, merchandise sales and gross profits, lease term, rental rate and other
obligations and the store's contribution to corporate overhead. Although
closing or selling underperforming stores reduces revenue, our operating
results typically improve since these stores were generally unprofitable.
Acquisition Activity and Selection
Since April 1997, we have acquired 892 convenience stores in 11 major and
numerous smaller transactions located in Florida, North Carolina, South
Carolina and Virginia. See "--Store Locations" above. With these acquisitions,
we expanded our geographic reach within the southeast to Florida and Virginia
and enhanced our market position in North Carolina and South Carolina.
64
<PAGE>
We focus on acquiring chains within our existing and contiguous marketing
areas. In evaluating potential acquisition candidates, we consider a number of
factors including: (1) strategic fit and desirability of location, (2) price,
(3) ability to improve productivity and profitability of a location through the
implementation of our operating strategy and (4) financial impact. We believe
the advantages of these acquired locations include demonstrated revenue, growth
and market characteristics. We also believe the acquired stores have a lower
risk profile and higher average return on investment than traditional new store
development programs.
Site Selection
In opening new stores in recent years, we have focused on selecting store
sites on highly traveled roads in coastal/resort and suburban markets or near
highway exit and entrance ramps that provide convenient access to store
locations. In selecting sites for new stores, we use an evaluation process
designed to enhance our return on investment by focusing on market area
demographics, population density, traffic volume, visibility, ease of access
and economic development in the market area. We also review the location of
competitive stores and customer activity at those stores.
Upgrading Store Facilities and Equipment
We have upgraded the facilities and equipment at many of our existing and
acquired store locations, including gasoline equipment upgrades, at a cost of
approximately $9.2 million in fiscal 1997 and $30.9 million in fiscal 1998. A
portion of these upgrade costs have been reimbursed through long-term contracts
with our gasoline suppliers. Our store renovation program is an integral part
of our operating strategy. We continually evaluate the performance of
individual stores and periodically upgrade store facilities and equipment based
on sales volumes, the lease term for leased locations and management's
assessment of the potential return on investment.
Typical upgrades for many stores include improvements to interior
fixtures and equipment for self-service food and beverages, interior lighting,
in-store restrooms for customers and exterior lighting and signage. The
upgrading program for our gasoline operations includes multi-product dispensers
and pay-at-the-pump credit card readers to enhance customer convenience and
service and the installation of underground storage tank, leak detection and
other equipment in accordance with applicable EPA regulations. For further
discussion of EPA and other environmental regulations see "--Government
Regulation and Environmental Matters" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Store Operations
Each convenience store is staffed with a manager, an assistant manager
and sales associates who work various shifts to enable most stores to remain
open 24 hours a day, seven days a week. Our field operations organization is
comprised of a network of regional, divisional and district managers who, with
our corporate management, evaluate store operations. District managers
typically oversee from eight to ten stores. We also monitor store conditions,
maintenance and customer service through a regular store visitation program by
district and regional management.
Technology and Store Automation
We utilize information systems and application programs for our core
business systems, such as accounting, financial reporting and payroll. Within
the past two years, we installed newer and more reliable mid-range system
hardware to support these applications and our continued growth.
65
<PAGE>
These systems continue to be enhanced through modification and redesign in
order to meet management reporting requirements and operational needs.
Over the last year, we have expanded our computer system infrastructure
with the addition of new local area network systems, improved end user computer
hardware and software and replacement of older point of sale systems. This has
helped to streamline operations and improve productivity at our corporate
office, among our field management staff and at our stores.
In addition, these new and expanding systems have laid the foundation for
a strategic information systems initiative that will bring a new store and
corporate accounting and management reporting system. We selected and began
implementation of a leading convenience store systems package, Resource
Management Series ("RMS") from Professional Datasolutions, Inc. ("PDI"), a
wholly-owned subsidiary of McLane. Handy Way has the RMS system in place and
has kept pace with PDI upgrades. Handy Way also has a well-developed system in
place that provides centralized management reporting for their food service
operations. We expect to benefit from Handy Way's experience and knowledge as
we implement this technology at The Pantry.
During fiscal 1999, RMS will be implemented in phases. We will continue
to accelerate the store level implementation that began with all of the stores
we acquired in 1998. We expect to have the entire store base fully integrated
by the end of fiscal 2000. To complete this program, we plan to spend $5.8
million in fiscal 1999 and $3.0 million in fiscal 2000. In addition to
facilitating integration of future acquisitions, these upgrades will enable us
to optimize merchandise category margin and mix, monitor inventory levels,
implement zone pricing, improve receiving and pricing accuracy, increase
expense control and management reporting and improve communication between
individual stores and headquarters.
Competition
The convenience store and retail gasoline industries are highly
competitive. Changes in traffic patterns and the type, number and location of
competing stores can affect the performance of individual stores. Major
competitive factors include, among others, location, ease of access, gasoline
brands, pricing, product and service selections, customer service, store
appearance, cleanliness and safety. In addition, factors such as inflation,
increased labor and benefit costs and the lack of availability of experienced
management and hourly employees may adversely affect the convenience store
industry.
We compete with numerous other convenience stores and supermarkets. In
addition, our stores offering self-service gasoline compete with gasoline
service stations, including service stations operated by major oil companies
and, more recently, supermarkets. Our stores also compete to some extent with
supermarket chains, drug stores, fast food operations and other similar retail
outlets. In some of our markets, certain competitors, particularly major oil
companies, have been in existence longer and have substantially greater
financial, marketing and other resources than us.
Trade Names, Service Marks and Trademarks
We have registered or applied for registration of a variety of trade
names, service marks and trademarks for use in our business, including The
Pantry(R), Worth(R), Bean Street Coffee Company(TM), Bean Street Market(TM),
Big Chill(R), ETNA, Handy Way, Lil' Champ(R), Quick Stop, Zip Mart(TM), Express
Stop, Sprint(TM), and Smokers Express(TM). We regard our intellectual property
as having significant value and as being an important factor in the marketing
of the company and our
66
<PAGE>
convenience stores. We are not aware of any facts which would negatively impact
our continuing use of any of our trade names, service marks or trademarks.
Government Regulation and Environmental Matters
Many aspects of our operations are subject to regulation under federal,
state and local laws. We are currently in substantial compliance with all EPA
regulations and requirements that affect our locations that sell gasoline. The
most significant of the regulations that impact all aspects of our operations
are described below.
Storage and Sale of Gasoline
We are subject to various federal, state and local environmental laws.
Federal, state, and local regulatory agencies have adopted regulations
governing underground storage tanks, or USTs, that require us to make certain
expenditures for compliance. In particular, at the federal level, the Resource
Conservation and Recovery Act of 1976 requires the EPA to establish a
comprehensive regulatory program for the detection, prevention and cleanup of
leaking USTs.
Federal and state regulations require us to maintain evidence of the
financial responsibility necessary to take corrective action and compensate
third parties in the event of a release from our UST systems. In order to
comply with the applicable requirements, we maintain letters of credit in the
aggregate amount of $2.3 million issued by a commercial bank in favor of state
environmental agencies in the states of North Carolina, South Carolina,
Virginia, Tennessee, Kentucky and Indiana. We also rely upon the reimbursement
provisions of applicable state trust funds. In Florida, we meet such financial
responsibility requirements through private commercial liability insurance and
by qualified self-insurance. We have sold all of our Georgia stores but have
retained responsibility for pre-closing environmental remediation at certain
locations. The cost of such remediation and third party claims should be
covered by the state trust fund, subject to applicable deductibles and caps on
reimbursement.
Regulations enacted by the EPA in 1988 established requirements for (1)
installing UST systems; (2) upgrading UST systems; (3) taking corrective action
in response to releases; (4) closing UST systems; (5) keeping appropriate
records; and (6) maintaining evidence of financial responsibility for taking
corrective action and compensating third parties for bodily injury and property
damage resulting from releases. These regulations permit states to develop,
administer and enforce their own regulatory programs, incorporating
requirements which are at least as stringent as the federal standards. The
Florida rules for 1998 upgrades are more stringent than the 1988 EPA
regulations. Our facilities in Florida all meet or exceed such rules. The
following is an overview of the requirements imposed by these regulations:
. Leak Detection. We utilize several approved leak detection methods
for all company-owned UST systems. Daily and monthly inventory
reconciliations are completed at the store level and at the corporate
support center. The daily and monthly reconciliation data is also
analyzed using statistical inventory reconciliation which compares
the reported volume of gasoline purchased and sold with the capacity
of each UST system and highlights discrepancies. We believe we are in
substantial compliance with the leak detection requirements
applicable to our USTs.
. Corrosion Protection. The 1988 EPA regulations require that all UST
systems have corrosion protection by December 22, 1998. We began
installing non-corrosive fiberglass tanks and piping in 1982. All of
the UST systems at our stores are in substantial compliance with
these 1988 EPA regulations.
67
<PAGE>
. Overfill/Spill Prevention. The 1988 EPA regulations require that all
sites have overfill/spill prevention devices by December 22, 1998.
All of the company-owned UST systems are in substantial compliance
with these EPA regulations.
State Trust Funds
All states in which we operate UST systems have established trust funds
for the sharing, recovering and reimbursing of certain cleanup costs and
liabilities incurred as a result of releases from UST systems. These trust
funds, which essentially provide insurance coverage for the cleanup of
environmental damages caused by the operation of UST systems, are funded by a
UST registration fee and a tax on the wholesale purchase of motor fuels within
each state. We have paid UST registration fees and gasoline taxes to each state
where we operate to participate in these trust programs and we have filed
claims and received reimbursement in North Carolina, South Carolina, Kentucky,
Indiana, Georgia, Florida and Tennessee. The coverage afforded by each state
fund varies but generally provides from $150,000 to $1.0 million per site for
the cleanup of environmental contamination, and most provide coverage for
third-party liabilities.
Costs for which we do not receive reimbursement include but are not
limited to: (1) the per-site deductible; (2) costs incurred in connection with
releases occurring or reported to trust funds prior to their inception; (3)
removal and disposal of UST systems; and (4) costs incurred in connection with
sites otherwise ineligible for reimbursement from the trust funds. The trust
funds require that we pay deductibles ranging from $10,000 to $100,000 per
occurrence depending on the upgrade status of our UST system, the date the
release is discovered/reported and the type of cost for which reimbursement is
sought. The Florida trust fund will not cover releases first reported after
December 31, 1998. We have obtained private coverage for remediation and third
party claims arising out of releases reported after December 31, 1998.
In addition to immaterial amounts to be spent by us, a substantial amount
will be expended for remediation on our behalf by state trust funds established
in our operating areas or other responsible third parties (including insurers).
To the extent such third parties do not pay for remediation as we anticipated,
we will be obligated to make such payments, which could materially adversely
affect our financial condition and results of operations. Reimbursements from
state trust funds will be dependent upon the continued maintenance and
viability of the various funds.
Sale of Alcoholic Beverages
In areas where our stores are located, state or local laws limit the
hours of operation for the sale of certain products, the most significant of
which limit or govern the sale of alcoholic beverages. State and local
regulatory agencies have the authority to approve, revoke, suspend or deny
applications for and renewals of permits and licenses relating to the sale of
alcoholic beverages and to impose various restrictions and sanctions. In many
states, retailers of alcoholic beverages have been held responsible for damages
caused by intoxicated individuals who purchased alcoholic beverages from them.
While the potential exposure to us for damage claims as a seller of alcoholic
beverages is substantial, we have adopted employee training procedures intended
to minimize such exposure. In addition, we maintain general liability insurance
which may mitigate the cost of any liability.
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<PAGE>
Video Poker Licenses
Stores in South Carolina operating video poker machines are subject to
local and state regulations regarding the operation and ownership of video
poker machines. Furthermore, state and local laws limit the manner in which
video poker machines may be operated. In addition, state and local regulatory
agencies have the authority to approve, revoke, suspend or deny applications
for, and renewal of, the applicable licenses for video poker machines.
Store Operations
Our stores are subject to regulation by federal agencies and to licensing
and regulations by state and local health, sanitation, safety, fire and other
departments relating to the development and operation of convenience stores,
including regulations relating to zoning and building requirements and the
preparation and sale of food. Difficulties in obtaining or failures to obtain
the required licenses or approvals could delay or prevent the development of a
new store in a particular area.
Our operations are also subject to federal and state laws governing such
matters as wage rates, overtime, working conditions and citizenship
requirements. At the federal level, there are proposals under consideration
from time to time to increase minimum wage rates and to introduce a system of
mandated health insurance which could affect our results of operations.
Employees
As of February 28, 1999, we employed 6,526 full-time and 1,624 part-time
employees. We employ fewer part-time employees during the winter months than
during the peak spring and summer seasons. Of our employees, approximately
7,610 are employed in our stores and 540 are corporate and field management
personnel. We have not been adversely impacted by recent increases in the
minimum wage because the majority of our employees are paid more than the
minimum wage. None of our employees are represented by unions. We consider our
employee relations to be good.
Properties
As of February 28, 1999 we owned 394 of our stores and leased the real
property at 757 of our stores. Management believes that none of these leases is
individually material to us. Most of our leases are net leases requiring us to
pay taxes, insurance and maintenance costs. Although our leases expire at
various times, approximately 90% of the leases have terms, including renewal
options, extending beyond the end of fiscal 2003. Of our leases that expire
prior to the end of 2003, management anticipates that we will be able to
negotiate acceptable extensions of the leases for those locations that it
intends to continue operating. When appropriate, we have chosen to sell and
then lease-back properties. Factors leading to this decision include
alternative desires for use of cash, beneficial taxation, and minimization of
the risks associated with owning the property (especially changes in valuation
due to population shifts, urbanization, and/or proximity to high volume
streets) and the economic terms of such sale-leaseback transactions.
We own our corporate headquarters, a three-story, 51,000 square foot
office building in Sanford, North Carolina, and a regional operations center in
central Florida. We lease our Lil' Champ corporate headquarters in
Jacksonville, Florida. Management believes that our headquarters facilities are
adequate for our present and foreseeable needs.
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<PAGE>
Legal Proceedings
We are party to various legal actions which we believe are routine in
nature and incidental to the operation of our business. While the outcome of
such actions cannot be predicted with certainty, we believe that the resolution
of these matters, individually or in the aggregate, will not have a material
adverse impact on our business, financial condition or prospects. We make
routine applications to state trust funds for the sharing, recovering and
reimbursement of certain cleanup costs and liabilities incurred as a result of
releases from UST systems. See "--Government Regulation and Environmental
Matters."
70
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following is a list of our directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position with The Pantry
- ---- --- ------------------------
<S> <C> <C>
Peter J. Sodini......... 58 President, Chief Executive Officer and Director
Dennis R. Crook......... 56 Senior Vice President, Administration and Gasoline Marketing
William T. Flyg......... 56 Senior Vice President and Chief Financial Officer
Douglas M. Sweeney...... 60 Senior Vice President, Operations
Daniel J. McCormack..... 56 Vice President, Marketing
William M. Wardlaw...... 52 Director
Charles P. Rullman...... 50 Director
Todd W. Halloran........ 36 Director
Jon D. Ralph............ 34 Director
Christopher C. Behrens.. 38 Director
Peter M. Starrett....... 51 Director
</TABLE>
Peter J. Sodini has served as our President and Chief Executive Officer
since June 1996 and served as our Chief Operating Officer from February 1996
until June 1996. Mr. Sodini has served as a director since November 1995. Mr.
Sodini is a director of Transamerica Income Shares Inc. and Pamida Holding
Corporation. From December 1991 to November 1995, Mr. Sodini was Chief
Executive Officer and a director of Purity Supreme, Inc. ("Purity"), a chain of
grocery stores located in New England. Prior to 1991, Mr. Sodini held executive
positions at several supermarket chains including Boys Markets, Inc. and Piggly
Wiggly Southern, Inc.
Dennis R. Crook has served as our Senior Vice President, Administration
and Gasoline Marketing since March 1996. From December 1987 to November 1995,
Mr. Crook was Senior Vice President, Human Resources and Labor Relations of
Purity.
William T. Flyg has served as our Senior Vice President, Finance and
Chief Financial Officer since January 1997. He was employed by Purity as Chief
Financial Officer from January 1992 until Purity was sold in November 1995, at
which time he continued as an employee of Purity until December 1996.
Douglas M. Sweeney has served as our Senior Vice President, Operations
since March 1996. From December 1991 to December 1995, Mr. Sweeney was Senior
Vice President, Operations of Purity.
Daniel J. McCormack has served as our Vice President, Marketing since
March 1996. From 1989 to February 1996, Mr. McCormack was Director of
Purchasing of Purity.
William M. Wardlaw has served as a director since August 1998. Mr.
Wardlaw joined Freeman Spogli in 1988 and became a Principal in 1991. From 1984
to 1988, Mr. Wardlaw was Managing Partner in the Los Angeles law firm of
Riordan & McKinzie. Prior to 1984, he served as a partner in the law firm of
O'Melveny & Myers. Mr. Wardlaw is also a director of AFC Enterprises, Inc.
71
<PAGE>
Charles P. Rullman has served as a director since November 1995. Mr.
Rullman joined Freeman Spogli as a Principal in 1995. From 1992 to 1995, Mr.
Rullman was a General Partner of Westar Capital, a private equity investment
firm specializing in middle market transactions. Prior to joining Westar, Mr.
Rullman spent twenty years at Bankers Trust Company and its affiliate BT
Securities Corporation where he was a Managing Director and Partner. Mr.
Rullman is also a director of Hudson Respiratory Care Inc.
Todd W. Halloran has served as a director since November 1995. Mr.
Halloran joined Freeman Spogli in 1995 and became a Principal in 1998. From
1990 to 1995, Mr. Halloran was a Vice President and Associate at Goldman, Sachs
& Co., where he worked in the Principal Investment Area and the Mergers and
Acquisition Department.
Jon D. Ralph has served as a director since November 1995. Mr. Ralph
joined Freeman Spogli in 1989 and became a Principal in 1998. Prior to joining
Freeman Spogli, Mr. Ralph spent three years at Morgan Stanley & Co. where he
served as an analyst in the Investment Banking Division. Mr. Ralph is also a
director of Envirosource, Inc., Hudson Respiratory Care Inc., River Holding
Corp. and Century Maintenance Supply, Inc.
Christopher C. Behrens has served as a director since February 1996.
Since 1994, he has been a principal of Chase Capital Partners, the private
equity investment affiliate of Chase Manhattan Capital Corporation. From 1990
to 1994, Mr. Behrens was a Vice President in The Chase Manhattan Corporation's
Merchant Banking Group. Mr. Behrens is a director of Portola Packaging and
Patina Oil & Gas, as well as other private companies.
Peter M. Starrett has served as a director since January 1999. Since
August 1998, Mr. Starrett has served as a consultant to Freeman Spogli. Prior
to August 1998, Mr. Starrett was President of Warner Bros. Studio Stores
Worldwide and had been employed by Warner Bros. since May 1990. Mr. Starrett is
also a director of Petco Animal Supplies, Inc., Brylane, Inc., AFC Enterprises,
Inc., Advance Auto, Inc. and Guitar Center, Inc.
Our directors are elected annually and hold office until the next annual
meeting of stockholders and until their successors are duly elected and
qualified. Pursuant to the stockholder's agreement, Chase Capital is entitled
to nominate one director as long as it owns at least 10% of the common stock.
Upon consummation of the offering or soon thereafter, we expect that two
additional directors who are not our affiliates will be appointed to the board
of directors.
Board Committees
The board of directors has authorized the creation of an audit committee
to review the results and scope of the annual audit and the services provided
by our independent accountants. We anticipate that independent directors will
be appointed to the audit committee following consummation of the offering.
We historically have not used a compensation committee. We anticipate
that the board of directors will create a compensation committee in connection
with the offering.
Compensation Committee Interlocks and Insider Participation
Our board of directors determines the compensation of executive officers.
During fiscal 1997, Mr. Sodini participated in board of director deliberations
regarding the compensation of our executive officers.
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<PAGE>
Compensation of Directors
Our directors receive no compensation as directors. Directors are
reimbursed for their reasonable out-of-pocket expenses in attending meetings.
Executive Compensation
The following table summarizes fiscal 1996, 1997 and 1998 compensation
for services in all capacities of our Chief Executive Officer and the four
other most highly compensated executive officers who were serving as executive
officers at the end of the last completed fiscal year (collectively, the
"Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
--------------------------------- ------------
Other Securities
Name and Principal Fiscal Annual Underlying All Other
Position Year Salary Bonus Compensation(a) Options/SARs Compensation(b)
------------------ ------ -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sodini ........ 1998 $475,000 $250,000 $42,337 $2,500
President and Chief 1997 305,218 150,000 98,892 -- 2,500
Executive Officer(c) 1996 124,086 50,000 3,392 -- --
Dennis R. Crook......... 1998 175,000 87,000 7,471 4,253
Senior Vice President, 1997 151,832 70,000 1,025 -- 2,019
Administration and 1996 82,933 20,000 41,250 -- --
Gasoline Marketing (d)
William T. Flyg......... 1998 175,000 75,000 6,041 --
Senior Vice President, 1997 109,615 54,000 3,076 -- --
Finance and Chief
Financial Officer(e)
Douglas Sweeney......... 1998 180,000 90,000 10,174 4,651
Senior Vice President, 1997 149,983 72,000 2,593 -- 2,014
Operations(f) 1996 91,334 20,000 1,352 --
Daniel J. McCormack..... 1998 110,000 60,000 10,412 2,645
Vice President,
Marketing(g) 1997 95,488 45,000 4,269 -- 1,279
1996 45,334 15,000 5,934 -- --
</TABLE>
- --------
(a) Consists primarily of executive medical, moving and relocation
reimbursements.
(b) Consists of matching contributions to our 401(k) Savings Plan. See
"Benefit Plan" below.
(c) Mr. Sodini was appointed Chief Operating Officer in February 1996 and
appointed President and Chief Executive Officer in June 1996.
(d) Dennis R. Crook was appointed Senior Vice President, Administration and
Gasoline Marketing in March 1996.
(e) William T. Flyg was appointed our Senior Vice President, Finance and Chief
Financial Officer in January 1997 and, accordingly, only fiscal 1997 and
fiscal 1998 information is provided.
(f) Douglas M. Sweeney was appointed Senior Vice President, Operations in
March 1996.
(g) Daniel J. McCormack was appointed Vice President, Marketing in September
1996.
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<PAGE>
Option Grants
The following table sets forth information with respect to stock options
granted to our Chief Executive Officer and Executive Officers during the year
ended September 24, 1998:
Options/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed
Annual Rates
Individual Grants of Stock
---------------------------------------------- Price
Number of % of Total Exercise Appreciation
Securities Options/SARs Price or for Option
Underlying Granted to Base Term
Options/SARs Employees in Price Expiration -------------
Name Granted(#) Fiscal Year ($/Share) Date 5%($) 10%($)
---- ------------ ------------ --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sodini......... (a) $ 01/01/08 $ $
(b) 08/25/08
Dennis R. Crook......... (a) 01/01/08
(b) 08/25/08
William T. Flyg......... (a) 01/08/08
(b) 08/25/08
Douglas Sweeney......... (a) 01/01/08
(b) 08/25/08
Daniel J. McCormack..... (a) 01/01/08
(b) 08/25/08
</TABLE>
(Individual Grants)
- --------
(a) This option vests and becomes exercisable in three equal, annual
installments beginning on the first anniversary of the vesting commencement
date and expires to the extent not exercised by January 1, 2008.
(b) This option vests and becomes exercisable in three equal, annual
installments beginning on the first anniversary of the vesting commencement
date and expires to the extent not exercised by August 25, 2008.
Aggregate Option Exercises and Option Values
The following table sets forth information with respect to our Chief
Executive Officer and Executive Officers concerning option exercises for the
fiscal year ended September 24, 1998 and exercisable and unexercisable options
held as of September 24, 1998:
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
September 24, 1998(#) September 24, 1998($)(a)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sodini......... -- -- $ $
Dennis R. Crook......... -- --
William T. Flyg......... -- --
Douglas Sweeney......... -- --
Daniel J. McCormack..... -- --
</TABLE>
- --------
(a) These values are calculated using the assumed initial public offering price
of $ per share, less the exercise price of the options.
74
<PAGE>
Executive Employment Contracts
On October 1, 1997, we entered into an employment agreement with Mr.
Sodini. This agreement contains customary employment terms and provides for an
annual base salary of $475,000, subject to annual adjustment by the board of
directors, participation in any of our benefit or bonus programs, participation
in an incentive bonus program which provides for a payout of a minimum of 25%
upon the achievement of goals determined by the board of directors, and other
perquisites. This agreement terminates on September 30, 2000. Pursuant to the
terms of the agreement, if Mr. Sodini is terminated by us prior to a "change in
control" with "just cause" or upon death or disability, Mr. Sodini shall be
entitled to his then effective compensation and benefits through the last day
of his actual employment by us (for termination for just cause or upon death)
or his effective date of termination, as determined by the board of directors
(for termination upon disability). In addition, if Mr. Sodini is terminated
because of death or disability, we will pay to the estate of Mr. Sodini or to
Mr. Sodini, as the case may be, one year's pay less amounts paid under any
disability plan.
If Mr. Sodini is terminated by us prior to a change in control without
cause, Mr. Sodini shall be entitled to severance pay (including regular
benefits) through the term of the agreement until such time as he engages in
other employment. If Mr. Sodini is terminated by us following a change in
control without cause or Mr. Sodini terminates his employment for "good
reason," Mr. Sodini shall be entitled to severance pay (including regular
benefits) for a period of 18 months from the termination date, subject to
certain limitations. This agreement contains covenants prohibiting Mr. Sodini,
through the period ending on the latter of (1) 18 months after termination or
(2) such time at which he no longer received severance benefits from us, from
competing with us or soliciting employment from our employees.
We have severance arrangements with each of Mr. Crook, Mr. Sweeney and
Mr. McCormack that remain in effect so long as each continues to be employed by
us. Pursuant to these arrangements, if the employee is terminated by us prior
to a "change of control" (as defined) without cause, he shall be entitled to
severance pay for one year from the termination date, subject to certain
limitations. If the employee is terminated by us following a change of control
without cause or if the employee terminates his employment for "good reason"
(as defined), he shall be entitled to severance pay (including regular
benefits) for a period of two years from the termination date, subject to
certain limitations.
Benefit Plan
We sponsor a 401(k) employee retirement savings plan with Diversified
Investment Advisors for eligible employees. Employees must be at least nineteen
years of age and have one year of service working at least 1,000 hours to be
eligible to participate in the 401(k) plan. Employees may contribute up to 15%
of their annual compensation and contributions are matched by us on the basis
of 50% of the first 5% contributed. Matching contribution expense was $330,000
in fiscal 1996, $305,000 in fiscal 1997 and $396,000 in fiscal 1998.
Stock Option Plan
We adopted a stock option plan in January 1998. The stock option plan
provides for the grant of incentive stock options and nonqualified stock
options, as appropriate, to certain of our officers, key employees and
consultants and certain members of our board of directors. An aggregate of
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shares of common stock has been reserved for issuance under the stock option
plan. As of December 24, 1998, options to purchase shares of common stock
were outstanding, and shares were available for future grant.
The stock option plan is currently administered by the board of
directors, although the board of directors may designate a committee to
undertake the administration. The stock option plan provides that the
administrator may, among other things, select the participants in the stock
option plan, determine the number of options which may be granted to such
participants, and determine the vesting schedule of the options granted. The
exercise price of options granted under the stock option plan will be
determined by the administrator, although the exercise price of incentive stock
options must be at least equal to the fair market value of our common stock on
the date of grant. The stock option plan will terminate in the event of certain
acquisitions of The Pantry as set forth in the stock option plan, and in such
event, the administrator may determine whether unvested options will
accelerate. The stock option plan will terminate when all shares authorized
thereunder have been issued, unless terminated earlier pursuant to the terms of
the stock option plan or by the board of directors.
Stock Subscription Plan
We adopted a stock subscription plan in August 1998. This plan permits
certain of our employees, including directors and executive officers, to
purchase up to an aggregate of shares of common stock at fair market value.
The purchase price for common stock purchased under our stock subscription plan
is payable in cash and/or the delivery to us of a secured promissory note
payable to us or one of our subsidiaries. As of December 24, 1998, we have
issued shares of common stock to employees under our stock subscription
plan.
The following table sets forth for our Chief Executive Officer and our
Executive Officers the number of shares purchased pursuant to the stock
subscription plan and the amount borrowed, if any, to finance the purchase of
such shares:
<TABLE>
<CAPTION>
Number of Amount of
Shares of Purchase Price Interest Rate
Common Stock Subject to Due Date of of
Name Purchased Promissory Note Promissory Note Promissory Note
- ---- ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Peter J. Sodini......... $100,100 8/31/2003 8.5%
Dennis R. Crook......... 50,025 8/31/2003 8.5%
William T. Flyg......... -- -- -- --
Douglas Sweeney......... -- -- --
Daniel J. McCormack..... 50,025 8/31/2003 8.5%
</TABLE>
Key Personnel Life Insurance
We are not the beneficiary of any key personnel life insurance policy on
any of our key management personnel.
Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law, we can
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act. We intend to enter
into agreements to indemnify our directors to the fullest extent
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permitted by law. These agreements, among other things, will indemnify our
directors for certain expenses (including attorneys' fees), judgments, fines
and settlement amounts incurred by such person in any action or proceeding,
including but not limited to any action by or in the right of The Pantry, on
account of services as a director of The Pantry, or as a director or officer of
any other company or enterprise to which the person provides services at our
request. We have also purchased liability insurance covering our director and
officers. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In addition, our certificate of incorporation provides that our directors
shall not be liable for monetary damages for breach of such director's
fiduciary duty of care to us and our stockholders except for liability for
breach of the director's duty of loyalty to us or our stockholders, for acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. This provision does not
eliminate the duty of care and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal or state securities
or environmental laws.
There is no pending litigation or proceeding involving any of our
directors, officers, employees or other agents as to which indemnification is
being sought, nor are we aware of any pending or threatened litigation that may
result in claims for indemnification by any director, officer, employee or
other agent.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1995, Freeman Spogli purchased 45,521 shares of our common
stock and 10,374 shares of our Series A Preferred Stock and Chase Capital
purchased 13,700 shares of our common stock and 3,123 shares of our Series A
Preferred Stock. A portion of these shares were purchased from us and the rest
from existing stockholders.
In August 1996, Freeman Spogli and Chase Capital purchased the
outstanding common stock and Series A Preferred Stock held by other
stockholders.
In December 1996, Freeman Spogli purchased 17,500 shares of our series B
preferred stock and warrants to purchase 46,000 shares of common stock for
approximately $17.5 million. The warrants are exercisable at $380 per share
until December 30, 2006 and contain adjustment provisions in the event we
declare dividends or distributions, make stock splits or engage in mergers,
reorganizations or reclassifications. In connection with this offering, we will
repurchase the series B preferred stock from Freeman Spogli for $17.5 million,
plus approximately $6.0 million in accrued dividends.
In October 1997, Freeman Spogli, Chase Capital and Peter J. Sodini
purchased an aggregate of $32.4 million of common stock in connection with the
Lil' Champ acquisition. Mr. Sodini purchased 889 shares of common stock for an
aggregate purchase price of $400,500, payable $185,500 in cash and $215,000 in
the form of a secured promissory note in our favor. All of our Series A
Preferred Stock was contributed back to The Pantry and cancelled at this time.
In July 1998, in connection with the acquisition of certain of the assets
of Quick Stop and the acquisition of certain of the assets of Stallings Oil
Company, Freeman Spogli and Chase Capital purchased an aggregate of 43,478
shares of common stock for an aggregate purchase price of $25.0 million. As of
September 24, 1998, Freeman Spogli owned 78.8% of our outstanding common stock
and Chase Capital and its affiliates owned 19.5% of our outstanding common
stock. Certain of our directors and executive management owned the remaining
common stock in The Pantry. See "Management--Stock Subscription Plan" for a
description of loans made to our Chief Executive Officer and Executive Officers
for purchases of common stock under our stock subscription plan.
Since November 1995, we have paid transaction fees in the amount of $5.5
million to Freeman Spogli in connection with previous investments and
assistance with analyzing acquisition candidates and obtaining financing.
We have entered into a stockholders' agreement with Freeman Spogli, Chase
Capital and Peter J. Sodini whereby (1) Freeman Spogli has certain rights of
first offer prior to transfers of securities to non-affiliates (other than
transfers pursuant to a registration statement or under Rule 144), (2) Freeman
Spogli has certain rights to require Chase Capital and Sodini to sell their
shares of common stock to a third party buyer on the same terms as Freeman
Spogli with respect to the sale of securities, and (3) Freeman Spogli, Chase
Capital and Sodini have rights to be included in certain sales of common stock
by the other stockholders. In addition, Freeman Spogli has agreed, as long as
Chase Capital holds 10% of our common stock, to vote for a director nominated
by Chase Capital.
We have entered into a registration rights agreement with Freeman Spogli,
Chase Capital and Mr. Sodini obligating us to (1) make three registrations of
common stock upon the request of these stockholders, (2) put in place a
registration statement covering the resale of common stock by these
stockholders, and (3) allow these stockholders to participate in other
registrations made by us. The registration rights agreement also grants Freeman
Spogli, Chase Capital and Mr. Sodini the right to purchase their pro rata
portion of additional shares issued by us. This right will terminate upon
consummation of this offering.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information, as of December 24,
1998, with respect to the beneficial ownership of capital stock by (1) each
person who beneficially owns more than 5% of such shares, (2) each of the
Executive Officers, (3) each of our directors and (4) all of our executive
officers and directors as a group.
<TABLE>
<CAPTION>
Shares of Shares of
Common Stock Preferred Stock
Name and Address of Beneficially Percentage Beneficially Percentage
Beneficial Owner(1) Owned of Class Owned of Class
------------------- ------------ ---------- --------------- ----------
<S> <C> <C> <C> <C>
Freeman Spogli & Co.
Incorporated(2).......... 82.3%(2) 17,500(3) 100%
William M. Wardlaw(2)... -- -- -- --
Charles P. Rullman(2)... -- -- -- --
Jon D. Ralph(2)......... -- -- -- --
Todd W. Halloran(2)..... -- -- -- --
Chase Manhattan Capital,
L.P.(4).................. 11.6% -- --
Christopher C.
Behrens(4)(5).......... * -- --
Peter J. Sodini(6)........ * -- --
Dennis R. Crook(7)........ * -- --
William T. Flyg(8)........ * -- --
Douglas Sweeney(9)........ * -- --
Daniel J. McCormack(10)... * -- --
Peter M. Starrett(11)..... * -- --
All directors and
executive officers as a
group (11 individuals)... * -- --
</TABLE>
- --------
* Less than 1.0%.
(1) Unless indicated otherwise, the address of the shareholder is c/o The
Pantry, P.O. Box 1410, 1801 Douglas Drive, Sanford, North Carolina 27331.
Unless indicated otherwise, each shareholder has sole voting and
investment power with respect to the shares of common stock beneficially
owned by such shareholder.
(2) Includes shares issuable on the exercise of currently exercisable
warrants. shares, shares and shares of common stock are held of
record by FS Equity Partners III, L.P. ("FSEP III"), FS Equity Partners
IV, L.P. ("FSEP IV") and FS Equity Partners International, L.P. ("FSEP
International"), respectively. As general partner of FS Capital Partners,
L.P. ("FS Capital"), which is general partner of FSEP III, FS Holdings,
Inc. ("FSHI") has the sole power to vote and dispose of the shares owned
by FSEP III. As general partner of FS&Co. International, L.P. ("FS&Co.
International"), which is the general partner of FSEP International, FS
International Holdings Limited ("FS International Holdings") has the sole
power to vote and dispose of the shares owned by FSEP International.
Bradford M. Freeman, Ronald M. Spogli, J. Frederick Simmons, William M.
Wardlaw, John M. Roth and Mr. Rullman are the sole directors, officers and
shareholders of FSHI, FS International Holdings and Freeman Spogli, and as
such may be deemed to be the beneficial owners of the shares of the common
stock and rights to acquire the common stock owned by FSEP III and FSEP
International. As general partner of FSEP IV, FS Capital Partners LLC
("FSCP") has the sole power to vote and dispose of the shares owned by
FSEP IV. Messrs. Freeman, Spogli, Wardlaw, Rullman, Ralph, Halloran, Roth
and Mark J. Doran are the sole directors, officers and beneficial owners
of FSCP, and as such may be deemed to be the beneficial owners of the
shares of the common stock and rights to acquire the common stock owned by
FSEP IV. The business address of Freeman Spogli, FSEP III, FSEP IV, FS
Capital, FSHI and FSCP and their directors, officers and beneficial owners
is 11100 Santa Monica Boulevard, Suite 1900, Los Angeles, California
90025. The business address of FSEP International, FS&Co. International
and FS International Holdings is c/o Padget-Brown & Company, Ltd., West
Winds Building, Third Floor, Grand Cayman, Cayman Islands, British West
Indies.
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(3) Includes and shares of preferred stock are held of record by FSEP III
and FSEP International, respectively. Each share of preferred stock is
entitled to ten votes on all matters on which holders of the common stock
vote. All of the preferred stock will be redeemed with the proceeds of the
offering.
(4) Includes shares held of record by Chase Manhattan Capital, L.P. and
shares held by CB Capital Investors, L.P. ("CBCLP"). The business address
of Chase Capital and CBCLP is c/o Chase Capital Partners, 380 Madison
Avenue, 12th Floor, New York, New York, 10017. Beneficial ownership of a
portion of such shares may be deemed to be attributable to Mr. Behrens as
a general partner of Chase Capital Partners ("CCP"), which is the limited
partner of, and which acts as the investment manager for, each of Chase
Capital and CBCLP. The actual pro rata portion of such beneficial
ownership is subject to several variables, including rates of return, and
thus is not readily determinable. Mr. Behrens is also the managing general
partner of Baseball Partners, which may be deemed to be an affiliate of
CCP, Chase Capital and CBCLP. Each of CCP, Chase Capital and CBCLP
disclaims any beneficial ownership interest in the shares held by Baseball
Partners that may be attributable to it as a result of any such
affiliation.
(5) Includes shares held of record by Baseball Partners, a New York
general partnership of which Mr. Behrens is the managing general partner.
Mr. Behrens disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein. Baseball is party to a
Stockholders Agreement with Chase Capital that contains various provisions
pertaining to the voting, acquisition and disposition of such shares,
including Baseball's grant to Chase Capital of a proxy to vote such shares
and restrictions on Baseball's ability to transfer such shares. Chase
Capital disclaims any beneficial ownership interest in such shares that
may be attributable to it as a result of such provisions.
(6) Includes shares of common stock issuable upon the exercise of options
exercisable within 60 days after February 28, 1999.
(7) Includes shares of common stock issuable upon the exercise of options
exercisable within 60 days after February 28, 1999.
(8) Includes shares of common stock issuable upon the exercise of options
exercisable within 60 days after February 28, 1999.
(9) Includes shares of common stock issuable upon the exercise of options
exercisable within 60 days after February 28, 1999.
(10) Includes shares of common stock issuable upon the exercise of options
exercisable within 60 days after February 28, 1999.
(11) Includes shares of common stock issuable upon the exercise of options
exercisable within 60 days after February 28, 1999.
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DESCRIPTION OF CAPITAL STOCK
Authorized Capital Stock
Upon consummation of the offering, our authorized capital stock will
consist of shares of common stock and shares of preferred stock. Of the
shares of common stock authorized, shares have been reserved for
issuance pursuant to our stock option plan and have been reserved for
issuance pursuant to warrants held by Freeman Spogli.
The following summary description of our capital stock does not purport
to be complete and is qualified in its entirety by reference to Delaware law
and to our certificate of incorporation, a copy of which is filed as an exhibit
to the registration statement of which this prospectus is a part.
Common Stock
Each share of common stock is entitled to one vote on all matters
submitted to a vote of our stockholders. Generally, all matters to be voted
upon by stockholders must be approved by a majority of the votes cast or
entitled to be cast by all shares of common stock. Subject to preferences that
may be applicable to any then outstanding preferred stock, holders of common
stock are entitled to receive ratably such dividends, if any, as may be
declared by the board of directors out of funds legally available therefor. See
"Dividend Policy."
In the event of a liquidation, dissolution or winding up of The Pantry,
holders of the common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding preferred stock or any class or series of stock ranking prior
to the common stock. There are no redemption or sinking fund provisions
applicable to the shares of common stock. All outstanding shares of common
stock are, and the common stock to be outstanding upon completion of this
offering will be, fully paid and nonassessable.
Preferred Stock
We intend to use a portion of the proceeds of the offering to redeem all
shares of preferred stock currently outstanding. However, the board of
directors will have the authority, without further action by the stockholders,
to issue from time to time preferred stock in one or more series and to fix the
number of shares, designations, preferences, powers and relative participating,
optional or other special rights and the qualifications or restrictions
thereof. The issuance of preferred stock could decrease the amount of earnings
and assets available for distribution to holders of common stock or affect
adversely the rights and powers, including voting rights, of the holders of
common stock, and may have the effect of delaying, deferring or preventing a
change in control of The Pantry. We have no present plan to issue any shares of
preferred stock.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is First Union
National Bank.
Listing
Application will be made for the quotation of the common stock on the
Nasdaq National Market under the symbol "PTRY."
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have outstanding shares of
common stock, assuming no exercise of outstanding warrants of options under our
stock option plan. An aggregate of shares of common stock have been
reserved for issuance pursuant to our stock option plan, of which options to
purchase shares are outstanding, and shares of common stock have been
reserved for issuance pursuant to warrants held by Freeman Spogli.
The shares of common stock sold in the offering will be freely tradable
without restriction or limitation under the Securities Act, except for any such
shares held by our "affiliates", as such term is defined under Rule 144 of the
Securities Act, which shares will be subject to the resale limitations under
Rule 144. Of our remaining shares (1) shares are "restricted securities"
within the meaning of Rule 144 and were issued and sold by us in private
transactions and may be publicly sold only if registered under the Securities
Act or sold in accordance with an applicable exemption from registration, such
as Rule 144 and (2) shares were sold to our employees in transactions
registered under the Securities Act and are freely tradeable.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
for at least one year, including an affiliate of The Pantry, would be entitled
to sell, within any three-month period, that number of shares that does not
exceed the greater of one percent of the then outstanding shares of common
stock (approximately shares) and the average weekly trading volume in the
common stock during the four calendar weeks immediately preceding the date on
which the notice of sale is filed with the Securities and Exchange Commission,
provided certain manner of sale and notice requirements and requirements as to
the availability of current public information about us are satisfied. Under
Rule 144(k), a holder of "restricted securities" who is not deemed an affiliate
of the issuer and who has beneficially owned shares for at least two years
would be entitled to sell shares under Rule 144(k) without regard to the
limitations described above. As defined in Rule 144, an "affiliate" of an
issuer is a person who directly or indirectly through the use of one or more
intermediaries controls, or is controlled by, or is under common control with,
such issuer.
We and our executive officers and directors and all of our existing
shareholders have agreed, subject to certain exceptions, not to directly or
indirectly (1) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of or otherwise dispose of or transfer
any shares of common stock or securities convertible into or exchangeable or
exercisable for or repayable with common stock, whether now owned or thereafter
acquired by the person executing the agreement or with respect to which the
person executing the agreement thereafter acquires the power of disposition, or
file a registration statement under the Securities Act with respect to the
foregoing or (2) enter into any swap or other agreement that transfers, in
whole or in part, the economic consequence of ownership of the common stock
whether any such swap or transaction is to be settled by delivery of common
stock or other securities, in cash or otherwise, without the prior written
consent of Merrill Lynch on behalf of the underwriters for a period of 180 days
after the date of this prospectus.
We intend to file a registration statement under the Securities Act
following the date of this prospectus to register the future issuance of up to
shares of common stock under the stock option plan. Shares issued under the
stock option plan after the effective date of such registration statement will
be freely tradable in the open market, subject to the lock-up agreements with
the
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representatives of the underwriters described above and, in the case of sales
by affiliates, to certain requirements of Rule 144. As of February 28, 1999,
options to purchase approximately shares of common stock are vested, of
which approximately such shares will be subject to the 180-day lock-up
period described above. See "Management--Stock Option Plan."
We are unable to estimate the number of shares that may be sold in the
future by our existing stockholders or the effect, if any, that sales of shares
by such stockholders will have on the market price of the common stock
prevailing from time to time. Sales of substantial amounts of common stock, or
the prospect of such sales, could materially adversely affect the market price
of the common stock.
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MATERIAL U.S. TAX CONSIDERATIONS APPLICABLE TO
NON-U.S. HOLDERS OF THE COMMON STOCK
The following discussion summarizes the material U.S. federal income and
estate tax consequences of the acquisition, ownership and disposition of the
common stock held by non-U.S. holders. A "non-U.S. holder" means a holder of
common stock who is not a U.S. holder. A U.S. holder means a holder of common
stock who, for U.S. federal income tax purposes, is
. A citizen or resident of the United States;
. A corporation, partnership or other entity created or organized in
the United States or under the laws of the United States or of any
political subdivision thereof (other than a partnership treated as
foreign under U.S. Treasury regulations);
. An estate whose income is includable in gross income for United
States federal income tax purposes regardless of its source;
. A trust, if a United States court is able to exercise primary
supervision over the administration of the trust and one or more
United States persons have the authority to control all substantial
decisions of the trust; or
. A person whose worldwide income or gain is subject to U.S. federal
income tax on a net basis.
An individual may, among other ways, be deemed to be a resident of the
United States with respect to any calendar year by virtue of being present in
the United States on at least 31 days in such calendar year and for an
aggregate of at least 183 days during the current calendar year and the two
preceding calendar years (counting for such purposes all of the days present in
the current year, one-third of the days present in the immediately preceding
year and one-sixth of the days present in the second preceding year).
This discussion is included for general information and is based upon the
U.S. federal tax law now in effect, which is subject to change, possibly
retroactively, which could affect the continued validity of this discussion.
The tax treatment of the holders of common stock may vary depending on their
particular situation. U.S. holders acquiring common stock are subject to
different rules than those discussed below. In addition, certain other holders
(including insurance companies, tax-exempt organizations, financial
institutions, subsequent purchasers of common stock, U.S. expatriates and
broker-dealers) may be subject to special rules not discussed below. The
discussion also does not consider the tax consequences for any person who is a
shareholder, partner or beneficiary of a holder of the common stock. Moreover,
the effect of any applicable state, local or foreign taxing jurisdiction is not
discussed. In general, this discussion assumes that a non-U.S. holder holds
such common stock as a capital asset and not as part of a "hedge," "straddle,"
"conversion transaction," "synthetic security" or other integrated investment.
Prospective investors are urged to consult their tax advisors regarding the
U.S. federal tax consequences of acquiring, holding and disposing of common
stock, as well as any tax consequences that may arise under the laws of any
foreign, state, local or other taxing jurisdiction.
Dividends
As described above, we do not expect to pay dividends. In the event we
pay dividends, dividends paid to a non-U.S. holder will be subject to a U.S.
withholding tax at a rate of 30% (or a lower rate under a relevant treaty) of
the gross amount of the dividend, unless the dividends are effectively
connected with the conduct of a trade or business by the non-U.S. holder within
the United States. Non-U.S. holders should consult their tax advisors regarding
their entitlement to benefits under a relevant income tax treaty.
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Currently, for purposes of determining whether tax is to be withheld at
the 30% rate or at a reduced treaty rate, we will ordinarily presume that
dividends paid to an address in a foreign country are paid to a resident of
such country, absent knowledge to the contrary. Under U.S. Treasury regulations
effective for payments after December 31, 1999, holders will be required to
satisfy certain applicable certification requirements to claim treaty benefits.
These regulations also contain special rules regarding treaty benefits
available for payments made to certain intermediary or disregarded entities.
Except to the extent otherwise provided under an applicable treaty,
dividends that are effectively connected with such holder's conduct of a trade
or business in the United States are subject to U.S. federal income tax on a
net income basis at applicable graduated individual or corporate rates, and are
not generally subject to withholding, if the holder complies with certain
certification and disclosure requirements. Any such effectively connected
dividends received by a foreign corporation may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or such lower rate as may be specified by an applicable income tax treaty.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income
tax in respect of gain recognized on a disposition of common stock unless:
. The gain is effectively connected with a trade or business of the
non-U.S. holder in the United States, or, alternatively, if a tax
treaty applies, is attributable to a permanent establishment
maintained by the non-U.S. holder in the United States (in which
cases such gain will be subject to tax at the rates and in the manner
applicable to United States persons and, if the holder is a foreign
corporation, the branch profits tax described above may also apply);
. In the case of a non-U.S. holder who is an individual and holds the
common stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of the sale and
either the income from the disposition is attributable to an office
or other fixed place of business maintained by the holder in the
United States or where the holder has a "tax home" in the United
States and certain other requirements are met; or
. We are or have been a "United States real property holding
corporation" for U.S. federal income tax purposes at any time during
the shorter of the five-year period ending on the date of the
disposition and the period that the common stock was held by the non-
U.S. holder.
In general, we will be treated as a U.S. real property holding
corporation if the fair market value of our U.S. real property interests equals
or exceeds 50% of the total fair market value of our U.S. and non-U.S. real
property interests and our other assets used or held for use in a trade or
business. The determination of the fair market value of our assets and,
therefore, whether we are a U.S. real property holding corporation at any given
time will depend on the particular facts and circumstances applicable at the
time. Currently, it is our best estimate that the fair market value of our U.S.
real property interests is approximately 50% of the fair market value of our
U.S. and non-U.S. real property interests and our other assets used or held for
use in our trade or business. Therefore, we believe that it is likely that we
currently are a U.S. real property holding corporation. Because the
determination of whether we are a U.S. real property holding corporation is
based on the fair market value of our U.S. real property interests and our
other assets, it is difficult to predict whether we will be a U.S. real
property holding corporation in the future.
85
<PAGE>
However, even if we are or have been a U.S. real property holding
corporation, a non-U.S. holder which did not beneficially own, directly or
indirectly, more than 5% of the total fair market value of our common stock at
any time during the shorter of the five-year period ending on the date of
disposition and the period that the common stock was held by the non-U.S.
holder, a "non-5% holder," and which is not otherwise subject to tax under any
other circumstance above will not be subject to U.S. federal income tax on any
gain realized on the disposition of the common stock if, at any time during the
calendar year of the disposition, the common stock was regularly traded on an
established securities market.
We have applied to have the common stock quoted on the Nasdaq National
Market. Although not free from doubt, our common stock should be considered to
be regularly traded on an established securities market for any calendar
quarter during which it is regularly quoted on Nasdaq by brokers or dealers
which hold themselves out to buy or sell the common stock at the quoted price.
If the common stock were not considered to be regularly quoted on Nasdaq at any
time during the applicable calendar year and we are treated as a U.S. real
property holding corporation, then a non-5% holder would be subject to U.S.
federal income tax on any gain realized on the disposition of its common stock
on a net income basis as if the gain were effectively connected with the
conduct of a United States trade or business by the non-5% holder during the
taxable year and, in such case, the person acquiring the common stock from a
non-5% holder generally would be required to withhold 10% of the amount of the
proceeds of the disposition. Such withholding may be reduced or eliminated
pursuant to a withholding certificate issued by the Internal Revenue Service in
accordance with applicable U.S. Treasury regulations. All non-U.S. holders
should consult their own tax advisors regarding application of the foregoing
rules to them.
Federal Estate Taxes
Common stock owned or treated as owned by a non-U.S. holder at the time
of death, or common stock of which the non-U.S. holder made certain lifetime
transfers, will be included in such holder's gross estate for U.S. federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
United States Information Reporting Requirements and Backup Withholding Tax
We must report annually to the Internal Revenue Service and to each non-
U.S. holder the amount of dividends paid to such holder and the tax withheld
with respect to such dividends, regardless of whether any tax was actually
withheld. Copies of the information returns reporting such dividends and
withholding may also be made available to the tax authorities in the country in
which the non-U.S. holder resides under the provisions of an applicable income
tax treaty.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
and additional information reporting generally will not apply to dividends paid
on common stock before January 1, 2000, that are either
. Subject to withholding at the 30% rate (or at a reduced rate under an
applicable treaty); or
. Paid to an address outside the United States.
Dividends paid after December 31, 1999, generally will be subject to
backup withholding at a 31% rate unless the non-U.S. holder provides a valid
Form W-8 (or substitute form) or is a corporation or other exempt recipient
that meets certain requirements.
86
<PAGE>
In general, payment to or through a United States office of a broker of
the proceeds of a sale of common stock is generally subject to both backup
withholding and information reporting unless either:
. The non-U.S. holder is a corporation or other exempt recipient that
meets certain requirements; or
. The non-U.S. holder provides a valid Form W-8 (or substitute form);
provided, however, the broker does not have actual knowledge that the holder is
a U.S. holder or that the conditions of any other exemption are not, in fact,
satisfied. Before January 1, 2000, payment of the proceeds of a sale of common
stock to or through a foreign office of a foreign broker generally will not be
subject to backup withholding and information reporting. After December 31,
1999, backup withholding will apply if information reporting is required.
However, payments of proceeds from the disposition of common stock to or
through a foreign office of a broker that is:
. A United States person;
. A controlled foreign corporation for U.S. federal income tax
purposes; or
. A foreign person 50% or more of whose gross income from certain
periods is effectively connected with a United States trade or
business,
will be subject to information reporting unless the broker has documentary
evidence in its files that the owner is a non-U.S. holder and the broker has no
actual knowledge to the contrary. After December 31, 1999, payments made to or
through a foreign intermediary satisfying certain requirements will not be
subject to either backup withholding or information reporting. Prospective
investors should consult with their own tax advisors regarding these rules, and
in particular with respect to whether the use of a particular broker would
subject the investor to potential information reporting and backup withholding.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules may be allowed as a refund or a credit against
such holder's U.S. federal income tax liability, provided the required
information is furnished to the Internal Revenue Service.
87
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated and NationsBanc
Montgomery Securities LLC are acting as representatives of each of the
underwriters named below. Subject to the terms and conditions set forth in a
purchase agreement among The Pantry and the underwriters, The Pantry has agreed
to sell to the underwriters, and each of the underwriters severally and not
jointly has agreed to purchase from The Pantry, the number of shares of common
stock listed opposite its name below.
<TABLE>
<CAPTION>
Number
of
Underwriter Shares
----------- ------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................
NationsBanc Montgomery Securities LLC.............................
Total........................................................
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the shares of
common stock being sold pursuant to each such agreement if any of the shares of
common stock being sold pursuant to such agreement are purchased. In the event
of a default by an underwriter, the purchase agreement provides that, in
certain circumstances, the purchase commitments of the nondefaulting
underwriters may be increased or the purchase agreement may be terminated.
The Pantry has agreed to indemnify the underwriters against certain
liabilities, including certain liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make in respect
thereof.
Commissions and Discounts
The representatives have advised The Pantry that the underwriters propose
initially to offer the shares of common stock to the public at the initial
public offering price set forth on the cover page of this prospectus, and to
certain dealers at such price less a concession not in excess of $ per share
of common stock. The underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share of common stock to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the per share and total public offering price,
underwriting discount to be paid by The Pantry to the underwriters and the
proceeds before expenses to The Pantry. This
88
<PAGE>
information is presented assuming either no exercise or full exercise by the
underwriters of their over-allotment options.
<TABLE>
<CAPTION>
Per Without With
Share Option Option
----- ------- ------
<S> <C> <C> <C>
Public offering price.................................. $ $ $
Underwriting discount.................................. $ $ $
Proceeds, before expenses, to The Pantry............... $ $ $
</TABLE>
The expenses of the offering (exclusive of the underwriting discount) are
estimated at $ and are payable by The Pantry.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and
certain other conditions. The underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part.
Over-allotment Options
The Pantry has granted options to the underwriters, exercisable for 30
days after the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price set forth on the
cover page of this prospectus, less the underwriting discount. The underwriters
may exercise these options solely to cover over-allotments, if any, made on the
sale of the common stock offered hereby. To the extent that the underwriters
exercise these options, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares of common stock
proportionate to such underwriter's initial amount reflected in the foregoing
table.
Reserved Shares
At the request of The Pantry, the underwriters have reserved for sale, at
the initial public offering price, up to % of the shares offered hereby to be
sold to certain directors, officers, employees, business associates and related
persons of The Pantry. The number of shares of common stock available for sale
to the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not orally confirmed for
purchase within one day of the pricing of the offering will be offered by the
underwriters to the general public on the same terms as the other shares
offered hereby.
No Sales of Similar Securities
The Pantry and its executive officers and directors and all existing
stockholders have agreed, subject to certain exceptions, not to directly or
indirectly offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right
or warrant for the sale of or otherwise dispose of or transfer any shares of
common stock or securities convertible into or exchangeable or exercisable for
or repayable with common stock, whether now owned or thereafter acquired by the
person executing the agreement or with respect to which the person executing
the agreement thereafter acquires the power of disposition, or file a
registration statement under the Securities Act with respect to the foregoing
or enter into any swap or other agreement that transfers, in whole or in part,
the economic consequence of ownership of the common stock whether any such swap
or transaction is to be settled by delivery of common stock or other
89
<PAGE>
securities, in cash or otherwise, without the prior written consent of Merrill
Lynch on behalf of the underwriters for a period of 180 days after the date of
this prospectus. See "Shares Eligible for Future Sale."
Nasdaq National Market Listing
We will apply to the Nasdaq National Market for the quotation of the
common stock under the symbol "PTRY." Prior to the offering, there has been no
public market for the common stock of The Pantry. The initial public offering
price will be determined through negotiations between The Pantry and the
representatives. The factors considered in determining the initial public
offering price, in addition to prevailing market conditions, are price-earnings
ratios of publicly traded companies that the representatives believe to be
comparable to The Pantry, certain financial information of The Pantry, the
history of, and the prospects for, The Pantry and the industry in which it
competes, and an assessment of its management, its past and present operations,
the prospects for, and timing of, future revenue of The Pantry, and the present
state of its development. There can be no assurance that an active trading
market will develop for the common stock or that the common stock will trade in
the public market subsequent to the offering at or above the initial public
offering price.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and certain selling group members to bid for and purchase the common stock. As
an exception to these rules, the representatives are permitted to engage in
certain transactions that stabilize the price of the common stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares of common stock
than are set forth on the cover page of this prospectus, the representatives
may reduce that short position by purchasing common stock in the open market.
The representatives may also elect to reduce any short position by exercising
all or part of the over-allotment options described above.
The representatives may also impose a penalty bid on certain underwriters
and selling group members. This means that if the representatives purchase
shares of common stock in the open market to reduce the underwriters' short
position or to stabilize the price of the common stock, they may reclaim the
amount of the selling concession from the underwriters and selling group
members who sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of the common stock to the extent
that it discourages resales of the common stock.
Neither The Pantry nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the common stock. In
addition, neither The Pantry nor any of the underwriters makes any
representation that the representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
90
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the common stock will be passed
upon for us by Riordan & McKinzie, a Professional Corporation, Los Angeles,
California. Certain legal matters will be passed upon for the Underwriters by
Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), New York, New York. Certain principals and employees of Riordan
& McKinzie are limited partners in a partnership which is a limited partner of
a Freeman Spogli investment fund that owns a majority of The Pantry's equity
interests. See "Security Ownership of Certain Beneficial Owners and
Management."
EXPERTS
The consolidated financial statements of The Pantry, Inc. as of September
25, 1997 and September 24, 1998 and for each of the three years in the period
ended September 24, 1998, included in the prospectus, and the related financial
statement schedule included elsewhere in the registration statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the registration statement, and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of Lil' Champ Food Stores, Inc. (a wholly-owned
subsidiary of Docks, U.S.A., Inc.) as of December 30, 1995 and December 28,
1996 and for the years then ended, included in the prospectus, have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The financial statements of Quick Stop Food Mart, Inc. as of December 31,
1996 and 1997 and for each of the three years in the period ended December 31,
1997 included in this prospectus have been audited by Cherry, Bekaert &
Holland, L.L.P., independent auditors, as stated in their report appearing
herein, and have been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of Express Stop, Inc. as of December 31, 1997
and the year then ended included in this prospectus have been audited by
Griffin, Maxwell & Frazelle, P.A., independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The financial statements of Taylor Oil Company as of December 31, 1997
and 1998 and for each of the three years in the period ended December 31, 1998
included in this prospectus have been audited by Edwards, Falls & Renegar,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The combined financial statements of Miller Enterprises, Inc. and
Peninsular Petroleum Company as of April 2, 1997 and April 1, 1998 and for each
of the three years ended March 27, 1996, April 2, 1997 and April 1, 1998
included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing.
91
<PAGE>
The statement of net assets acquired from Miller Brothers and Circle
Investments, Ltd. as of January 28, 1999 of The Pantry, Inc. included in this
prospectus has been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and has been so included in reliance
upon the report of such firm given their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Pantry has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the common stock. This prospectus
does not contain all of the information set forth in the Registration
Statement, certain portions of which are omitted as permitted by the rules and
regulations of the Commission. For further information pertaining to The Pantry
and the common stock, reference is made to the Registration Statement,
including the exhibits thereto and the financial statements, notes and
schedules filed as a part thereof. Statements contained in this prospectus
regarding the contents of any contract or other document referred to herein or
therein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
The Pantry is subject to the informational requirements of the Securities
Exchange Act of 1934, and files reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information, as
well as the Registration Statement and its exhibits and schedules, may be
inspected, without charge, or copied, at prescribed rates, at the public
reference facility maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. In addition, the Commission maintains an Internet
site that contains reports, proxy and information statements, and other
information, regarding issuers that file electronically with the Commission.
The address of the Commission's site is http://www.sec.gov.
92
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
THE PANTRY, INC.:
Independent Auditors' Report............................................ F-3
Consolidated Balance Sheets as of September 25, 1997 and September 24,
1998, and December 24, 1998 (unaudited)................................ F-4
Consolidated Statements of Operations for the years ended September 26,
1996, September 25, 1997 and September 24, 1998, and the three months
ended December 25, 1997 and December 24, 1998 (unaudited).............. F-6
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the years ended September 26, 1996, September 25, 1997 and September
24, 1998, and the three months ended December 24, 1998 (unaudited)..... F-7
Consolidated Statements of Cash Flows for the years ended September 26,
1996, September 25, 1997 and September 24, 1998, and the three months
ended December 25, 1997 and December 24, 1998 (unaudited).............. F-8
Notes to Consolidated Financial Statements.............................. F-10
LIL' CHAMP FOOD STORES, INC.:
Independent Auditors' Report............................................ F-46
Balance Sheets as of December 30, 1995 and December 28, 1996, and
September 27, 1997 (unaudited)......................................... F-47
Statements of Operations for the years ended December 30, 1995 and
December 28, 1996, and the nine months ended September 28, 1996 and
September 27, 1997 (unaudited)......................................... F-48
Statements of Shareholder's Equity for the years ended December 30, 1995
and December 28, 1996, and the nine months ended September 28, 1996 and
September 27, 1997 (unaudited)......................................... F-49
Statements of Cash Flows for the years ended December 30, 1995 and
December 28, 1996, and the nine months ended September 28, 1996 and
September 27, 1997 (unaudited)......................................... F-50
Notes to Financial Statements........................................... F-51
QUICK STOP FOOD MART, INC.:
Report of Independent Certified Public Accountants...................... F-60
Balance Sheets as of December 31, 1996 and 1997, and June 30, 1998
(unaudited)............................................................ F-61
Statements of Income for the years ended December 31, 1995, 1996 and
1997, and the six months ended June 30, 1997 and 1998 (unaudited)...... F-62
Statements of Stockholders' Equity for the years ended December 31,
1995, 1996 and 1997, and the six months ended June 30, 1998
(unaudited)............................................................ F-63
Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997, and the six months ended June 30, 1997 and 1998 (unaudited)...... F-64
Notes to Financial Statements........................................... F-65
EXPRESS STOP, INC.:
Report of Independent Auditors.......................................... F-71
Balance Sheets as of December 31, 1997 and September 30, 1998
(unaudited)............................................................ F-72
Statements of Income for the year ended December 31, 1997, and the nine
months ended September 30, 1997 and 1998 (unaudited)................... F-73
Statements of Retained Earnings for the year ended December 31, 1997,
and the nine months ended September 30, 1997 and 1998 (unaudited)...... F-74
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C>
Statements of Cash Flows for the year ended December 31, 1997, and the
nine months ended September 30, 1997 and 1998 (unaudited)............. F-75
Notes to Financial Statements.......................................... F-76
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
Independent Auditors' Report........................................... F-82
Combined Balance Sheets as of April 3, 1997 and April 1, 1998, and
December 30, 1998..................................................... F-83
Combined Statements of Income for the years ended March 27, 1996, April
2, 1997, April 1, 1998 and the nine months ended December 25, 1997 and
December 30, 1998..................................................... F-84
Combined Statements of Changes in Shareholders' Equity for the years
ended March 27, 1996, April 2, 1997, and April 1, 1998................ F-85
Combined Statements of Cash Flows for the years ended March 27, 1996,
April 2, 1997, and April 1, 1998, and for the nine months ended
December 25, 1997 and December 20, 1998............................... F-86
Notes to Combined Financial Statements................................. F-87
STATEMENT OF NET ASSETS ACQUIRED FROM MILLER BROTHERS AND CIRCLE
INVESTMENTS, LTD.
Independent Auditors' Report........................................... F-95
Statement of Net Assets Acquired from Miller Brothers and Circle
Investments, Ltd. as of January 28, 1999.............................. F-96
Notes to Statement of Net Assets Acquired.............................. F-97
TAYLOR OIL COMPANY:
Independent Auditors' Report........................................... F-98
Balance Sheets as of December 31, 1997 and 1998........................ F-99
Statements of Income for the years ended December 31, 1996, 1997 and
1998.................................................................. F-101
Statement of Changes in Shareholders Equity for the years ended
December 31, 1996, 1997 and 1998...................................... F-102
Statements of Cash Flows for the years ended December 31, 1996, 1997
and 1998.............................................................. F-103
Notes to Financial Statements.......................................... F-104
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders of
The Pantry, Inc.
Sanford, North Carolina
We have audited the accompanying consolidated balance sheets of The
Pantry, Inc. and subsidiaries as of September 25, 1997 and September 24, 1998,
and the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the three years in the period ended
September 24, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Pantry, Inc. and
subsidiaries as of September 25, 1997 and September 24, 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended September 24, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, in
fiscal 1996 the Company adopted Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
December 18, 1998
F-3
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited as to December 24, 1998 information)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 25, September 24, December 24,
1997 1998 1998
------------- ------------- ------------
(Unaudited)
ASSETS
-------------------------------------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents............ $ 3,347 $ 34,404 $ 15,069
Receivables (net of allowance for
doubtful accounts of $150 at
September 25, 1997; $280 at
September 24, 1998 and $379 at
December 24, 1998).................. 2,101 9,907 13,393
Inventories (Note 3)................. 17,161 47,809 53,546
Income taxes receivable (Note 6)..... -- 488 --
Prepaid expenses..................... 1,204 2,216 1,338
Property held for sale............... 3,323 3,761 2,971
Deferred income taxes (Note 6)....... 1,142 3,988 3,521
-------- -------- --------
Total current assets.............. 28,278 102,573 89,838
-------- -------- --------
Property and equipment, Net (Notes 4,
5, 7 and 10)......................... 77,986 300,978 328,037
-------- -------- --------
Other assets:
Goodwill (net of accumulated
amortization of $9,705 at September
25, 1997, $11,940 at September 24,
1998 and $12,903 at December 24,
1998) (Notes 2 and 10).............. 20,318 120,025 119,534
Deferred lease costs (net of
accumulated amortization of $8,956
at September 25, 1997, 9,001 at
September 24, 1998 and $9,012 at
December 24, 1998) ................. 314 269 258
Deferred financing costs (net of
accumulated amortization of $4,345
at September 25, 1997, $4,871 at
September 24, 1998 and $5,468 at
December 24, 1998) (Note 5)......... 4,578 14,545 14,025
Environmental receivables (Note 8)... 6,511 13,187 12,783
Deferred income taxes (Note 6)....... 156 --
Escrow for Lil' Champ acquisition
(Note 2)............................ 4,049 --
Other................................ 609 3,243 4,085
-------- -------- --------
Total other assets................ 36,535 151,269 150,685
-------- -------- --------
Total assets.......................... $142,799 $554,820 $568,560
======== ======== ========
</TABLE>
F-4
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS--(Continued)
(Unaudited as to December 24, 1998 information)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 25, September 24, December 24,
1997 1998 1998
------------- ------------- ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
-----------------------------
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt
(Note 5)................................ $ 33 $ 45 $ 39
Current maturities of capital lease
obligations (Note 7).................... 285 1,240 1,240
Short-term debt.......................... -- -- 2,000
Accounts payable:
Trade.................................. 16,035 49,559 50,221
Money orders........................... 3,022 5,181 5,099
Accrued interest (Note 5)................ 4,592 11,712 5,529
Accrued compensation and related taxes... 3,323 6,719 6,031
Income taxes payable (Note 6)............ 296 -- 104
Other accrued taxes...................... 2,194 7,007 4,108
Accrued insurance........................ 3,887 5,745 6,097
Other accrued liabilities................ 2,856 24,348 27,490
-------- -------- --------
Total current liabilities............ 36,523 111,556 107,958
-------- -------- --------
Long-term debt (Note 5).................... 100,305 327,269 343,260
-------- -------- --------
Other noncurrent liabilities:
Environmental costs (Note 8)............. 7,806 17,137 17,291
Deferred income taxes (Note 6)........... -- 20,366 19,927
Capital lease obligations (Note 7)....... 679 12,129 11,806
Employment obligations................... 1,341 934 842
Accrued dividends on preferred stock
(Notes 2 and 13)........................ 7,958 4,391 5,103
Other.................................... 6,060 21,734 21,628
-------- -------- --------
Total other non-current liabilities.. 23,844 76,691 76,597
-------- -------- --------
Commitments and contingencies (Notes 5, 7,
8 and 15)................................. -- -- --
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 150,000
shares authorized; 43,499 issued and
outstanding at September 25, 1997 and
17,500 issued and outstanding at
September 24, 1998 and December 24,
1998, liquidation preference $1,000 per
share (Notes 2 and 13).................. -- -- --
Common stock, $.01 par value, 300,000
shares authorized; 114,029 issued and
outstanding at September 25, 1997,
229,507 issued and outstanding at
September 24, 1998 and 232,701 issued
and outstanding at December 24, 1998
(Note 12)............................... 1 2 2
Additional paid-in capital............... 5,396 68,115 69,925
Shareholder loans........................ -- (215) (937)
Accumulated deficit...................... (23,270) (28,598) (28,245)
-------- -------- --------
Total shareholders' equity
(deficit)........................... (17,873) 39,304 40,745
-------- -------- --------
Total liabilities and shareholders' equity
(deficit)................................. $142,799 $554,820 $568,560
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
December 25, December 24,
September 26, September 25, September 24, 1997 1998
1996 1997 1998 (Unaudited) (Unaudited)
------------- ------------- ------------- ------------ ------------
(52 weeks) (52 weeks) (52 weeks) (13 weeks) (13 weeks)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $188,091 $202,440 $460,798 $ 89,360 $139,390
Gasoline sales........ 192,737 220,166 509,958 103,022 171,789
Commissions........... 3,979 4,787 14,128 2,789 4,428
-------- -------- -------- -------- --------
Total revenues...... 384,807 427,393 984,884 195,171 315,607
-------- -------- -------- -------- --------
Cost of sales:
Merchandise........... 125,979 132,846 303,968 58,897 94,453
Gasoline.............. 167,610 197,268 447,565 90,909 148,774
-------- -------- -------- -------- --------
Total cost of
sales.............. 293,589 330,114 751,533 149,806 243,227
-------- -------- -------- -------- --------
Gross Profit............ 91,218 97,279 233,351 45,365 72,380
-------- -------- -------- -------- --------
Operating Expenses:
Store expenses........ 57,841 60,208 140,089 28,165 43,729
General and
administrative
expenses............. 17,127 16,796 32,761 7,172 9,968
Merger integration
costs (Note 2)....... -- -- 1,016 -- --
Restructuring charges
(Note 11)............ 2,184 -- -- -- --
Impairment of long-
lived assets (Note
10).................. 3,034 -- -- -- --
Depreciation and
amortization......... 9,158 9,504 27,642 5,151 8,190
-------- -------- -------- -------- --------
Total operating
expenses........... 89,344 86,508 201,508 40,488 61,887
-------- -------- -------- -------- --------
Income from operations.. 1,874 10,771 31,843 4,877 10,493
-------- -------- -------- -------- --------
Other Income (Expense):
Interest expense...... (11,992) (13,039) (28,946) (5,817) (8,912)
Miscellaneous......... (660) 1,293 1,776 439 (184)
-------- -------- -------- -------- --------
Total other
expense............ (12,652) (11,746) (27,170) (5,378) (9,096)
-------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary loss..... (10,778) (975) 4,673 (501) 1,397
Income tax benefits
(Note 6)............... 2,664 -- -- 412 (332)
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item..... (8,114) (975) 4,673 (89) 1,065
Extraordinary loss (Note
5)..................... -- -- (7,998) (6,800) --
-------- -------- -------- -------- --------
Net loss................ $ (8,114) $ (975) $ (3,325) $ (6,889) $ 1,065
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT)
(Unaudited as to Three Months Ended December 24, 1998 information)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------- ----------------------- Paid in
Shares Par Value Shares Par Value Capital
-------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, September 28,
1995................... -- $ -- 100,000 $ 1 $ 6,999
Net loss................ -- -- -- -- --
Issuances of common and
preferred stock........ 25,999 -- 14,029 -- (447)
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ------- ------- --------
Balance, September 26,
1996................... 25,999 -- 114,029 1 6,552
Net loss................ -- -- -- -- --
Net proceeds from stock
issue.................. 17,500 -- -- -- 15,953
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ------- ------- --------
Balance, September 25,
1997................... 43,499 -- 114,029 1 22,505
-------- -------- ------- ------- --------
Net loss................ -- -- -- -- --
Issuances of common
stock.................. -- -- 115,478 1 57,150
Contribution of Series A
Preferred Stock and
related dividends to
Additional Paid in
Capital................ (25,999) -- -- -- 5,569
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ------- ------- --------
Balance, September 24,
1998................... 17,500 -- 229,507 2 $ 85,224
Net income.............. -- -- -- -- --
Issuances of common
stock.................. -- -- 3,194 -- 1,810
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ------- ------- --------
Balance, December 24,
1998................... 17,500 $ -- 232,701 $ 2 $ 87,034
======== ======== ======= ======= ========
<CAPTION>
Total
Additional
Paid in Shareholder Accumulated
Other(1) capital Loans Deficit Total
-------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, September 28,
1995................... $(17,109) $(10,110) $ -- $(6,223) $(16,332)
Net loss................ -- -- -- (8,114) (8,114)
Issuances of common and
preferred stock........ -- (447) -- -- (447)
Dividends on preferred
stock.................. -- -- -- (2,654) (2,654)
-------- -------- ------- ------- --------
Balance, September 26,
1996................... (17,109) (10,557) -- (16,991) (27,547)
Net loss................ -- -- -- (975) (975)
Net proceeds from stock
issue.................. -- 15,953 -- -- 15,953
Dividends on preferred
stock.................. -- -- -- (5,304) (5,304)
-------- -------- ------- ------- --------
Balance, September 25,
1997................... (17,109) 5,396 -- (23,270) (17,873)
-------- -------- ------- ------- --------
Net loss................ -- -- -- (3,325) (3,325)
Issuances of common
stock.................. -- 57,150 (215) -- 56,936
Contribution of Series A
Preferred Stock and
related dividends to
Additional Paid in
Capital................ -- 5,569 -- -- 5,569
Dividends on preferred
stock.................. -- -- -- (2,003) (2,003)
-------- -------- ------- ------- --------
Balance, September 24.
1998................... (17,109) 68,115 (215) (28,598) $ 39,304
-------- -------- ------- ------- --------
Net income.............. -- -- -- 1,065 1,065
Issuances of common
stock.................. -- 1,810 (722) -- 1,088
Dividends on preferred
stock.................. -- -- -- (712) (712)
-------- -------- ------- ------- --------
Balance, December 24,
1998................... $(17,109) $ 69,925 $ (937) (28,245) 40,745
======== ======== ======= ======= ========
</TABLE>
- --------
(1) Represents excess of amount paid in 1987 leveraged buy-out over net book
value for "carry over" shareholders (Note 1).
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended Three Months Ended
----------------------------------------- -------------------------
December 25, December 24,
September 26, September 25, September 24, 1997 1998
1996 1997 1998 (Unaudited) (Unaudited)
------------- ------------- ------------- ------------ ------------
(52 weeks) (52 weeks) (52 weeks) (13 weeks) (13 weeks)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss................ $(8,114) $ (975) $ (3,325) $ (6,889) $ 1,065
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Extraordinary loss..... -- -- 2,006 2,006 --
Impairment of long-
lived assets.......... 3,034 -- -- -- --
Depreciation and
amortization.......... 9,158 9,504 27,642 5,151 8,190
Provision for deferred
income taxes.......... (1,558) 371 138 (1,851) --
(Gain) loss on sale of
property and
equipment............. 470 (1,054) 531 (268) 260
Provision for
environmental
expenses.............. 512 1,574 6,181 27 154
Provision for closed
stores................ 673 (11) 50 -- --
Write-off of property
held for sale......... 168 -- -- -- --
Changes in operating
assets and liabilities,
net of effects of
acquisitions:
Receivables............ (539) (527) (8,512) (1,227) (2,566)
Inventories............ (937) (2,273) (4,518) (951) (4,677)
Prepaid expenses....... 20 (429) 390 614 878
Other non-current
assets................ 432 (4,295) 5,111 3,574 36
Accounts payable....... 2,104 603 13,896 (335) (480)
Other current
liabilities and
accrued expenses...... (639) 3,393 2,241 (2,614) (6,172)
Employment
obligations........... (255) (698) (407) (92) (92)
Other noncurrent
liabilities........... 886 2,155 6,608 1,927 (106)
------- -------- --------- --------- --------
Net cash provided by
(used in) operating
activities............. 5,415 7,338 48,032 (928) (3,510)
------- -------- --------- --------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale.......... (4,050) (1,828) (5,203) -- (42)
Additions to property
and equipment.......... (7,084) (14,749) (43,153) (5,932) (9,540)
Proceeds from sale of
property held for
sale................... 2,462 1,345 4,807 2,025 524
Proceeds from sale of
property and
equipment.............. 1,468 2,315 7,648 409 91
Acquisitions of related
businesses, net of cash
acquired............... -- (12,162) (250,592) (135,605) (25,541)
------- -------- --------- --------- --------
Net cash used in
investing activities... (7,204) (25,079) (286,493) (139,103) (34,508)
------- -------- --------- --------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases... (347) (303) (1,424) (246) (323)
Proceeds from issuance
of capital leases...... -- -- 1,086 -- --
Principal repayments of
long-term debt......... (20) (26) (51,543) (51,004) (15)
Net proceeds from
issuance of long-term
debt................... -- 200 278,508 200,023 16,000
Proceeds from issuance
of short-term debt..... -- -- -- -- 2,000
Net proceeds from equity
issues................. -- 15,953 56,935 32,151 1,088
Other financing costs... (3,505) (74) (14,044) (12,418) (67)
------- -------- --------- --------- --------
Net cash provided by
(used in) financing
activities............. (3,872) 15,750 269,518 168,506 18,683
------- -------- --------- --------- --------
Net increase (decrease)
in cash................ (5,661) (1,991) 31,057 28,475 (19,335)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD.... 10,999 5,338 3,347 3,347 34,404
------- -------- --------- --------- --------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD ................ $ 5,338 $ 3,347 $ 34,404 $ 31,822 $ 15,069
======= ======== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended Three Months Ended
----------------------------------------- -----------------------------
December 25, December 24,
September 26, September 25, September 24, 1997 1998
1996 1997 1998 (unaudited) (unaudited)
------------- ------------- ------------- ------------ ------------
(13 weeks) (13 weeks)
<S> <C> <C> <C> <C> <C> <C>
Cash paid (refunded)
during the year:
Interest.............. $12,719 $12,863 $21,826 $6,165 $15,095
======= ======= ======= ====== =======
Taxes................. $ (403) $ (917) $ 784 $ (116) $ 285
======= ======= ======= ====== =======
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1997 and 1998, the Company entered into several business
acquisitions and divestitures (see Note 2--Business Acquisitions and Note 12--
Common Stock). In connection with the acquisitions, the holders of the
Company's Series A Preferred Stock contributed all outstanding shares of Series
A Preferred Stock and related accrued and unpaid dividends to the capital of
the Company, resulting in an increase in paid in capital of $5,569.
F-9
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as to December 25, 1997 and December 24, 1998 information)
NOTE 1--HISTORY OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
The consolidated financial statements include the accounts of The Pantry,
Inc. ("The Pantry" or the "Company") and its wholly-owned subsidiaries,
Sandhills, Inc., Lil' Champ Food Stores, Inc. ("Lil' Champ"), PH Holding
Corporation ("PH") and PH's wholly-owned subsidiaries, TC Capital Management,
Inc. and Pantry Properties, Inc. All intercompany transactions and balances
have been eliminated in consolidation. The Pantry owns and operates
approximately 1,151 convenience stores in North Carolina, South Carolina,
Florida, Tennessee, Kentucky, Indiana and Virginia.
Prior to November 2, 1993, The Pantry was a wholly-owned subsidiary of
Montrose Pantry Acquisition Corporation ("MPAC"), an entity formed to affect
the 1987 leveraged buy-out of The Pantry. On November 2, 1993, The Pantry was
merged into MPAC and MPAC's name was changed to The Pantry. MPAC had no assets
or operations other than its investment in The Pantry.
On November 30, 1995, Freeman Spogli & Co. Incorporated, through its
affiliates, FS Equity Partners III, L.P., a Delaware limited partnership ("FSEP
III") and FS Equity Partners International, L.P., a Delaware limited
partnership ("FSEP International," collectively with FSEP III, "the FS Group"),
acquired a 39.9% interest in the Company and Chase Manhattan Capital
Corporation ("Chase") acquired a 12.0% interest in the Company through a series
of transactions which included the purchase of common stock from certain
shareholders and the purchase of newly issued common and preferred stock. The
FS Group and Chase subsequently acquired the remaining interests of
approximately 37.0% and 11.1%, respectively, on August 19, 1996 through the
purchase of common and preferred stock from certain shareholders. On December
30, 1996, the FS Group purchased additional preferred stock of the Company.
On October 23, 1997, The Pantry acquired 100% of the outstanding common
stock of Lil' Champ from Docks U.S.A., Inc. (the "Lil' Champ Acquisition"). The
acquisition was funded by a combination of Senior Subordinated Notes and an
additional equity investment by the FS Group, Chase and a member of management.
Also during fiscal 1998, the Company acquired several smaller convenience store
chains, financed primarily from an additional equity issuance (see discussion
of 1998 acquisitions at Note 2--Business Acquisitions). As of September 24,
1998, the Company was owned 76.4% and 17.0% by the FS Group and Chase,
respectively.
Unaudited Financial Statements--In the opinion of management, the
unaudited consolidated balance sheet at December 24, 1998, and the unaudited
consolidated statements of operations, shareholders' equity, and cash flows for
the three months ended December 25, 1997 and December 24, 1998 include all
adjustments (which include only normal recurring adjustments) necessary to
present the financial position and results of operations and cash flows for the
periods then ended in accordance with generally accepted accounting principles.
Acquisition Accounting
MPAC acquired all of The Pantry's common stock in a leveraged buy-out as
of August 13, 1987. Certain individuals and entities which held an ownership
interest in The Pantry retained approximately 45% of ownership interest after
the August 13, 1987 transaction. A new basis of
F-10
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
accounting was established as a result of the acquisition to the extent of the
"new" equity interests (partial step-up). The original basis of accounting was
retained for those shareholders that retained an equity interest in MPAC after
the acquisition. To the extent of ownership change, the excess amount paid over
The Pantry's net book value was allocated to property and equipment,
inventories, deferred lease cost and goodwill based on relative fair market
values. To the extent that certain individuals and entities maintained their
equity interests, the excess amount paid over net book value was recorded as a
debit in shareholders' deficit ($17,109,000). Had there not been a partial
step-up, this amount would have been allocated to property and equipment,
inventories, deferred lease cost and goodwill based on relative fair market
values.
Long-Lived Assets
In 1996, the Company early-adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed of. Accordingly, long-lived assets are
reviewed for impairment on a store-by-store basis whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When an evaluation is required, the projected future undiscounted
cash flows attributable to each store are compared to the carrying value of the
long-lived assets (including an allocation of goodwill, if appropriate) of that
store to determine if a write-down to fair value is required (see Note 10--
Impairment of Long-Lived Assets).
Goodwill
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over periods of
20 to 40 years. The Company assesses the recoverability of this intangible
asset by determining whether amortization of the goodwill balance over its
remaining life can be recovered through estimated undiscounted future operating
results. Estimated future results are based on a trend of historical results
for the trailing three fiscal years and management's estimate of future results
which indicate that the goodwill balances will be recovered over the various
periods remaining to be benefited.
Deferred Lease Cost
Deferred lease cost represents the value assigned to favorable leases
acquired. Such amounts are being amortized over the remaining term of the
respective leases.
Property Held for Sale
Certain property is classified as current assets when management's intent
is to sell these assets in the ensuing fiscal year, and is recorded at the
lower of cost or fair value less cost to sell.
Deferred Financing Cost
Deferred financing cost represents expenses related to issuing the
Company's long-term debt (see Note 5--Long-Term Debt), obtaining its lines of
credit (see Note 5--Long-Term Debt), and obtaining lease financing (see Note
7--Leases). Such amounts are being amortized over the remaining term of the
respective financing.
F-11
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization is provided primarily by the
straight-line method over the estimated useful lives of the assets for
financial statement purposes and by accelerated methods for income tax
purposes.
Upon sale or retirement of depreciable assets, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is
recognized. Leased buildings capitalized in accordance with SFAS No. 13 are
recorded at the lesser of fair value or the discounted present value of future
lease payments at the inception of the leases. Amounts capitalized are
amortized over the estimated useful lives of the assets or terms of the leases
(generally 5 to 20 years) using the straight-line method.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out ("LIFO") method, except for gasoline inventories
maintained by Lil' Champ, for which cost is determined using the first-in,
first-out ("FIFO") method.
Income Taxes
All operations of The Pantry and its subsidiaries are included in a
consolidated Federal income tax return. Pursuant to SFAS No. 109, Accounting
for Income Taxes, The Pantry recognizes deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between financial
statement carrying amounts and the related tax bases.
Stock Based Compensation
The Company's stock option plan is accounted for in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"). The Company follows the disclosure requirements of SFAS
No. 123, Accounting for Stock Based Compensation.
Cash and Cash Equivalents
For purposes of the consolidated financial statements, cash and cash
equivalents include cash, deposits in interest bearing accounts, and other
financial instruments with original maturities of less than three months.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
F-12
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
Accounting Period
The Pantry operates on a 52 or 53 week fiscal year ending on the last
Thursday in September. For 1996, 1997 and 1998, each of the Company's fiscal
years contained 52 weeks.
Reclassifications
Certain amounts in the fiscal 1996 and 1997 consolidated financial
statements have been reclassified to conform to the current year presentation.
Newly Adopted Accounting Standards and Recently Issued Accounting Standards Not
Yet Adopted
In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 96-1, Environmental Remediation Liabilities. SOP 96-1 contains
authoritative guidance on specific accounting issues that are present in the
recognition, measurement, display and disclosure of environmental remediation
liabilities. The adoption of SOP 96-1 in fiscal 1998 did not have a material
effect on the Company's 1998 consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and loses) in a full set of general-purpose financial
statements. SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This Statement requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. This Statement is effective for
fiscal 1999. The adoption of SFAS No. 130 during the three months ended
December 24, 1998 did not have an impact on the Company's net income or
stockholder's equity as the Company had no differences between net loss and
comprehensive income.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(b) a hedge of the exposure to variable cash flows of a forecasted transaction,
or (c) a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. Under SFAS
No. 133, an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for
F-13
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk. SFAS No. 133 is
effective for the first quarter of fiscal 2000. Earlier application of all of
the provisions of SFAS No. 133 is encouraged. As of September 24, 1998, the
Company has not determined the effect of SFAS No. 133 on its consolidated
financial statements.
NOTE 2--BUSINESS ACQUISITIONS:
During fiscal 1998, the Company acquired the businesses described below,
which were accounted for by the purchase method of accounting:
. The October 23, 1997 acquisition of all of the common stock of Lil' Champ
Food Stores, Inc. ("Lil' Champ") for $136.4 million (net of cash
acquired), including the repayment of $10.7 million in outstanding
indebtedness of Lil' Champ. Lil' Champ is a leading operator of
convenience stores in Florida and the largest convenience store operator
in northern Florida. Lil' Champ's 479 stores are located primarily in
northern Florida and Georgia. The purchase price, the refinancing of
existing Lil' Champ debt, and the fees and expense of the Lil' Champ
acquisition were financed with the proceeds from the offering of $200.0
million, 10 1/4% Senior Subordinated Notes due 2007, cash on hand and the
purchase by existing stockholders and management of the Company of an
additional $32.4 million of the Company's capital stock.
. The March 19, 1998 acquisition of the operating assets of 23 convenience
stores in eastern North Carolina which was financed primarily from the
Acquisition Facility and cash on hand.
. The May 1998 acquisitions, in three separate transactions, of 12
convenience stores in the Gainesville, Florida area which were financed
primarily from the Acquisition Facility and cash on hand.
. The July 2, 1998 acquisition of certain assets of Quick Stop Food Mart,
Inc. ("Quick Stop") including, but not limited to, seventy-five (75)
convenience stores located throughout North Carolina and South Carolina
(the "Quick Stop Acquisition"). Total consideration paid was
approximately $56.0 million.
. The July 16, 1998 acquisition of certain assets of Stallings Oil Company,
Inc. ("Stallings") including, but not limited to, forty-one (41)
convenience stores located throughout North Carolina and Virginia (the
"Stallings Acquisition"). Total consideration paid was approximately
$29.3 million. The Stallings and Quick Stop acquisitions were financed by
proceeds of $50.0 million from the Acquisition Facility, cash on hand,
and an equity investment of $25.0 million in the aggregate by existing
shareholders of the Company.
Subsequent to September 24, 1998 in two separate transactions, the
Company acquired certain operating assets including 32 convenience stores
located in North Carolina and South Carolina. These transactions were funded
from borrowings under the Company's Credit Facility and cash on hand.
(unaudited)
F-14
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The purchase prices have been allocated to the assets purchased and the
liabilities assumed based upon the fair values on the dates of the
acquisitions, as follows (amounts in thousands):
<TABLE>
<CAPTION>
Stallings,
Quick Stop
Lil' Champ and Others Total
---------- ---------- --------
<S> <C> <C> <C>
ASSETS ACQUIRED:
Receivables, net............................... $ 1,617 $ 2,100 $ 3,717
Inventories.................................... 20,113 8,758 28,871
Deferred income taxes.......................... 2,992 -- 2,992
Prepaid expenses and other current assets...... 1,402 -- 1,402
Property and equipment......................... 155,382 48,682 204,064
Other noncurrent assets........................ 3,696 -- 3,696
-------- -------- --------
Total assets acquired.......................... 185,202 59,540 244,742
-------- -------- --------
LIABILITIES ASSUMED:
Short-term capital lease obligations........... 1,027 -- 1,027
Accounts payable--trade........................ 10,870 228 11,098
Other liabilities and accrued expenses......... 36,093 -- 36,093
Long-term capital lease obligations............ 11,716 -- 11,716
Environmental remediation liabilities.......... 3,150 -- 3,150
Noncurrent deferred income taxes............... 20,530 -- 20,530
Other noncurrent liabilities................... 8,070 996 9,066
Total liabilities assumed...................... 91,456 1,224 92,680
-------- -------- --------
Net tangible assets acquired................... 93,746 58,316 152,062
Goodwill....................................... 42,622 55,908 98,530
-------- -------- --------
Total consideration paid, including direct
costs, net of cash acquired................... $136,368 $114,224 $250,592
======== ======== ========
</TABLE>
The Stallings and Quick Stop purchase price allocations are preliminary
estimates, based on available information and certain assumptions management
believes are reasonable. Accordingly, the purchase price allocations are
subject to finalization. The purchase price allocations for other 1998
acquisitions have been finalized. The excess of the purchase prices over fair
values of the net assets acquired for all 1998 acquisitions, $98,530,000 has
been recorded as goodwill, which is being amortized on a straight-line basis
over 30 years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and acquired businesses as if
the transactions occurred at the beginning of the fiscal year for each of the
periods presented (amounts in thousands):
<TABLE>
<CAPTION>
Quarter Ended
-------------------------
December 25, December 24,
1997 1998 1997 1998
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenues................ 1,246,596 1,235,520 325,093 319,885
Income (loss) before
extraordinary loss........... (9,684) 4,278 1,390 1,132
Net loss...................... (9,684) (3,720) (5,410) 1,132
</TABLE>
In management's opinion, the unaudited pro forma information is not
necessarily indicative of actual results that would have occurred had the
acquisitions been consummated at the beginning of fiscal 1997 or fiscal 1998,
or of future operations of the combined companies.
F-15
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
In connection with the Lil' Champ acquisition, the Company recorded an
integration charge of approximately $1.0 million for costs of combining its
existing business with the acquired business of Lil' Champ. The charge includes
$0.3 million for relocation costs and $0.7 million for consolidation and
related expenses. All amounts had been expended as of September 24, 1998.
During fiscal 1997, the Company acquired 35 stores, acquired the gasoline
operations at 23 third-party locations and disposed of 21 stores. The net
assets acquired and liabilities assumed are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
September 25,
1997
-------------
<S> <C>
Inventories................................................ $ 1,665
Property and equipment..................................... 6,374
Other noncurrent assets.................................... 9
Accrued expenses........................................... (43)
-------
8,005
Goodwill................................................... 4,157
-------
Total consideration, including direct costs................ $12,162
=======
</TABLE>
NOTE 3--INVENTORIES:
At September 25, 1997 and September 24, 1998, inventories consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Inventories at FIFO cost:
Merchandise.......................................... $16,877 41,967
Gasoline............................................. 4,969 11,510
------- -------
21,846 53,477
Less adjustment to LIFO cost:
Merchandise.......................................... (4,203) (5,668)
Gasoline............................................. (482) --
------- -------
Inventories at LIFO cost............................... $17,161 $47,809
======= =======
</TABLE>
Total inventories at September 24, 1998 include $5,213,000 of gasoline
inventories held by Lil' Champ that are recorded under the FIFO method.
The positive effect on cost of sales of LIFO inventory liquidations was
$68,000, $4,141 and $482,000 for fiscal years 1996, 1997 and 1998,
respectively.
F-16
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
NOTE 4--PROPERTY AND EQUIPMENT:
At September 25, 1997 and September 24, 1998, property and equipment
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Land..................................................... $ 16,109 62,183
Buildings................................................ 29,928 85,278
Gasoline equipment....................................... 50,362 95,729
Other equipment, furniture and fixtures.................. 26,657 96,874
Leasehold improvements................................... 10,743 28,286
Automobiles.............................................. 134 516
Construction in progress................................. 1,471 9,443
-------- --------
135,404 378,309
Less--accumulated depreciation and amortization.......... (57,418) (77,331)
-------- --------
$ 77,986 $300,978
======== ========
</TABLE>
NOTE 5--LONG-TERM DEBT:
At September 25, 1997 and September 24, 1998, long-term debt consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Notes payable ("Senior Notes"); due November 15, 2000;
interest payable semi-annually at 12%.................. $ 99,995 $ 48,995
Notes payable ("Senior Subordinated Notes"); due October
15, 2007; interest payable semi-annually at 10.25%..... -- 200,000
Note payable; secured by certain property; due monthly
through 2004; interest at 10%.......................... 153 136
Notes payable ("Acquisition Facility"); interest payable
monthly at LIBOR (5.85% at September 24, 1998) plus
2.5%; principal due in quarterly installments through
October 31, 2002....................................... -- 78,000
Note payable; secured by certain property; due monthly
through 2005; interest at 8%........................... 190 173
-------- --------
Other notes payable; due monthly through 1999; interest
at 9%.................................................. -- 10
100,338 327,314
Less--current maturities................................ (33) (45)
-------- --------
$100,305 $327,269
======== ========
</TABLE>
While the Senior Notes are unsecured, the terms of the Senior Notes
contain certain covenants restricting (i) the use of proceeds from the
offering; (ii) the placing of liens on properties; (iii) certain "restricted
payments" as defined in the agreement; (iv) the incurrance of additional debt;
(v) the sale of assets; (vi) any merger, consolidation or change in control;
(vii) lines of business and (viii) transactions with affiliates. In addition,
the Indenture requires certain positive covenants including the maintenance of
a "Consolidated Fixed Charge Ratio" (the "Coverage Ratio") of greater than 1.69
to 1.0.
F-17
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
On October 23, 1997 in connection with the Lil' Champ Acquisition, the
Company completed the offering of the Senior Subordinated Notes and, in a
related transaction, completed the Tender Offer and Consent Solicitation with
respect to the Senior Notes. The Tender Offer resulted in the Company's
purchase of $51 million in principal amount of the Senior Notes at a purchase
price of 110% of the aggregate principal amount plus accrued and unpaid
interest and other related fees. In connection with this repurchase, the
Company incurred an extraordinary loss of approximately $8.0 million related to
costs of the Tender Offer and Consent Solicitation and write-off of deferred
financing costs.
The Senior Subordinated Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, as to the payment of principal, premium,
if any, and interest, jointly and severally, by all Guarantors (see Note 15--
Supplemental Guarantors Information). The Senior Subordinated Notes contain
covenants that, among other things, restrict the ability of the Company and any
restricted subsidiary to: (i) incur additional indebtedness; (ii) pay dividends
or make distributions; (iii) issue stock of subsidiaries; (iv) make certain
investments; (v) repurchase stock; (vi) create liens; (vii) enter into
transactions with affiliates; (viii) enter into sale-leaseback transactions;
(ix) merge or consolidate the Company or any of its subsidiaries; and (x)
transfer and sell assets.
Historically, The Pantry had two bank lines of credit with borrowing
capacity limits of $10.0 million and $15.0 million, respectively. The $10.0
million line of credit bore interest at prime (8.50% at September 25, 1997)
plus 0.5%.
On October 23, 1997 in connection with the Lil' Champ Acquisition, the
Company entered into the New Credit Facility replacing the $10.0 million and
$15.0 million bank lines discussed above. Originally, the New Credit Facility
consisted of a $45.0 million Revolving Credit Facility and a $30 million
Acquisition Facility.
Under the terms of the New Credit Facility, the Acquisition Facility is
available to finance acquisition of related businesses with certain
restrictions (see Note 2--Business Acquisitions). The New Credit Facility
contains covenants restricting the ability of the Company and any of its
subsidiaries to among other things: (i) incur additional indebtedness; (ii)
declare dividends or redeem or repurchase capital stock; (iii) prepay, redeem
or purchase debt; (iv) incur liens; (v) make loans and investments; (vi) make
capital expenditures; (vii) engage in mergers, acquisitions or asset sales; and
(viii) engage in transactions with affiliates. The Company is also required to
comply with financial covenants with respect to (a) a minimum coverage ratio,
(b) a minimum pro forma EBITDA, (c) a maximum pro forma leverage ratio, and (d)
a maximum capital expenditure allowance.
During the year, the New Credit Facility was amended to increase the
amount available to the Company for acquisitions from $30.0 million to $85.0
million. In addition, amendments were made to certain of the Company's
financial covenants under the New Credit Facility, including (a) the minimum
coverage ratio, (b) the minimum pro forma EBITDA, (c) the maximum pro forma
leverage ratio, and (d) the maximum capital expenditure allowance. As of
September 24, 1998, there was $78,000,000 outstanding under the acquisition
line. The Company had outstanding letters of credit of $13,545,000 at September
24, 1998, issued under the Revolving Credit Facility.
F-18
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
As of September 24, 1998, the Company was in compliance with all
covenants and restrictions relating to all its outstanding borrowings.
As of September 24, 1998, substantially all of the Company's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
See Unaudited Note 16--Subsequent Events.
NOTE 6--INCOME TAXES:
The components of income tax expense (benefit) are summarized below (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ----- -----
<S> <C> <C> <C>
Current:
Federal............................................. $(1,111) $ 163 $ --
State............................................... 5 (534) 138
------- ----- -----
(1,106) (371) 138
------- ----- -----
Deferred:
Federal............................................. (1,074) 371 --
State............................................... (484) -- (138)
------- ----- -----
(1,558) 371 (138)
------- ----- -----
$(2,664) $ -- $ --
======= ===== =====
</TABLE>
As of September 25, 1997 and September 24, 1998, deferred tax
liabilities (assets) are comprised of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Depreciation.............................................. $ 6,513 $ 32,921
Deferred lease cost....................................... 27 17
Inventory................................................. 940 3,417
Other..................................................... 469 1,672
------- --------
Gross deferred tax liabilities............................ 7,949 38,027
------- --------
Capital lease obligations................................. (321) (1,207)
Allowance for doubtful accounts........................... (58) (108)
Environmental expenses.................................... (500) (2,114)
Accrued insurance reserves................................ (1,607) (4,482)
Exit and employee termination costs....................... -- (1,860)
Accrued compensation...................................... (667) --
Other..................................................... (616) (3,154)
------- --------
Gross deferred tax assets................................. (3,769) (12,925)
Net operating loss carryforwards.......................... (2,622) (6,836)
General business credits.................................. (1,846) (1,832)
AMT Credits............................................... (2,696) (2,492)
Deferred tax assets valuation allowance................... 1,686 2,436
------- --------
$(1,298) $ 16,378
======= ========
</TABLE>
F-19
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
As of September 25, 1997 and September 24, 1998, net current deferred
income tax assets totaled $1,142,000 and $3,988,000, respectively, and net
noncurrent deferred income tax assets (liabilities) totaled $156,000 and
$(20,366,000), respectively.
Reconciliations of income taxes at the Federal statutory rate (34%) to
actual taxes provided are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ----- -------
<S> <C> <C> <C>
Tax benefit at Federal statutory rate............. $(3,665) $(332) $(1,131)
Tax benefit at state rate, net of Federal income
tax benefit...................................... (316) (325) (153)
Permanent differences:
Amortization of goodwill........................ 1,127 235 474
Other........................................... 14 248 190
Tax benefit from creation of general business
credits.......................................... -- (151) --
Valuation allowance............................... 176 325 620
------- ----- -------
Net income tax benefit............................ $(2,664) $ -- $ --
======= ===== =======
</TABLE>
As of September 24, 1998 The Pantry had net operating loss carryforwards,
general business credits and AMT credits which can be used to offset future
Federal income taxes. The benefit of these carryforwards is recognized, net of
a valuation allowance, as a reduction in the Company's net deferred tax asset.
Loss carryforwards as of September 24, 1998 have the following expiration dates
(in thousands):
<TABLE>
<CAPTION>
Federal State
------- -------
<S> <C> <C>
2009........................................................ $ -- $ 3,158
2010........................................................ -- 2,974
2011........................................................ -- 10,919
2012........................................................ 2,332 5,101
2013........................................................ -- 12,820
2018........................................................ 12,022 --
------- -------
Total loss carryforwards.................................... $14,354 $34,972
======= =======
</TABLE>
The valuation allowance increased $176,000 and $325,000 in 1996 and 1997,
respectively, to provide for state net economic loss carryforwards. The
valuation allowance increased $620,000 in 1998, which was primarily
attributable to federal net operating losses, net of a decrease for state tax
net economic loss carryovers (as discussed below).
The State of North Carolina and the State of Tennessee have assessed
Sandhills, Inc., a subsidiary of the Company, with additional taxes plus
penalties and accrued interest totaling approximately $5 million, for the
periods February 1, 1992 to September 26, 1996. The Company reached a
settlement with the State of North Carolina, which is pending final approval by
the State. Under the settlement, the Company will reduce State net economic
loss carryforwards and pay a de minimis amount of additional tax. The expected
settlement is reflected in the financial statements as a reduction to State net
economic losses and a reduction of deferred tax assets which is fully offset by
a corresponding reduction to the valuation allowance. The Company is contesting
the Tennessee
F-20
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
assessment and believes that, in the event of a mutual settlement, the
assessment amount and related penalties would be substantially reduced. Based
on this, the Company believes the outcome of the audits will not have a
material adverse effect on the Company's financial condition or financial
statements.
NOTE 7--LEASES:
The Pantry leases store buildings, office facilities and store equipment
under both capital and operating leases. The asset balances related to capital
leases at September 25, 1997, and September 24, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Buildings................................................ $ 2,196 $12,344
Less--accumulated amortization........................... (1,649) (2,142)
------- -------
$ 547 $10,202
======= =======
</TABLE>
Amortization expense related to capitalized leased assets was $261,000,
$185,000, and $1,249,000 for fiscal 1996, 1997, and 1998 respectively.
Future minimum lease payments as of September 24, 1998, for capital
leases and operating leases that have initial or remaining terms in excess of
one year are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Fiscal Year Leases Leases
----------- ------- ---------
<S> <C> <C>
1999..................................................... $ 2,507 $ 21,462
2000..................................................... 2,396 20,179
2001..................................................... 2,309 18,203
2002..................................................... 2,307 16,954
2003..................................................... 2,307 15,817
Thereafter............................................... 5,022 38,083
------- --------
Net minimum lease payments............................... 16,848 $130,698
========
Amount representing interest (8% to 20%)................. 3,479
-------
Present value of net minimum lease payments.............. 13,369
Less--current maturities................................. 1,240
-------
$12,129
=======
</TABLE>
Rental expense for operating leases was approximately $8,126,000,
$9,618,000 and $23,758,000 for fiscal years 1996, 1997 and 1998, respectively.
NOTE 8--COMMITMENTS AND CONTINGENCIES:
As of September 24, 1998, the Company was contingently liable for
outstanding letters of credit in the amount of $13,545,000 related primarily to
several areas in which the Company is self-insured. The letters of credit are
not to be drawn against unless the Company defaults on the timely payment of
related liabilities.
F-21
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry is involved in certain legal actions arising in the normal
course of business. In the opinion of management, based on a review of such
legal proceedings, the ultimate outcome of these actions will not have a
material effect on the consolidated financial statements.
Environmental Liabilities and Contingencies
The Company is subject to various federal, state and local environmental
laws and regulations governing underground petroleum storage tanks ("USTs")
that require the Company to make certain expenditures for compliance. In
particular, at the federal level, the Resource Conservation and Recovery Act,
as amended, requires the EPA to establish a comprehensive regulatory program
for the detection, prevention, and cleanup of leaking USTs. Regulations enacted
by the EPA in 1988 established requirements for (i) installing UST systems;
(ii) upgrading UST systems; (iii) taking corrective action in response to
releases; (iv) closing UST systems; (v) keeping appropriate records; and (vi)
maintaining evidence of financial responsibility for taking corrective action
and compensating third parties for bodily injury and property damage resulting
from releases. These regulations permit states to develop, administer and
enforce their own regulatory programs, incorporating requirements which are at
least as stringent as the federal standards. The Florida rules for 1998
upgrades are more stringent than the 1998 EPA regulations. The Pantry
facilities in Florida all meet or exceed such rules. The following is an
overview of the requirements imposed by these regulations:
. Leak Detection: The EPA and states' release detection regulations were
phased in based on the age of the USTs. All USTs were required to comply
with leak detection requirements by December 22, 1993. The Company
utilizes several approved leak detection methods for all Company-owned
UST systems. Daily and monthly inventory reconciliations are completed at
the store level and at the corporate support center. The daily and
monthly reconciliation data is also analyzed using statistical inventory
reconciliation which compares the reported volume of gasoline purchased
and sold with the capacity of each UST system and highlights
discrepancies. The Company believes it is in full or substantial
compliance with the leak detection requirements applicable to USTs.
. Corrosion Protection: The 1988 EPA regulations require that all UST
systems have corrosion protection by December 22, 1998. All of the
Company's USTs have been protected from corrosion either through the
installation of fiberglass tanks or upgrading steel USTs with interior
fiberglass lining and the installation of cathodic protection.
. Overfill/Spill Prevention: The 1988 EPA regulations require that all
sites have overfill/spill prevention devices by December 22, 1998. The
Company has installed spill/overfill equipment on all Company-owned UST
systems to meet these regulations.
In addition to the technical standards, The Pantry is required by federal
and state regulations to maintain evidence of financial responsibility for
taking corrective action and compensating third parties in the event of a
release from its UST systems. In order to comply with this requirement, The
Pantry maintains letters of credit in the aggregate amount of $2.3 million
issued by a commercial bank in favor of state environmental enforcement
agencies in the states of North Carolina, Virginia, South Carolina, Tennessee,
Indiana and Kentucky and relies on reimbursements from applicable state trust
funds. In Florida, the Company meets such financial responsibility requirements
by state trust
F-22
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
fund coverage through December 31, 1998 and will meet such requirements
thereafter through private commercial liability insurance and by qualified self
insurance. The Company has sold all of its Georgia stores but has retained
responsibility for pre-closing environmental remediation at certain locations.
The costs of such remediation and third party claims should be covered by the
state trust fund, subject to applicable deductibles and caps on reimbursements.
All states in which The Pantry operates or has operated UST systems have
established trust funds for the sharing, recovering, and reimbursing of certain
cleanup costs and liabilities incurred as a result of releases from UST
systems. These trust funds, which essentially provide insurance coverage for
the cleanup of environmental damages caused by the operation of UST systems,
are funded by a UST registration fee and a tax on the wholesale purchase of
motor fuels within each state. The Company has paid UST registration fees and
gasoline taxes to each state where it operates to participate in these programs
and has filed claims and received reimbursement in North Carolina, South
Carolina, Kentucky, Indiana, Florida, Georgia, and Tennessee. The coverage
afforded by each state fund varies but generally provides up to $1.0 million
per site for the cleanup of environmental contamination, and most provide
coverage for third party liabilities. Costs for which the Company does not
receive reimbursement include but are not limited to: (i) the per-site
deductible; (ii) costs incurred in connection with releases occurring or
reported to trust funds prior to their inception; (iii) removal and disposal of
UST systems; and (iv) costs incurred in connection with sites otherwise
ineligible for reimbursement from the trust funds. The trust funds require the
Company to pay deductibles ranging from $10,000 to $100,000 per occurrence
depending on the upgrade status of its UST system, the date the release is
discovered/reported and the type of cost for which reimbursement is sought. The
Florida trust fund will not cover releases first reported after December 31,
1998. The Company will obtain private coverage for remediation and third party
claims arising out of releases reported after December 31, 1998. In addition to
material amounts to be spent by the Company, a substantial amount will be
expended for remediation on behalf of the Company by state trust funds
established in the Company's operating areas or other responsible third parties
(including insurers). To the extent such third parties do not pay for
remediation as anticipated by the Company, the Company will be obligated to
make such payments, which could materially adversely affect the Company's
financial condition and results of operations. Reimbursement from state trust
funds will be dependent upon the maintenance and continued solvency of the
various funds.
Environmental reserves of $17.1 million and $17.3 million (unaudited) as
of September 24, 1998 and December 24, 1998, respectively, represent estimates
for future expenditures for remediation, tank removal and litigation associated
with all known contaminated sites as a result of releases (e.g., overfills,
spills and underground storage tank releases) and are based on current
regulations, historical results and certain other factors. The Company
anticipates that it will be reimbursed for a portion of these expenditures from
state insurance funds and private insurance. As of September 24, 1998, and
December 24, 1998, these anticipated reimbursements of $13.2 million and $12.8
million (unaudited), respectively, are recorded as long-term environmental
receivables. In Florida, remediation of such contamination will be performed by
the state and substantially all of the costs will be paid by the state trust
fund. The Company will perform remediation in other states through independent
contractor firms engaged by the Company. For certain sites the trust fund does
not cover a deductible or has a copay which may be less than the cost of such
remediation.
F-23
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Company has reserved $500,000 to cover third party claims that are
not covered by state trust funds or by private insurance. This reserve is based
on management's best estimate of losses that may be incurred over the next
several years based on, among other things, the fact that remediation standards
and expectations are evolving, the legal principles regarding the right to and
proper measure of damages for diminution in value, lost profit, lost
opportunity and damage to soil and subsurface water that may be owned by the
state, the absence of controlling authority of the limitation period, if any,
that may be applicable and the possibility that remediation (which will be
funded by state trust funds, private insurance or is included within the
reserve described above for remediation) may be sufficient.
Several of the locations identified as contaminated are being cleaned up
by third parties who have indemnified The Pantry as to responsibility for clean
up matters. Additionally, The Pantry is awaiting closure notices on several
other locations which will release the Company from responsibility related to
known contamination at those sites.
NOTE 9--BENEFIT PLANS:
The Pantry sponsors a 401(k) Employee Retirement Savings Plan for
eligible employees. Employees must be at least nineteen years of age and have
one year of service with at least 1,000 hours worked to be eligible to
participate in the plan. Employees may contribute up to 15% of their annual
compensation, and contributions are matched by The Pantry on the basis of 50%
of the first 5% contributed. Matching contribution expense was $330,000,
$305,000 and $396,000 for fiscal years 1996, 1997 and 1998, respectively.
NOTE 10--IMPAIRMENT OF LONG-LIVED ASSETS:
In fiscal year 1996, the Company early-adopted SFAS No. 121, Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to be
Disposed of. SFAS No. 121 establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived and certain identifiable
intangible assets to be disposed of.
Pursuant to SFAS No. 121, the Company evaluated its long-lived assets for
impairment on a store-by-store basis by comparing the sum of the projected
future undiscounted cash flows attributable to each store to the carrying value
of the long-lived assets (including an allocation of goodwill, if appropriate)
of that store. Projected future cash flows for each store were estimated for a
period approximating the remaining lives of that store's long-lived assets,
based on earnings history, lease expiration dates and renewal periods, market
conditions and assumptions reflected in internal operating plans and
strategies. Based on this evaluation, the Company determined that certain long-
lived assets were impaired and recorded an impairment loss based on the
difference between the carrying value and the fair value of the assets. Fair
value was determined based on an evaluation of each property's value. The
impairment consists of the following assets (in thousands):
<TABLE>
<S> <C>
Property, plant and equipment.................................... $ 415
Goodwill......................................................... 2,619
------
Total............................................................ $3,034
======
</TABLE>
F-24
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
NOTE 11--RESTRUCTURING CHARGES:
In fiscal year 1996, the Company recorded restructuring charges of
$2,184,000 pursuant to a formal plan to restructure its corporate offices. The
costs include $1,484,000 for employee severance, $350,000 for employee moving
costs, and $350,000 for legal costs related to the ownership litigation.
Substantially all of these amounts were expended during fiscal 1996.
NOTE 12--COMMON STOCK
In connection with the Lil' Champ Acquisition and related transactions,
the Company issued 72,000 shares of Common Stock, par value $0.01, to certain
existing stockholders and a member of management for $32.4 million. Prior to
the purchase of Common Stock, holders of the Company's Series A Preferred
Stock, par value $0.01 per share, contributed all outstanding shares of Series
A Preferred Stock and related accrued and unpaid dividends to the capital of
the Company (together with the issuance of Common Stock, "the Equity
Investment"). As a result, preferred stock and accrued dividends were reduced
by $260 and $5,569,000 respectively, and additional paid in capital was
increased by $5,569,260.
On July 2, 1998 and in connection with two acquisitions completed in July
1998, the Company issued 43,478 shares of Common Stock, par value $0.01 per
share, to certain existing stockholders for an aggregate purchase price of
$25.0 million.
NOTE 13--PREFERRED STOCK:
As of September 24, 1998, preferred stock consists of 150,000 authorized
shares. As discussed in Note 12--Common Stock, holders of the Company's 25,999
shares of Series A contributed all outstanding shares of Series A and related
accrued and unpaid dividends to the Capital of the Company in connection with
the Lil' Champ acquisition. Issued and outstanding shares at September 24, 1998
include 17,500 shares designated as Series B, all of which is held by FS Group.
The Company is limited from paying dividends under the terms and conditions of
the Senior Notes Indenture, Senior Subordinated Notes Indenture and the
Certificate of Designation of Preferences of the Series B Preferred Stock of
The Pantry, Inc. ("Series B Preferred Stock Certificate").
In addition, the Series B Preferred Stock Certificate, without consent of
the holders of a majority of the outstanding shares of Series B Preferred
Stock, voting separately as a single class, restricts the following: (i) the
issuance of any securities with equal or superior rights with respect to
dividends or liquidation preferences, (ii) the repurchase of any shares of,
making of any dividend or distribution to, or any reclassification with respect
to, any of the Company's outstanding shares of capital stock, (iii) amendment
or modification of the Company's Article of Incorporation or Bylaws so as to
adversely affect the relative rights, preferences, qualification, limitations
or restrictions or the Series B Preferred Stock and (iv) amendment of the
related paragraph regarding Restrictions and Limitations in the Series B
Preferred Stock Certificate.
At all meetings of the stockholders of the Company and in the case of any
actions of stockholders in lieu of a meeting date, the holders of the Series B
Preferred Stock shall be entitled to ten (10) votes per share and, except as
required by Delaware law, shall vote together with the holders
F-25
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
of Common Stock as a single class. The holders of Series B Preferred Stock are
entitled to cumulative dividends from the Company on each share of Series B
Preferred Stock at a quarterly rate equal to $32.5 per share plus an amount
determined by applying a thirteen percent (13%) annual rate compounded
quarterly to any accrued but unpaid dividend. Except as limited by both the
Senior Notes and Senior Subordinated Notes Indentures, such dividends on the
outstanding shares of Series B Preferred Stock shall be payable at such
intervals as the Board of Directors of the Company may from time to time
determine and may be paid in cash or by issuing additional shares, including
fractional shares of Series B Preferred Stock, at the rate of one share for
each $1,000 of dividends outstanding. As of September 24, 1998, substantially
all of the Company's and its subsidiaries' net assets are restricted as to
payment of dividends and other distributions.
Upon the dissolution, liquidation or winding up of the Company, whether
voluntary or involuntary, the holders of outstanding shares of Series B
Preferred Stock, shall be entitled to be paid out of the assets of the Company
available for distribution to its Stockholders, whether such assets are
capital, surplus or earnings, before any payment or declaration and setting
apart for payment of any amount shall be made in respect of the outstanding
shares of any other class or series of the Company's capital stock, including
without limitation, shares of Common Stock, an amount equal to $1,000 per share
of Series B Preferred Stock then outstanding, plus all accrued but unpaid
dividends thereon to the date fixed for liquidation (whether or not declared),
and no more. If upon the dissolution, liquidation or winding up of the Company,
whether voluntary or involuntary, the assets to be distributed among the
holders of outstanding shares of Series B Preferred Stock shall be insufficient
to permit the payment to such stockholders of the full preferential amounts
aforesaid, then the entire assets of the Company are to be distributed ratably
among the holders of outstanding shares of Series B Preferred Stock based on
the full preferential amounts for the number of outstanding shares of Series B
Preferred Stock held by each holder.
NOTE 14--STOCK OPTIONS AND OTHER EQUITY INSTRUMENTS:
On January 1, 1998, the Company adopted an incentive and non-qualified
1998 Stock Option Plan (the "1998 Plan"). Pursuant to the provisions of the
1998 Plan, options may be granted to officers, key employees and consultants of
the Company or any of its subsidiaries and certain members of the Board of
Directors ("BOD") to purchase up to 25,000 shares of the Company's Common
Stock. The 1998 Plan is administered by the BOD or a committee of the BOD.
Options are granted at prices determined by the BOD and may be exercisable in
one or more installments. Additionally, the terms and conditions of awards
under the 1998 Plan may differ from one grant to another. Under the 1998 Plan,
incentive stock options may only be granted to employees with an exercise price
at least equal to the fair market value of the related common stock on the date
the option is granted. During 1998, options to acquire 11,311 shares of Common
Stock were granted under the Plan with exercise prices ranging from $450-$575
per share (weighted-average exercise price of $479 per share).
F-26
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The following table summarizes information about stock options
outstanding at September 24, 1998:
<TABLE>
<CAPTION>
Number
Outstanding at Weighted-Average
Range of September 24, Remaining Weighted-Average
Exercise Prices 1998 Contractual Life Exercise Price
--------------- -------------- ---------------- ----------------
<S> <C> <C> <C>
$450........................ 8,701 9 $450
$575........................ 2,610 9 $575
------
Total..................... 11,311
======
</TABLE>
All options granted in 1998 vest over a three-year period, with one-third
of each grant vesting on the anniversary of the initial grant. None of the
options outstanding at September 24, 1998 had vested as of that date. All stock
options are granted at estimated fair market value of the common stock at the
grant date. Had compensation cost for the 1998 Plan been determined consistent
with SFAS 123, the Company's pro-forma net loss for 1998 would have been
approximately $3,395,000. The fair value of each option grant is estimated on
the date of grant using the minimum value method with the following
assumptions:
<TABLE>
<CAPTION>
1998
-----
<S> <C>
Weighted-average grant date fair value................................ $ 479
Weighted-average expected lives (years)............................... 2.33
Risk-free interest rate............................................... 5.5%
Dividend yield........................................................ 0.00%
</TABLE>
On August 31, 1998, the Company adopted the 1998 Stock Subscription Plan
("1998 Subscription Plan"). The 1998 Subscription Plan allows the Company to
offer to certain employees the right to purchase shares of the Company's Common
Stock at a purchase price equal to the fair market value on the date of
purchase. A purchaser may not sell, transfer or pledge their shares (a) prior
to the first anniversary of the date on which the purchaser acquires the
shares, or (b) after the first anniversary, except in compliance with the
provisions of the subscription agreement (and a pledge agreement if part of the
consideration for such shares includes a secured promissory note). In the event
that the purchaser's employment with the Company and all of its subsidiaries
terminates for any reason, the Company shall have the option to repurchase from
the purchaser all or any portion of the shares acquired by the purchaser under
the subscription agreement for a period of six months after the effective date
of such termination (the "Repurchase Option"). The Repurchase Option shall
terminate upon the later to occur of (a) the first anniversary of the date the
shares were originally acquired, and (b), an initial public offering of common
stock by the Company registered under the Securities Act (other than an
offering registered on Form S-4 or Form S-8) resulting in gross proceeds to the
Company in excess of $25 million. After the first anniversary of the date the
shares were originally acquired by the purchaser, the purchaser may transfer
the shares for cash (only) to a third party, subject to the Company's right of
first refusal with respect to such sale. Finally, under certain circumstances,
a purchaser of shares under the 1998 Subscription Plan may be forced to sell
all or part of the shares purchased under such plan if any members of the FS
Group find a third-party buyer for all or part of the shares of Company Common
Stock held by the FS Group. No issuances of shares under the 1998 Subscription
Plan had been made at September 24, 1998. During the three months ended
December 24, 1998, 3,184 shares were issued under the 1998 Subscription Plan.
F-27
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
In December 1996, in connection with their purchase of $17,500 shares of
Series B Preferred Stock, the FS Group acquired warrants to purchase 46,000
shares of common stock. The warrants are exercisable at $380 per share until
December 30, 2006, and contain adjustment provisions in the event the Company
declares dividends or distributions, makes stock splits, or engages in mergers,
reorganizations or reclassifications. None of these warrants had been exercised
at December 24, 1998.
NOTE 15--SUPPLEMENTAL GUARANTORS INFORMATION:
As discussed in Note 2--Business Acquisitions, on October 23, 1997, the
Company purchased all of the capital stock of Lil' Champ, Sandhills, Inc., Lil'
Champ and all future direct and indirect restricted subsidiaries (together the
"Guarantors"), jointly and severally, unconditionally guaranteed, on an
unsecured senior subordinated basis, the full and prompt performance of The
Pantry's obligations under the Senior Subordinated Notes and the related
Indenture, the issuance of which occurred on October 23, 1997. The Senior
Subordinated Notes were exchanged for new notes in an exchange offer which was
registered under the Securities Act on a registration statement on Form S-4
which became effective on January 8, 1998. The form and terms of the exchange
notes are the same as the form and terms of the Senior Subordinated Notes
(which they replaced) except that (i) the exchange notes are registered under
the Securities Act and, therefore, do not bear legends restricting the transfer
thereof, and (ii) the holders of the exchange notes are not entitled to certain
rights under the Registration Rights Agreement by virtue of consummation of the
exchange offer.
The Senior Subordinated Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, as to the payment of principal, premium,
if any, and interest, jointly and severally, by all current direct and indirect
restricted subsidiaries (currently, Sandhills, Inc. and Lil Champ, wholly-owned
subsidiaries of The Pantry) and future direct and indirect restricted
subsidiaries (the "Guarantors"). The Senior Subordinated Notes contain
covenants that, among other things, restrict the ability of The Pantry and any
restricted subsidiary to: (i) incur additional indebtedness; (ii) pay dividends
or make distributions; (iii) issue stock of subsidiaries; (iv) make certain
investments; (v) repurchase stock; (vi) create liens; (vii) enter into
transaction with affiliates; (viii) enter into sale-leaseback transactions;
(ix) merge or consolidate The Pantry or any of its subsidiaries; and (x)
transfer and sell assets.
As of September 24, 1998, substantially all of the Company's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
Management has determined that separate, full financial statements of the
Guarantors (Sandhills, Inc. and Lil' Champ as of September 24, 1998) would not
be material to investors and therefore such financial statements are not
provided. The following supplemental combining financial statements present
information regarding the Guarantors and The Pantry.
Certain reclassifications have been made to conform all of the financial
information to the financial presentation on a consolidated basis. The
principal eliminating entries eliminate investments in subsidiaries and
intercompany balances.
F-28
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statements of Operations
Year Ended September 26, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Guarantor Non-Guarantor
Pantry Subsidiary Subsidiary Eliminations Total
-------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $188,091 $ -- $ -- $ -- $188,091
Gasoline sales........ 192,737 -- -- -- 192,737
Commissions........... 3,979 -- -- -- 3,979
-------- ------- ----- -------- --------
Total revenues...... 384,807 -- -- -- 384,807
-------- ------- ----- -------- --------
Cost of sales:
Merchandise........... 125,979 -- -- -- 125,979
Gasoline.............. 167,610 -- -- -- 167,610
-------- ------- ----- -------- --------
Total cost of
sales.............. 293,589 -- -- -- 293,589
-------- ------- ----- -------- --------
Gross profit............ 91,218 -- -- -- 91,218
-------- ------- ----- -------- --------
Operating expenses:
Store expenses........ 68,331 -- (293) (11,471) 56,567
Store expenses--
related parties...... 1,274 -- -- -- 1,274
General and
administrative
expenses............. 17,024 80 23 -- 17,127
Restructuring
charges.............. 2,184 -- -- -- 2,184
Impairment of long-
lived assets......... 3,034 -- -- -- 3,034
Depreciation and
amortization......... 9,138 14 6 -- 9,158
-------- ------- ----- -------- --------
Total operating
expenses........... 100,985 94 (264) (11,471) 89,344
-------- ------- ----- -------- --------
Income from operations.. (9,767) (94) 264 11,471 1,874
-------- ------- ----- -------- --------
Equity in earnings of
subsidiaries........... 14,597 -- -- (14,597) --
-------- ------- ----- -------- --------
Other income (expense):
Interest expense...... (14,540) -- (14) 2,562 (11,992)
Miscellaneous......... (1,068) 14,243 198 (14,033) (660)
-------- ------- ----- -------- --------
Total other
expense............ (15,608) 14,243 184 (11,471) (12,652)
-------- ------- ----- -------- --------
Income (loss) before
income taxes........... (10,778) 14,149 448 (14,597) (10,778)
Income tax benefit
(expense).............. 2,664 (4,811) (128) 4,939 2,664
-------- ------- ----- -------- --------
Net income (loss)....... $ (8,114) $ 9,338 $ 320 $ (9,658) $ (8,114)
======== ======= ===== ======== ========
</TABLE>
F-29
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Year Ended September 26, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
The Pantry Subsidiary Subsidiary Eliminations Total
---------- ---------- ------------- ------------ -------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)...... $(8,114) $ 9,339 $ 319 $(9,658) $(8,114)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Impairment of long-
lived assets........ 3,034 -- -- -- 3,034
Depreciation and
amortization........ 9,152 -- 6 -- 9,158
Provision for
deferred income
taxes............... (1,558) -- -- -- (1,558)
Loss on sale of
property and
equipment........... 470 -- -- -- 470
Provision for
environmental
expenses............ 512 -- -- -- 512
Provision for closed
stores.............. 673 -- -- -- 673
Write-off of property
held for sale....... 168 -- -- -- 168
Equity earnings of
affiliates.......... (9,658) -- -- 9,658 --
Changes in operating
assets and
liabilities, net:
Receivables.......... (627) (392) (8) 488 (539)
Inventories.......... (937) -- -- -- (937)
Prepaid expenses..... 19 (1) 2 -- 20
Other non-current
assets.............. 448 (17) 1 -- 432
Accounts payable..... 2,104 -- -- -- 2,104
Other current
liabilities and
accrued expenses.... (641) 125 (27) (96) (639)
Employment
obligations......... (255) -- -- -- (255)
Other noncurrent
liabilities......... 1,279 -- (1) (392) 886
------- ------- ------ ------- -------
Net cash provided by
(used in) operating
activities............. (3,931) 9,054 292 -- 5,415
------- ------- ------ ------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (3,301) -- (799) 50 (4,050)
Additions to property
and equipment......... (7,070) -- (14) -- (7,084)
Proceeds from sale of
property held for
sale.................. 2,462 -- 50 (50) 2,462
Proceeds from sale of
property and
equipment............. 1,458 -- 10 -- 1,468
Intercompany notes
receivable
(payable)............. 12,502 (12,502) -- --
Acquisition of related
businesses............ -- -- -- -- --
------- ------- ------ ------- -------
Net cash provided by
(used in) investing
activities............. 6,051 (12,502) (753) -- (7,204)
------- ------- ------ ------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital lease
obligations........... (347) -- -- -- (347)
Principal repayments
of long-term debt..... (5) -- (15) -- (20)
Net proceeds from
equity issue.......... -- -- -- -- --
Other financing
costs................. (3,505) -- -- -- (3,505)
------- ------- ------ ------- -------
Net cash provided by
(used in) financing
activities............. (3,857) -- (15) -- (3,872)
------- ------- ------ ------- -------
Net increase (decrease)
in cash................ (1,737) (3,448) (476) -- (5,661)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR...... 3,247 3,584 4,168 -- 10,999
------- ------- ------ ------- -------
CASH AND CASH
EQUIVALENTS AT END OF
YEAR................... $ 1,510 $ 136 $3,692 $ -- $ 5,338
======= ======= ====== ======= =======
</TABLE>
F-30
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Balance Sheets
September 25, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Guarantor Non-Guarantor
Pantry Subsidiary Subsidiary Eliminations Total
----------------------- -------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents........... $ 2,247 $ 279 $ 821 $ -- $ 3,347
Receivables, net....... 4,056 4,562 30 (6,547) 2,101
Inventories............ 17,161 -- -- -- 17,161
Prepaid expenses....... 1,195 6 3 -- 1,204
Property held for
sale.................. 3,323 -- -- -- 3,323
Deferred income
taxes................. 1,142 -- -- -- 1,142
-------- ------- ------ -------- --------
Total current
assets............ 29,124 4,847 854 (6,547) 28,278
-------- ------- ------ -------- --------
Investment in
subsidiaries........... 47,225 -- -- (47,225) --
-------- ------- ------ -------- --------
Property and equipment,
net.................... 77,641 -- 345 -- 77,986
-------- ------- ------ -------- --------
Other assets:
Goodwill, net.......... 20,318 -- -- -- 20,318
Deferred lease cost,
net................... 314 -- -- -- 314
Deferred financing
cost, net............. 4,578 -- -- -- 4,578
Environmental
receivables........... 6,511 -- -- -- 6,511
Deferred income
taxes................. 156 -- -- -- 156
Escrow for Lil' Champ
acquisition........... -- -- 4,049 -- 4,049
Intercompany notes
receivable............ -- 39,434 -- (39,434) --
Other.................. 534 74 1 -- 609
-------- ------- ------ -------- --------
Total other
assets............ 32,411 39,508 4,050 (39,434) 36,535
-------- ------- ------ -------- --------
Total assets....... $186,401 $44,355 $5,249 $(93,206) $142,799
======== ======= ====== ======== ========
</TABLE>
F-31
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Balance Sheets
September 25, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Guarantor Non-Guarantor
Pantry Subsidiary Subsidiary Eliminations Total
-------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
- -----------------------------
Current liabilities:
Current maturities of long-
term debt.................. $ 17 $ -- $ 16 $ -- $ 33
Current maturities of
capital lease
obligations................ 285 -- -- -- 285
Accounts payable:
Trade..................... 16,032 3 -- -- 16,035
Money orders.............. 3,022 -- -- -- 3,022
Accrued interest............ 5,564 -- 1 (973) 4,592
Accrued compensation and
related taxes.............. 3,322 -- 1 -- 3,323
Income taxes payable........ 313 1,560 235 (1,812) 296
Other accrued taxes......... 2,194 -- -- -- 2,194
Accrued insurance........... 3,887 -- -- -- 3,887
Other accrued liabilities... 6,382 113 122 (3,761) 2,856
-------- ------- ------ -------- --------
Total current
liabilities............ 41,018 1,676 375 (6,546) 36,523
-------- ------- ------ -------- --------
Long-term debt............... 100,168 -- 137 -- 100,305
-------- ------- ------ -------- --------
Other non-current
liabilities:
Environmental expenses...... 7,806 -- -- -- 7,806
Capital lease obligations... 679 -- -- -- 679
Employment obligations...... 1,341 -- -- -- 1,341
Accrued dividends on
preferred stock............ 7,958 -- -- -- 7,958
Intercompany note payable... 39,434 -- -- (39,434) --
Other....................... 5,870 150 40 -- 6,060
-------- ------- ------ -------- --------
Total other non-current
liabilities............ 63,088 150 40 (39,434) 23,844
-------- ------- ------ -------- --------
SHAREHOLDERS' EQUITY
(DEFICIT):
Preferred stock.............. -- -- -- -- --
Common stock................. 1 -- -- -- 1
Additional paid-in capital... 5,396 25 5,001 (5,026) 5,396
Retained earnings (deficit).. (23,270) 42,504 (304) (42,200) (23,270)
-------- ------- ------ -------- --------
Total shareholders'
equity (deficit)....... (17,873) 42,529 4,697 (47,226) (17,873)
-------- ------- ------ -------- --------
Total liabilities and
shareholders' equity
(deficit).............. $186,401 $44,355 $5,249 $(93,206) $142,799
======== ======= ====== ======== ========
</TABLE>
F-32
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Year Ended September 25, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
The Pantry Subsidiary Subsidiary Eliminations Total
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $202,440 $ -- $ -- $ -- $202,440
Gasoline sales........ 220,166 -- -- -- 220,166
Commissions........... 4,787 -- -- -- 4,787
-------- ------- ----- -------- --------
Total revenues...... 427,393 -- -- -- 427,393
-------- ------- ----- -------- --------
Cost of sales:
Merchandise........... 132,846 -- -- -- 132,846
Gasoline.............. 197,268 -- -- -- 197,268
-------- ------- ----- -------- --------
Total cost of
sales.............. 330,114 -- -- -- 330,114
Gross profit............ 97,279 -- -- -- 97,279
-------- ------- ----- -------- --------
Operating expenses:
Store expenses........ 71,945 -- (291) (12,726) 58,928
Store expenses--
related parties...... 1,280 -- -- -- 1,280
General and
administrative
expenses............. 16,731 42 23 -- 16,796
Depreciation and
amortization......... 9,485 13 6 -- 9,504
-------- ------- ----- -------- --------
Total operating
expenses........... 99,441 55 (262) (12,726) 86,508
-------- ------- ----- -------- --------
Income from operations.. (2,162) (55) 262 12,726 10,771
-------- ------- ----- -------- --------
Equity in earnings of
subsidiaries........... 16,605 -- -- (16,605) --
Other income (expense):
Interest expense...... (16,095) -- (13) 3,069 (13,039)
Miscellaneous......... 677 16,207 204 (15,795) 1,293
-------- ------- ----- -------- --------
Total other
expense............ (15,418) 16,207 191 (12,726) (11,746)
-------- ------- ----- -------- --------
Income (loss) before
income taxes........... (975) 16,152 453 (16,605) (975)
Income tax benefit
(expense).............. -- (5,492) (155) 5,647 --
-------- ------- ----- -------- --------
Net income (loss)....... $ (975) $10,660 $ 298 $(10,958) $ (975)
======== ======= ===== ======== ========
</TABLE>
F-33
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Year Ended September 25, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
The Pantry Subsidiary Subsidiary Eliminations Total
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)....... $ (975) $10,660 $ 298 $(10,958) $ (975)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization......... 9,499 -- 5 -- 9,504
Provision for deferred
income taxes......... 371 -- -- -- 371
Gain on sale of
property and
equipment............ (1,054) -- -- -- (1,054)
Provision for
environmental
expenses............. 1,574 -- -- -- 1,574
Provision for closed
stores............... (11) -- -- -- (11)
Equity earnings of
affiliates........... (10,958) -- -- 10,958 --
Changes in operating
assets and
liabilities, net:
Receivables........... 129 (664) 8 -- (527)
Inventories........... (2,273) -- -- -- (2,273)
Prepaid expenses...... (426) (3) -- -- (429)
Other non-current
assets............... (5,378) 14 1 1,068 (4,295)
Accounts payable...... 600 3 -- -- 603
Other current
liabilities and
accrued expenses..... 3,396 246 135 (384) 3,393
Employment
obligations.......... (698) -- -- -- (698)
Other noncurrent
liabilities.......... 2,970 (131) -- (684) 2,155
-------- ------- ------ -------- --------
Net cash provided by
(used in) operating
activities............. (3,234) 10,125 447 -- 7,338
-------- ------- ------ -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (1,874) -- (4) 50 (1,828)
Additions to property
and equipment......... (14,749) -- -- -- (14,749)
Proceeds from sale of
property held for
sale.................. 642 -- 753 (50) 1,345
Proceeds from sale of
property and
equipment............. 2,315 -- -- -- 2,315
Intercompany notes
receivable (payable).. 9,982 (9,982) -- -- --
Acquisition of related
businesses............ (12,162) -- -- -- (12,162)
-------- ------- ------ -------- --------
Net cash provided by
(used in) investing
activities............. (15,846) (9,982) 749 -- (25,079)
-------- ------- ------ -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital lease
obligations........... (303) -- -- -- (303)
Principal repayments of
long-term debt........ (10) -- (16) -- (26)
Proceeds from issuance
of long-term debt..... 200 -- -- -- 200
Net proceeds from equity
issue.................. 15,953 -- -- -- 15,953
Other financing costs.. (74) -- -- -- (74)
-------- ------- ------ -------- --------
Net cash provided by
(used in) financing
activities............. 15,766 -- (16) -- 15,750
-------- ------- ------ -------- --------
Net increase (decrease)
in cash................ (3,314) 143 1,180 -- (1,991)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR...... 1,512 136 3,690 -- 5,338
-------- ------- ------ -------- --------
CASH AND CASH
EQUIVALENTS AT END OF
YEAR................... $ (1,802) $ 279 $4,870 $ -- $ 3,347
======== ======= ====== ======== ========
</TABLE>
F-34
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc. and Subsidiaries
Supplemental Combining Balance Sheets
Year Ended September 24, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Non-
Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
-------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents.......... $ 24,031 $ 6,300 $4,073 $ -- $ 34,404
Receivables, net...... 11,211 9,263 1,030 (11,597) 9,907
Inventories........... 24,933 22,876 -- -- 47,809
Income taxes
receivable........... 270 (2,098) (472) 2,788 488
Prepaid expenses...... 1,206 1,007 3 -- 2,216
Property held for
sale................. 3,761 -- -- -- 3,761
Deferred income
taxes................ 1,262 2,726 -- -- 3,988
-------- -------- ------ --------- --------
Total current
assets............. 66,674 40,074 4,634 (8,809) 102,573
-------- -------- ------ --------- --------
Investment in
subsidiaries........... 69,317 -- -- (69,317) --
-------- -------- ------ --------- --------
Property and equipment,
net.................... 125,340 175,298 340 -- 300,978
-------- -------- ------ --------- --------
Other assets:
Goodwill, net......... 72,375 47,650 -- -- 120,025
Deferred lease cost,
net.................. 269 -- -- -- 269
Deferred financing
cost, net............ 14,545 -- -- -- 14,545
Environmental
receivables, net..... 11,566 1,621 -- -- 13,187
Intercompany notes
receivable........... 19,803 49,705 -- (69,508) --
Other................. 155 3,088 -- -- 3,243
-------- -------- ------ --------- --------
Total other assets.. 118,713 102,064 -- (69,508) 151,269
-------- -------- ------ --------- --------
Total assets........ $380,044 $317,436 $4,974 $(147,634) $554,820
======== ======== ====== ========= ========
</TABLE>
F-35
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc. and Subsidiaries
Supplemental Combining Balance Sheets--(Continued)
Year Ended September 24, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Non-
Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
-------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS'
EQUITY (DEFICIT):
-----------------
Current liabilities:
Current maturities of
long-term debt....... $ 17 $ 10 $ 18 $ -- $ 45
Current maturities of
capital lease
obligations.......... 213 1,027 -- -- 1,240
Accounts payable:
Trade............... 28,563 20,996 -- -- 49,559
Money orders........ 4,112 1,069 -- -- 5,181
Accrued interest...... 11,564 1,283 1 (1,136) 11,712
Accrued compensation
and related taxes.... 4,366 2,352 1 -- 6,719
Other accrued taxes... 3,108 3,899 -- -- 7,007
Accrued insurance..... 3,188 2,557 -- -- 5,745
Other accrued
liabilities.......... 11,118 18,877 122 (5,769) 24,348
-------- -------- ------ --------- --------
Total current
liabilities...... 66,249 52,070 142 (6,905) 111,556
-------- -------- ------ --------- --------
Long-term debt.......... 188,151 139,000 118 -- 327,269
-------- -------- ------ --------- --------
Other non-current
liabilities:
Environmental
expenses............. 13,487 3,650 -- -- 17,137
Deferred income
taxes................ (36) 22,001 -- (1,599) 20,366
Capital lease
obligations.......... 1,534 10,595 -- -- 12,129
Employment
obligations.......... 934 -- -- -- 934
Accrued dividends on
preferred stock...... 4,391 -- -- -- 4,391
Intercompany note
payable.............. 50,705 20,822 -- (71,527)
Other................. 15,325 5,737 38 634 21,734
-------- -------- ------ --------- --------
Total other non-current
liabilities............ 86,340 62,805 38 (72,492) 76,691
-------- -------- ------ --------- --------
SHAREHOLDERS' EQUITY
(DEFICIT):
Preferred stock....... -- -- -- -- --
Common stock.......... 2 1 -- (1) 2
Additional paid-in
capital.............. 68,115 6,758 5,001 (11,759) 68,115
Shareholder loan...... (215) -- -- -- (215)
Accumulated earnings
(deficit)............ (28,598) 56,802 (325) (56,477) (28,598)
-------- -------- ------ --------- --------
Total
shareholders'
equity
(deficit)........ 39,304 63,561 4,676 (68,237) 39,304
-------- -------- ------ --------- --------
Total liabilities
and shareholders'
equity
(deficit)........ $380,044 $317,436 $4,974 $(147,634) $554,820
======== ======== ====== ========= ========
</TABLE>
F-36
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Year Ended September 24, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $245,402 $215,396 $ -- $ -- $460,798
Gasoline sales........ 269,865 240,093 -- -- 509,958
Commissions........... 6,838 7,290 -- -- 14,128
-------- -------- ----- -------- --------
Total revenues...... 522,105 462,779 -- -- 984,884
-------- -------- ----- -------- --------
Cost of sales:
Merchandise........... 162,027 141,941 -- -- 303,968
Gasoline.............. 238,381 209,184 -- -- 447,565
-------- -------- ----- -------- --------
Total cost of
sales.............. 400,408 351,125 -- -- 751,533
-------- -------- ----- -------- --------
Gross profit............ 121,697 111,654 -- -- 233,351
-------- -------- ----- -------- --------
Operating expenses:
Store expenses........ 89,774 66,046 (240) (15,491) 140,089
General and
administrative
expenses............. 18,398 14,341 22 -- 32,761
Merger integration
costs................ -- 1,016 -- -- 1,016
Depreciation and
amortization......... 14,003 13,633 6 -- 27,642
-------- -------- ----- -------- --------
Total operating
expenses........... 122,175 95,036 (212) (15,491) 201,508
-------- -------- ----- -------- --------
Income (loss) from
operations............. (478) 16,618 212 15,491 31,843
-------- -------- ----- -------- --------
Equity in earnings of
subsidiaries........... 22,864 -- -- (22,864) --
-------- -------- ----- -------- --------
Other income (expense):
Interest expense...... (18,241) (14,926) (12) 4,233 (28,946)
Miscellaneous......... 528 20,943 29 (19,724) 1,776
-------- -------- ----- -------- --------
Total other income
(expense).......... (17,713) 6,017 17 (15,491) (27,170)
-------- -------- ----- -------- --------
Income (loss) before
income taxes and
extraordinary loss..... 4,673 22,635 229 (22,864) 4,673
Income tax benefit
(expense).............. -- (8,337) (250) 8,587 --
-------- -------- ----- -------- --------
Net income (loss) before
extraordinary item..... 4,673 14,298 (21) (14,277) 4,673
Extraordinary loss...... (7,998) -- -- -- (7,998)
-------- -------- ----- -------- --------
Net income (loss)....... $ (3,325) $ 14,298 $ (21) $(14,277) $ (3,325)
======== ======== ===== ======== ========
</TABLE>
F-37
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Year Ended September 24, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
The Pantry Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)....... $ (3,325) $ 14,298 $ (21) $(14,277) $ (3,325)
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Extraordinary loss..... 2,006 -- -- -- 2,006
Depreciation and
amortization.......... 14,014 13,623 5 -- 27,642
Change in deferred
income taxes.......... -- 1,737 -- (1,599) 138
(Gain) loss on sale of
property and
equipment............. 88 443 -- -- 531
Provision for
environmental
expenses.............. 5,681 500 -- -- 6,181
Provision for closed
stores................ 50 -- -- -- 50
Equity earnings of
affiliates............ (15,359) -- -- 15,359 --
Changes in operating
assets and liabilities,
net:
Receivables............ (10,380) (2,165) (1,017) 5,050 (8,512)
Inventories............ 986 (5,504) -- -- (4,518)
Prepaid expenses....... (11) 401 -- -- 390
Other noncurrent
assets................ 379 681 4,050 1 5,111
Accounts payable....... 13,393 503 -- -- 13,896
Other current
liabilities and
accrued expenses...... 11,632 (6,497) 254 (3,148) 2,241
Employment
obligations........... (407) -- -- -- (407)
Other noncurrent
liabilities........... 8,459 (2,483) (2) 634 6,608
--------- --------- ------- -------- ---------
Net cash provided by
operating activities... 27,206 15,537 3,269 2,020 48,032
--------- --------- ------- -------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (5,203) -- -- -- (5,203)
Additions to property
and equipment......... (27,569) (15,584) -- -- (43,153)
Proceeds from sale of
property held for
sale.................. 4,807 -- -- -- 4,807
Proceeds from sale of
property and
equipment............. 2,102 5,546 -- -- 7,648
Intercompany notes
receivable (payable).. (8,532) 10,551 -- (2,019) --
Acquisition of related
businesses, net of
cash acquired......... (102,684) (147,908) -- -- (250,592)
--------- --------- ------- -------- ---------
Net cash used in
investing activities... (137,079) (147,395) -- (2,019) (286,493)
--------- --------- ------- -------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases.. (303) (1,121) -- -- (1,424)
Proceeds from issuance
of capital leases..... 1,086 -- -- -- 1,086
Principal repayments of
long-term debt........ (51,516) (10) (17) -- (51,543)
Proceeds from issuance
of long-term debt..... 139,499 139,010 -- (1) 278,508
Net proceeds from
equity issue.......... 56,935 -- -- -- 56,935
Other financing costs.. (14,044) -- -- -- (14,044)
--------- --------- ------- -------- ---------
Net cash provided by
(used in) financing
activities............. 131,657 137,879 (17) (1) 269,518
--------- --------- ------- -------- ---------
Net increase in cash.... 21,784 $ 6,021 3,252 -- 31,057
Cash and Cash
Equivalents at
Beginning of Year...... 2,247 279 821 -- 3,347
--------- --------- ------- -------- ---------
Cash and Cash
Equivalents at End of
Year................... $ 24,031 $ 6,300 $ 4,073 $ -- $ 34,404
========= ========= ======= ======== =========
</TABLE>
F-38
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Three Months Ended December 25, 1997
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $ 50,880 $38,480 $-- $ -- $ 89,360
Gasoline sales........ 56,830 46,192 -- -- 103,022
Commissions........... 1,432 1,357 -- -- 2,789
-------- ------- ---- ------- --------
Total revenues...... 109,142 86,029 -- -- 195,171
-------- ------- ---- ------- --------
Cost of sales:
Merchandise........... 33,102 25,795 -- -- 58,897
Gasoline.............. 50,443 40,466 -- -- 90,909
-------- ------- ---- ------- --------
Total cost of
sales.............. 83,545 66,261 -- -- 149,806
-------- ------- ---- ------- --------
Gross profit............ 25,597 19,768 -- -- 45,365
-------- ------- ---- ------- --------
Operating expenses:
Store expenses........ 19,002 12,489 (60) (3,266) 28,165
General and
administrative
expenses............. 4,335 2,832 5 -- 7,172
Depreciation and
amortization......... 2,870 2,279 2 -- 5,151
-------- ------- ---- ------- --------
Total operating
expenses........... 26,207 17,600 (53) (3,266) 40,488
-------- ------- ---- ------- --------
Income from operations.. (610) 2,168 53 3,266 4,877
-------- ------- ---- ------- --------
Equity in earnings of
subsidiaries........... 3,973 -- -- (3,973) --
-------- ------- ---- ------- --------
Other income (expense):
Interest expense...... (4,148) (2,747) (3) 1,081 (5,817)
Miscellaneous......... 284 4,465 6 (4,316) 439
-------- ------- ---- ------- --------
Total other
expense............ (3,864) 1,718 3 (3,235) (5,378)
-------- ------- ---- ------- --------
Income (loss) before
income taxes and
extraordinary loss..... (501) 3,886 56 (3,942) (501)
Income tax benefit
(expense).............. 412 (1,387) (75) 1,462 412
-------- ------- ---- ------- --------
Income (loss) before
extraordinary loss..... (89) 2,499 (19) (2,480) (89)
Extraordinary loss, net
of taxes............... (6,800) -- -- -- (6,800)
-------- ------- ---- ------- --------
Net income (loss)....... $ (6,889) $ 2,499 $(19) $(2,480) $ (6,889)
======== ======= ==== ======= ========
</TABLE>
F-39
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Three Months Ended December 25, 1997
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss................ $ (6,889) $ 2,499 $(19) $(2,480) $ (6,889)
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Extraordinary loss.... 2,006 -- -- -- 2,006
Depreciation and
amortization......... 2,870 2,280 1 -- 5,151
Provision for deferred
income taxes......... (1,834) -- (17) -- (1,851)
(Gain) loss on sale of
property and
equipment............ (190) (78) -- -- (268)
Provision for
environmental
expenses............. 27 -- -- -- 27
Equity earnings of
affiliates........... (2,480) -- -- 2,480 --
Changes in operating
assets and liabilities,
net:
Receivables........... (2,533) (5,269) 26 6,549 (1,227)
Inventories........... (12) (939) -- -- (951)
Prepaid expenses...... 477 135 2 -- 614
Other noncurrent
assets............... 140 3,460 (26) -- 3,574
Accounts payable...... (942) 607 -- -- (335)
Other current
liabilities and
accrued expenses..... 2,551 1,068 78 (6,311) (2,614)
Employment
obligations.......... (92) -- -- -- (92)
Other noncurrent
liabilities.......... 1,392 773 -- (238) 1,927
-------- --------- ---- ------- ---------
Net cash provided by
operating activities... (5,509) 4,536 45 -- (928)
-------- --------- ---- ------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
and equipment.......... (4,110) (1,822) -- -- (5,932)
Proceeds from sale of
property held for
sale................... 2,025 -- -- -- 2,025
Proceeds from sale of
property and
equipment.............. 273 136 -- -- 409
Intercompany notes
receivable (payable)... 4,048 (4,048) -- -- --
Acquisitions of related
businesses............. -- (135,605) -- -- (135,605)
-------- --------- ---- ------- ---------
Net cash provided by
(used in) investing
activities............. 2,236 (141,339) -- -- (139,103)
-------- --------- ---- ------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases... (76) (170) -- -- (246)
Principal repayments of
long-term debt......... (51,000) -- (4) -- (51,004)
Proceeds from issuance
of long-term debt...... 54,267 145,756 -- -- 200,023
Net proceeds from equity
issue.................. 32,151 -- -- -- 32,151
Other financing costs... (12,418) -- -- -- (12,418)
-------- --------- ---- ------- ---------
Net cash provided by
(used in) financing
activities............. 22,924 145,586 (4) -- 168,506
-------- --------- ---- ------- ---------
NET INCREASE IN CASH.... 19,651 8,783 41 -- 28,475
CASH & CASH EQUIVALENTS,
BEG. OF YEAR........... 2,247 279 821 -- 3,347
-------- --------- ---- ------- ---------
CASH & CASH EQUIVALENTS,
END OF YEAR............ $ 21,898 $ 9,062 $862 $ -- $ 31,822
======== ========= ==== ======= =========
</TABLE>
F-40
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Balance Sheets
December 24, 1998
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents........... $ 6,122 $ 4,799 $4,148 $ -- $ 15,069
Receivables, net....... 25,458 16,419 1,030 (29,514) 13,393
Inventories............ 28,444 25,102 -- -- 53,546
Income taxes
receivable
(payable)............. (47) (3,416) (517) 3,980 --
Prepaid expenses....... 946 392 -- -- 1,338
Property held for
sale.................. 2,971 -- -- -- 2,971
Deferred income
taxes................. 1,262 2,259 -- -- 3,521
-------- -------- ------ --------- --------
Total current
assets............ 65,156 45,555 4,661 (25,534) 89,838
-------- -------- ------ --------- --------
Investment in
subsidiaries........... 73,023 -- -- (73,023) --
-------- -------- ------ --------- --------
Property and equipment,
net.................... 151,710 175,989 338 -- 328,037
-------- -------- ------ --------- --------
Other assets:
Goodwill, net.......... 72,261 47,273 -- -- 119,534
Deferred lease cost,
net................... 258 -- -- -- 258
Deferred financing
cost, net............. 14,025 -- -- -- 14,025
Environmental
receivables, net...... 11,566 1,217 -- -- 12,783
Intercompany note
receivable............ 19,803 49,705 -- (69,508) --
Other.................. 1,037 3,048 -- -- 4,085
-------- -------- ------ --------- --------
Total other
assets............ 118,950 101,243 -- (69,508) 150,685
-------- -------- ------ --------- --------
Total assets....... $408,839 $322,787 $4,999 $(168,065) $568,560
======== ======== ====== ========= ========
</TABLE>
F-41
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Balance Sheets--(Continued)
December 24, 1998
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
- -----------------------------
Current liabilities:
Current maturities of long-
term debt.................. $ 17 $ 4 $ 18 $ -- $ 39
Current maturities of
capital lease
obligations................ 213 1,027 -- -- 1,240
Short-term debt............. 2,000 -- -- -- 2,000
Accounts payable:
Trade..................... 31,634 18,613 -- (26) 50,221
Money orders.............. 3,962 1,137 -- -- 5,099
Accrued interest............ 11,255 4,049 1 (9,776) 5,529
Accrued compensation and
related taxes.............. 3,430 2,600 1 -- 6,031
Income taxes payable........ -- -- -- 104 104
Other accrued taxes......... 2,194 1,914 -- -- 4,108
Accrued insurance........... 3,356 2,741 -- -- 6,097
Other accrued liabilities... 18,730 21,634 123 (12,997) 27,490
-------- -------- ------ --------- --------
Total current
liabilities............ 76,791 53,719 143 (22,695) 107,958
-------- -------- ------ --------- --------
Long-term debt............... 204,147 139,000 113 -- 343,260
-------- -------- ------ --------- --------
Other noncurrent liabilities:
Environmental reserves...... 13,641 3,650 -- -- 17,291
Deferred income taxes....... (1,550) 21,477 -- -- 19,927
Capital lease obligations... 1,466 10,340 -- -- 11,806
Employment obligations...... 842 -- -- -- 842
Accrued dividends on
preferred stock............ 5,103 -- -- -- 5,103
Intercompany note payable... 51,705 20,642 -- (72,347) --
Other....................... 15,949 5,642 37 -- 21,628
-------- -------- ------ --------- --------
Total other noncurrent
liabilities............ 87,156 61,751 37 (72,347) 76,597
-------- -------- ------ --------- --------
SHAREHOLDERS' EQUITY
(DEFICIT):
Preferred stock.............. -- -- -- -- --
Common stock................. 2 1 5,001 (5,002) 2
Additional paid-in capital... 69,925 6,758 -- (6,758) 69,925
Shareholder loans............ (937) -- -- -- (937)
Accumulated earnings
(deficit)................... (28,245) 61,558 (295) (61,263) (28,245)
-------- -------- ------ --------- --------
Total shareholders'
equity (deficit)....... 40,745 68,317 4,706 (73,023) 40,745
-------- -------- ------ --------- --------
Total liabilities and
shareholders' equity
(deficit).............. $408,839 $322,787 $4,999 $(168,065) $568,560
======== ======== ====== ========= ========
</TABLE>
F-42
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Three Months Ended December 24, 1998
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $ 83,377 $ 56,013 $-- $ -- $139,390
Gasoline sales........ 107,075 64,714 -- -- 171,789
Commissions........... 2,508 1,920 -- -- 4,428
-------- -------- ---- ------- --------
Total revenues...... 192,960 122,647 -- -- 315,607
-------- -------- ---- ------- --------
Cost of sales:
Merchandise........... 56,966 37,487 -- -- 94,453
Gasoline.............. 93,447 55,327 -- -- 148,774
-------- -------- ---- ------- --------
Total cost of
sales.............. 150,413 92,814 -- -- 243,227
-------- -------- ---- ------- --------
Gross profit............ 42,547 29,833 -- -- 72,380
-------- -------- ---- ------- --------
Operating expenses:
Store expenses........ 32,139 17,356 (61) (5,705) 43,729
General and
administrative
expenses............. 5,675 4,288 5 -- 9,968
Depreciation and
amortization......... 4,536 3,652 2 -- 8,190
-------- -------- ---- ------- --------
Total operating
expenses........... 42,350 25,296 (54) (5705) 61,887
-------- -------- ---- ------- --------
Income (loss) from
operations............. 197 4,537 54 5,705 10,493
-------- -------- ---- ------- --------
Equity in earnings of
subsidiaries........... 7,252 -- -- (7,252) --
-------- -------- ---- ------- --------
Other income (expense):
Interest expense...... (5,772) (4,372) (3) 1,235 (8,912)
Miscellaneous......... (280) 7,002 34 (6,940) (184)
-------- -------- ---- ------- --------
Total other
expense............ (6,052) 2,630 31 (5,705) (9,096)
-------- -------- ---- ------- --------
Income (loss) before
income taxes........... 1,397 7,167 85 (7,252) 1,397
Income tax benefit
(expense).............. (332) (2,411) (55) 2,466 (332)
-------- -------- ---- ------- --------
Net income (loss)....... $ 1,065 $ 4,756 $ 30 $(4,786) $ 1,065
======== ======== ==== ======= ========
</TABLE>
F-43
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Three Months Ended December 24, 1998
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)....... $ 1,065 $ 4,756 $ 30 $ (4,786) $ 1,065
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 4,536 3,650 4 -- 8,190
Change in deferred
income taxes.......... -- -- -- --
(Gain) loss on sale of
property and
equipment............. 176 86 (2) -- 260
Reserves for
environmental issues.. 154 -- -- -- 154
Equity earnings of
affiliates............ (4,786) -- -- 4,786 --
Changes in operating
assets and liabilities,
net:
Receivables............ (15,444) (6,857) 17 19,718 (2,566)
Inventories............ (2,451) (2,226) -- -- (4,677)
Prepaid expenses....... 260 615 3 -- 878
Other noncurrent
assets................ (4) 40 -- -- 36
Accounts payable....... 1,861 (2,315) -- (26) (480)
Other current
liabilities and
accrued expenses...... 5,621 5,336 29 (17,158) (6,172)
Employment
obligations........... (92) -- -- -- (92)
Other noncurrent
liabilities........... 624 (95) (1) (634) (106)
-------- ------- ------ -------- --------
Net cash provided by
(used in) operating
activities............. (8,480) 2,990 80 1,900 (3,510)
-------- ------- ------ -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (42) -- -- -- (42)
Additions to property
and equipment......... (5,474) (4,066) -- -- (9,540)
Proceeds from sale of
property held for
sale.................. 524 -- -- -- 524
Proceeds from sale of
property and
equipment............. 75 16 -- -- 91
Intercompany notes
receivable (payable).. 2,080 (180) -- (1,900) --
Acquisitions of related
businesses, net of
cash acquired of
$70................... (25,541) -- -- -- (25,541)
-------- ------- ------ -------- --------
Net cash used in
investing activities... (28,378) (4,230) -- (1,900) (34,508)
-------- ------- ------ -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases.. (68) (255) -- -- (323)
Principal repayments of
long-term debt........ (4) (6) (5) -- (15)
Proceeds from issuance
of short-term debt.... 2,000 -- -- -- 2,000
Proceeds from issuance
of long-term debt..... 16,000 -- -- -- 16,000
Net proceeds from
equity issue.......... 1,088 -- -- -- 1,088
Other financing costs.. (67) -- -- -- (67)
-------- ------- ------ -------- --------
Net cash provided by
(used in) financing
activities............. 18,949 (261) (5) -- 18,683
-------- ------- ------ -------- --------
NET INCREASE (DECREASE)
IN CASH................ (17,909) (1,501) 75 -- (19,335)
CASH & CASH EQUIVALENTS,
BEGINNING OF YEAR...... 24,031 6,300 4,073 -- 34,404
-------- ------- ------ -------- --------
CASH & CASH EQUIVALENTS,
END OF YEAR............ $ 6,122 $ 4,799 $4,148 $ -- $ 15,069
======== ======= ====== ======== ========
</TABLE>
F-44
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to December 25, 1997 and December 24, 1998 information)
NOTE 16--SUBSEQUENT EVENTS (Unaudited):
On January 28, 1999, the Company entered into an Amended and Restated
Credit Facility (the "Amended Credit Facility") consisting of (i) a $45.0
million revolving credit facility available for working capital financing,
general corporate purposes and issuing commercial and standby letters of credit
(the "'Revolving Credit Facility"); (ii) a $50.0 million acquisition facility
available to finance acquisition of related businesses (the "Acquisition
Facility") and (iii) term loan facilities with outstanding borrowings of $240.0
million (the "Term Loan Facilities").
The Amended Credit Facility contains covenants restricting the ability of
the Company and any of its subsidiaries to among other things: (i) incur
additional indebtedness; (ii) declare dividends or redeem or repurchase capital
stock; (iii) prepay, redeem or purchase debt; (iv) incur liens; (v) make loans
and investments; (vi) make capital expenditures (vii) engage in mergers,
acquisitions or asset sales; and (viii) engage in transactions with affiliates.
The Company is also required to comply with financial covenants with respect to
(a) a minimum coverage ratio, (b) a minimum pro forma EBITDA, as defined in the
Amended Credit Facility, (c) a maximum pro forma leverage ratio, and (d) a
maximum capital expenditure allowance.
The Company used the proceeds of the Term Loan Facilities and a $5.0
million initial draw under its Revolving Credit Facility, along with cash on
hand, to (i) finance the Miller Acquisition (as defined below), (ii) refinance
$94.0 million outstanding under the prior bank credit facility, and replace
outstanding letters of credit (iii) redeem the Company's outstanding Senior
Notes in the aggregate principal amount of $49.0 million and (iv) pay related
transaction costs.
On January 28, 1999, the Company acquired 100% of the outstanding capital
stock of Miller Enterprises and certain other real estate assets of certain
affiliates of Miller Enterprises (the "Miller Acquisition"). Miller Enterprises
is a leading operator of convenience stores, operating 121 stores located in
central Florida and operated under the name "Handy Way." The purchase price and
the fees and expenses of the Miller Acquisition were financed with proceeds
from the Company's Term Loan Facility and a draw under its Revolving Credit
Facility and cash on hand. On February 25, 1999, the Company acquired 60
convenience stores owned by Taylor Oil Company. The stores are located
throughout North Carolina and Virginia and are operated under the name "ETNA".
The acquisition and related fees were financed primarily with proceeds from the
Acquisition Facility.
On January 28, 1999, the Company redeemed $49.0 million in principal
amount of Senior Notes and paid (i) accrued and unpaid interest up to, but not
including, the date of purchase and (ii) a 4% call premium. The repurchase of
100% of the Senior Notes outstanding, the payment of accrued interest and the
call premium were financed with proceeds from the Company's Term Loan
Facilities, and a draw under its Revolving Credit Facility.
The Company recognized an extraordinary loss of approximately $5.5
million in connection with the repurchase of the Senior Notes including the
payment of the 4% call premium of $2.0 million, fees paid in connection with
the amendments and commitments under the Credit Facility, and the write-off of
related deferred financing costs.
F-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Lil' Champ Food Stores, Inc.
Jacksonville, Florida
We have audited the accompanying balance sheets of Lil' Champ Food
Stores, Inc. (a wholly-owned subsidiary of Docks U.S.A., Inc.) as of December
30, 1995 and December 28, 1996, and the related statements of operations,
shareholder's equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Lil' Champ Food Stores, Inc. as of December
30, 1995 and December 28, 1996 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Jacksonville, Florida
February 14, 1997
F-46
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
BALANCE SHEETS
(Unaudited as to September 27, 1997 information)
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
December 30, December 28, September 27,
1995 1996 1997
------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and equivalents.................. $ 13,553 $ 19,510 $ 9,506
Certificates of deposit............... 805 805 805
Receivables, net of allowance for
doubtful accounts (1995-$0; 1996-
$21; 1997-$21)....................... 1,518 1,820 1,824
Environmental receivables, current
portion, net of allowance for
uncollectible amounts (1995-$545;
1996-$710; 1997-$515)................ 1,798 2,066 1,330
Inventories........................... 17,072 17,938 18,017
Prepaid income taxes.................. 68 2,784 545
Current portion of deferred income
taxes................................ 313
Prepaid expenses and other assets..... 1,444 1,365 1,032
Due from affiliates................... 238 225 304
-------- -------- --------
Total current assets................ 36,809 46,513 33,363
-------- -------- --------
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, net of accumulated
depreciation and amortization (1995-
$56,543; 1996-$62,062; 1997-$61,848).. 110,083 117,354 119,158
BUILDINGS UNDER CAPITAL LEASES, net of
accumulated amortization (1995-$7,592;
1996-$7,895; 1997-$8,664)............. 8,210 11,264 10,396
OTHER ASSETS:
Investment in The Eli Witt Company.... 2,037
Goodwill, net of accumulated
amortization (1995-$4,391; 1996-
$5,166; 1997-$5,747)................. 14,981 14,206 13,625
Environmental receivables, net of
allowance for uncollectible amounts
(1995-$1,013; 1996-$429; 1997-
$734)................................ 3,341 1,249 1,521
Other................................. 1,076 921 1,042
-------- -------- --------
Total other assets.................. 21,435 16,376 16,188
-------- -------- --------
TOTAL ASSETS........................... $176,537 $191,507 $179,105
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable, trade............... $ 12,841 $ 18,287 $ 19,612
Current portion of obligations under
capital leases....................... 871 1,037 990
Current portion of long-term debt..... 4,353 4,355 10,700
Accrued compensation and employee
benefits............................. 1,867 2,146 2,182
Current portion of accrued workers'
compensation self insurance.......... 2,579 2,271 2,261
Accrued medical and health
insurance............................ 900 630 565
Accrued interest...................... 179 272 46
Lottery payable....................... 1,828 2,131 1,657
Other taxes payable................... 4,809 2,766 4,081
Deferred income taxes payable......... 90 159
Money orders trust fund payable....... 242 (309) 766
Other accrued liabilities............. 4,536 4,690 5,378
-------- -------- --------
Total current liabilities........... 35,005 38,366 48,397
-------- -------- --------
DEFERRED INCOME........................ 211 298 259
DEFERRED INCOME TAXES.................. 7,856 10,060 9,824
OBLIGATIONS UNDER CAPITAL LEASES, less
current portion....................... 9,604 12,547 11,837
ACCRUED WORKERS' COMPENSATION SELF-
INSURANCE less current portion........ 6,391 6,674 7,713
ENVIRONMENTAL RESERVE.................. 3,150
LONG-TERM DEBT, less current portion... 18,050 22,695
DUE TO DOCKS de FRANCE, S.A............ 12,000 6,000
-------- -------- --------
Total liabilities................... 89,117 96,640 81,180
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Notes 4,
6, 8 and 11)
SHAREHOLDER'S EQUITY:
Common stock; authorized issued and
outstanding 500 shares of $1 par
value................................ 1 1 1
Additional paid-in capital............ 67,966 67,966 67,966
Retained earnings..................... 19,453 26,900 29,958
-------- -------- --------
Total shareholder's equity.......... 87,420 94,867 97,925
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY................................ $176,537 $191,507 $179,105
======== ======== ========
</TABLE>
See notes to financial statements.
F-47
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
STATEMENTS OF OPERATIONS
(In Thousands Except Store Data)
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
------------------------- ---------------------------
December 30, December 28, September 28, September 27,
1995 1996 1996 1997
------------ ------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Number of stores in
operation at end of
period................. 501 495 499 488
======== ======== ======== ========
REVENUES:
Gasoline sales........ $257,056 $278,905 $207,208 $214,676
Merchandise sales..... 217,282 226,146 171,322 177,426
Commissions........... 7,978 8,164 5,979 5,971
-------- -------- -------- --------
Total revenues...... 482,316 513,215 384,509 398,073
-------- -------- -------- --------
COST OF SALES:
Gasoline.............. $227,592 251,614 186,110 193,499
Merchandise........... 143,598 148,877 112,909 116,879
-------- -------- -------- --------
Total cost of
sales.............. 371,190 400,491 299,019 310,378
-------- -------- -------- --------
GROSS PROFIT............ 111,126 112,724 85,490 87,695
-------- -------- -------- --------
Store operating
expense................ 70,289 73,721 55,486 56,339
General and
administrative
expenses............... 15,452 14,191 11,397 12,581
Environmental
contamination charge... 3,381
Depreciation and
amortization........... 11,568 11,361 8,439 8,989
-------- -------- -------- --------
Total operating
expenses........... 97,309 99,273 75,322 81,290
-------- -------- -------- --------
INCOME FROM OPERATIONS.. 13,817 13,451 10,168 6,405
OTHER INCOME (EXPENSE):
Interest expense...... (3,219) (2,670) (1,994) (1,712)
Miscellaneous......... 1,873 1,647 865 588
-------- -------- -------- --------
Total other
expense............ (1,346) (1,023) (1,129) (1,124)
-------- -------- -------- --------
INCOME BEFORE INCOME
TAXES.................. 12,471 12,428 9,039 5,281
INCOME TAX EXPENSE...... (4,985) (4,981) (3,622) (2,223)
-------- -------- -------- --------
NET INCOME.............. $ 7,486 $ 7,447 $ 5,417 $ 3,058
======== ======== ======== ========
</TABLE>
See notes to financial statements.
F-48
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
STATEMENTS OF SHAREHOLDER'S EQUITY
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to Nine Months Ended September 27, 1997 information)
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
Common Stock
------------ Additional
Par Paid-in Retained
Shares Value Capital Earnings Total
------ ----- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994............ 500 $ 1 $67,966 $11,967 $79,934
Net income.......................... 7,486 7,486
--- --- ------- ------- -------
BALANCE, DECEMBER 30, 1995............ 500 1 67,966 19,453 87,420
Net income.......................... 7,447 7,447
--- --- ------- ------- -------
BALANCE, DECEMBER 28, 1996............ 500 1 67,966 26,900 94,867
Net income.......................... 3,058 3,058
--- --- ------- ------- -------
BALANCE, SEPTEMBER 27, 1997........... 500 $ 1 $67,966 $29,958 $97,925
=== === ======= ======= =======
</TABLE>
See notes to financial statements.
F-49
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
------------------------- ---------------------------
December 30, December 28, September 28, September 27,
1995 1996 1996 1997
------------ ------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............ $ 7,486 $ 7,447 $ 5,417 $ 3,058
Adjustments to
reconcile net income
to cash provided by
operating activities:
Depreciation and
amortization....... 11,568 11,361 8,439 8,989
Loss on investment.. 37
(Gain) loss on sale
of assets.......... 225 (90) 193 132
Changes in assets and
liabilities
Deferred income
taxes.............. (744) 2,607 (167)
Receivables......... (10) (302) (300) (4)
Inventories......... (467) (866) (1,352) (79)
Prepaid taxes....... (68) (2,716) (507) 2,239
Prepaid expenses and
other assets....... 89 2,058 1,416 676
Due from
affiliates......... (43) 13 43 (79)
Accounts payable,
trade.............. 795 5,446 5,630 1,325
Enviromental
Reserve............ 3,150
Other liabilities... (345) (2,066) 2,148 3,565
Income taxes
payable............ (598)
Accrued interest.... (67) 93 92 (226)
-------- -------- -------- --------
Net cash provided
by operating
activities....... 17,821 23,022 21,219 22,579
-------- -------- -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property,
equipment and
leasehold
improvements......... (11,977) (21,353) (16,124) (10,153)
Proceeds from sale of
equipment and
leasehold
improvements......... 632 4,708 3,176 677
Proceeds related to
Eli Witt investment.. 2,000
-------- -------- -------- --------
Net cash used in
investing
activities....... (11,345) (14,645) (12,948) (9,476)
-------- -------- -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Additional borrowings
under long-term
debt................. 2,000 20,000 12,000
Payments to Docks de
France, S.A. ........ (6,000) (6,000) (6,000) (6,000)
Principal payments
under long-term
debt................. (4,862) (15,353) (7,348) (28,350)
Principal payments
under capital lease
obligations.......... (921) (1,067) (890) (757)
-------- -------- -------- --------
Net cash used in
financing
activities....... (9,783) (2,420) (14,238) (23,107)
-------- -------- -------- --------
NET INCREASE
(DECREASE)............. (3,307) 5,957 (5,967) (10,004)
CASH AND EQUIVALENTS,
BEGINNING OF YEAR...... 16,860 13,553 13,553 19,510
-------- -------- -------- --------
CASH AND EQUIVALENTS,
END OF YEAR............ $ 13,553 $ 19,510 $ 7,586 $ 9,506
======== ======== ======== ========
CASH PAID FOR:
Interest.............. $ 3,286 $ 2,577 $ 1,902 $ 1,937
======== ======== ======== ========
Income taxes.......... $ 6,438 $ 5,090 $ 4,130 $ 2,250
======== ======== ======== ========
</TABLE>
See notes to financial statements.
F-50
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
1--COMPANY'S BUSINESS
Lil' Champ Food Stores, Inc. ("LCFS"). LCFS is a convenience store chain
operating in central and northern Florida and southeastern Georgia.
2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year--The Company operates on the basis of a 52-53 week fiscal
year ending on the last Saturday in December. The years ended December 28, 1996
and December 30, 1995 consisted of 52 weeks.
Unaudited Financial Statements--In the opinion of management, the
Unaudited Balance Sheet as of December 24, 1998, and the unaudited statements
of Operations, Shareholder's Equity, and Cash Flows for the nine months ended
September 28, 1996 and September 27, 1997 include all adjustments (which
include only normal recurring adjustments) necessary to present the financial
position and results of operations and cash flows for the periods then ended in
accordance with generally accepted accounting principles.
Cash and Equivalents--LCFS considers all investments with an original
maturity of three months or less to be cash equivalents.
Certificates of Deposit--Certificates of deposit for $500,000 secure a
standby letter of credit and are pledged to the State of Georgia as security
for payment of workers' compensation claims.
Certificates of deposit for $305,000 are pledged to the State of Florida
as security for payment of workers' compensation claims.
Inventories--Merchandise inventories are valued at the lower of last-in,
first-out (LIFO) cost or market using the retail method. Information relating
to the first-in, first-out (FIFO) method may be useful in comparing operating
results to those companies not on LIFO. If the FIFO method had been used by the
Company, merchandise inventory would have been $3,112,000 and $3,086,000 higher
than as reported as of December 30, 1995 and December 28, 1996. Due to the LIFO
method of inventory valuation, income before income taxes was decreased by
$206,000 for the year ended December 30, 1995 and increased by $26,000 for the
year ended December 28, 1996.
Gasoline is valued at the lower of FIFO cost or market.
Property, Equipment and Leasehold Improvements--Property, equipment and
leasehold improvements are stated at cost, which includes cost of construction,
property taxes and interest incurred during development. Depreciation and
amortization for financial reporting purposes are computed using the straight-
line method based upon the following estimated useful lives in years:
<TABLE>
<S> <C>
Buildings.......................................... 18-30
Office and store equipment......................... 3-15
Automotive equipment............................... 3-4
Leasehold improvements, equipment and buildings Shorter of the initial
under lease....................................... lease term or estimated
useful under lease life
of asset.
</TABLE>
F-51
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
Repairs and maintenance are charged to income; major expenditures for
renewals and betterments are capitalized. When items of property are sold or
otherwise disposed of, the related costs and accumulated depreciation or
amortization are removed from the accounts, and any resulting gains or losses
are credited or charged to income.
Investment in The Eli Witt Company--The Company accounts for its
investment in The Eli Witt Company ("Eli Witt"), formerly known as Certified
Grocers of Florida, Inc., at lower of cost or estimated market. Writedowns of
this investment are considered to be permanent diminutions in value.
Goodwill--Goodwill is being amortized using the straight-line method over
twenty-five years.
Leasing Arrangements--A substantial portion of the Company's operations
are conducted in leased premises. Some leases on convenience store locations
provide for a base rental amount per month and contingent additional rentals if
an annual gross sales floor is exceeded. Renewal options generally provide for
multiple terms of five years each and in some instances are at increased
rentals. Some leases require the Company to pay real estate taxes and other
expenses.
Certain building and equipment leases have been capitalized and are being
amortized over the shorter of the lease term or the estimated useful life of
the asset. All other leases are accounted for as operating leases. In most
cases, management expects that leases will be renewed or replaced by other
leases in the normal course of business.
Workers' Compensation Self-Insurance--The Company self-insures its
exposure to workers' compensation claims up to certain limits. The Company
records estimated liabilities based on currently available information.
Ultimate claims and expenses may vary from the current estimates and as
adjustments become necessary, they are recorded in earnings in the periods in
which they become known.
Group Health Self Insurance--The Company self-insures its group health
insurance claims to certain limits per occurrence. Estimated liabilities are
based on prior years' experience on claims and on current year fixed
administrative costs.
Income Taxes--The Company's parent files consolidated Federal income tax
returns. For financial statement purposes, the Company determines its income
tax liability and provisions using the separate return method.
Deferred income taxes are provided on temporary differences between the
financial reporting and the tax basis of the Company's assets and liabilities.
Deferred Income--Gains resulting from sale/leaseback transactions
involving land and buildings have been deferred. Such gains are being amortized
in proportion to the amortization of the leased asset, if a capital lease, or
in proportion to the related gross rental charged to expense over the lease
term, if an operating lease.
F-52
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3--PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
A summary of property, equipment and leasehold improvements, net, follows
(in thousands):
<TABLE>
<CAPTION>
December 30, December 28,
1995 1996
------------ ------------
<S> <C> <C>
Land............................................... $ 44,581 $ 44,894
Buildings.......................................... 30,172 29,000
Store equipment.................................... 26,327 34,539
Leasehold improvements............................. 7,629 7,468
Automotive equipment............................... 547 581
Office equipment................................... 589 587
Construction in progress........................... 238 285
-------- --------
$110,083 $117,354
======== ========
</TABLE>
4--LEASES
Capital Leases--Minimum future lease payments under capital leases at
December 28, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year Ending:
1997............................................................ $ 2,274
1998............................................................ 2,170
1999............................................................ 2,083
2000............................................................ 2,039
2001............................................................ 1,973
Thereafter...................................................... 10,750
-------
Total minimum lease payments...................................... 21,289
Less interest portion............................................. (7,705)
-------
Present value of minimum lease payments (current portion of
$1,037).......................................................... $13,584
=======
</TABLE>
F-53
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
Operating Leases--Rent expense for the years December 30, 1995 and
December 28, 1996 was approximately $7,935,000 and $8,552,000. Minimum annual
rentals under noncancellable leases having an initial or remaining term of more
than one year at December 28, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year Ending:
1997.............................................................. $ 4,672
1998.............................................................. 4,342
1999.............................................................. 3,995
2000.............................................................. 3,465
2001.............................................................. 2,756
Thereafter........................................................ 9,865
-------
Total........................................................... $29,095
=======
</TABLE>
5--LONG-TERM DEBT
At December 30, 1995 and December 28, 1996 long-term debt comprised the
following (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Borrowings under revolving credit agreement with Credit
Lyonnais; interest is based on the New York interbank
eurodollar market rate ("Eurorate") plus .4% (6.30% and
6.08% at December 30, 1995 and December 28, 1996);
expiring January 31, 1997. Guaranteed by Docks de
France, S.A. .......................................... $ 6,000 $ 3,000
Note payable to bank under a commitment for total
borrowings up to $8,000 at a variable rate (6.684% and
6.50% at December 30, 1995 and December 28, 1996),
payable in annual installments of 16.67% of the loan
balance payable January 1996 and 1997 and the balance
due January 1998; guaranteed by Docks de France,
S.A. .................................................. 5,334 4,001
Borrowings under $20,000 revolving credit agreement with
Credit Lyonnais; interest is based on the Paris
Interbank Official Rate ("PIBOR") plus .25% (5.84% at
December 28, 1996), maturing on June 8, 1998.
Guaranteed by Docks de France, S.A. ................... 20,000
Borrowings under $15,000 revolving credit agreement with
Societe Generale; interest is based on the Eurorate
plus .35% (6.314% at December 30, 1995), guaranteed by
Docks de France, S.A. On December 30, 1996 the Company
secured a letter of intent to extend this credit
facility for one year.................................. 11,000
Other notes and mortgages payable, generally due in
monthly installments of principal plus interest at
various rates and terms................................ 69 49
-------- --------
22,403 27,050
Less current portion.................................... (4,353) (4,355)
-------- --------
$18,050 $22,695
======== ========
</TABLE>
The borrowings with Credit Lyonnais require the Company to obtain consent
from Credit Lyonnais before paying any dividends.
F-54
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
Because the Company has the ability and the intent to refinance
$6,000,000 of borrowings from Docks de France, S.A. otherwise coming due during
1997, this amount has been reclassified from current liabilities to long-term
as of December 28, 1996.
Aggregate principal payments required on long-term debt during each of
the fiscal years ending subsequent to December 28, 1996 are as follows (in
thousands):
<TABLE>
<S> <C>
Fiscal Year Ending In:
1997............................................................ $ 4,355
1998............................................................ 22,691
1999............................................................ 4
--------
$ 27,050
========
</TABLE>
6--RELATED PARTY TRANSACTIONS
Certain premises used by LCFS in its operations are leased under
arrangements with related parties. Rental payments under such leases for the
years ended December 30, 1995 and December 28, 1996 were approximately
$2,417,000 and $2,582,000. Required future rentals, which relate to both
capital and operating leases, at December 28, 1996 are as follows (in
thousands):
<TABLE>
<S> <C>
Fiscal Year Ending In:
1997............................................................. $ 2,825
1998............................................................. 2,813
1999............................................................. 2,749
2000............................................................. 2,672
2001............................................................. 2,600
Thereafter....................................................... 12,498
-------
$26,157
=======
</TABLE>
Sunbelt Wholesale, a company controlled by Robert Jackson, a brother of
an officer of the Company, furnishes certain supplies to the Company. Payments
to Sunbelt Wholesale were approximately $2,233,000 and $2,102,000 for the years
ended December 30, 1995 and December 28, 1996.
Allsafe Security Systems, Inc. and Allsafe Paging Systems, Inc.,
companies controlled by Lester Jackson, a brother of an officer of the Company,
supplies burglar alarms, security systems and an alerting system which allows
mobility to store personnel. This equipment is subject to a monthly rental fee
plus charges for initial installation and maintenance. Approximately $882,000
and $1,207,000 was expended for this service for the years ended December 30,
1995 and December 28, 1996.
F-55
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
The $6,000,000 due to Docks de France, S.A. is payable June 25, 1997.
Interest accrues at 6.6% per annum. Interest of $990,000 and $594,000 was paid
for the years ended December 30, 1995 and December 28, 1996. See note 5 related
to the classification of this amount.
LCFS paid Docks U.S.A., Inc. approximately $500,000 of service agreement
fees for the years ended December 30, 1995 and December 28, 1996.
During 1996, the company entered into sale-leaseback transactions with a
director whereby buildings were sold to the director for $4,176,000. This same
property was then leased back to the company. The leases were classified as
capital leases, therefore the underlying property was capitalized and the
obligation recognized.
7--INCOME TAXES
The provision for income taxes for the years ended December 30, 1995 and
December 28, 1996 is comprised of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Current:
Federal.................................................. $4,897 $2,028
State.................................................... 832 346
------ ------
5,729 2,374
------ ------
Deferred:
Federal.................................................. (634) 2,223
State.................................................... (110) 384
------ ------
(744) 2,607
------ ------
Provision for income taxes................................. $4,985 $4,981
====== ======
</TABLE>
Income taxes, for the years ended December 30, 1995 and December 28,
1996, differ from the amount computed by applying the federal statutory
corporate rate to earnings before income taxes. The amounts of such differences
(in thousands) and the reasons are set forth in the table below:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Provision based on federal income tax rate................. $4,240 $4,226
State income taxes--net of federal income tax benefit...... 580 481
Nondeductible amortization................................. 267 267
Other...................................................... (102) 7
------ ------
Actual provision for income taxes.......................... $4,985 $4,981
====== ======
</TABLE>
F-56
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
The types of temporary differences and their related tax effects which
create deferred tax liabilities at December 30, 1995 and December 28, 1996 are
summarized below (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Deferred tax liabilities:
Fixed asset basis differences............................ $7,960 $10,525
Reserve for LIFO......................................... 1,821 1,582
Deductible prepaids...................................... 3,066 1,762
Other.................................................... 609
------ -------
12,847 14,478
------ -------
Deferred tax assets:
Capital leases........................................... 853 874
Writedown of investment in Eli Witt...................... 516
Self-insured liabilities................................. 3,719 3,454
Other.................................................... 216
------ -------
5,304 4,328
------ -------
Net deferred tax liability................................. $7,543 $10,150
====== =======
</TABLE>
8--COMMITMENTS AND CONTINGENCIES
The Company is a party to various lawsuits, threatened suits and claims.
It is the opinion of management that the resolution of such matters will not
have a material adverse effect on the Company's financial position or results
of operations.
9--CASH FLOW
Supplemental disclosure of noncash investing and financing activities (in
thousands):
<TABLE>
<CAPTION>
1995 1996
---- ------
<S> <C> <C>
Additional capital lease obligations on buildings............. $-0- $4,176
==== ======
</TABLE>
10--RETIREMENT SAVINGS PLAN
LCFS has a 401(k) plan for all full-time employees who are 21 years of
age or older and who have been employed one year with at least 1,000 hours of
service. Participants can contribute 1% to 10% of their salary, not to exceed a
maximum allowable contribution amount. Participant contributions are 100%
vested. Distributions may be made at employment termination, retirement, or in
the event participants are disabled or can demonstrate financial hardship. The
Company matches an amount equal to 15% of the participants' contribution. The
total contribution for the years ended December 30, 1995 and December 28, 1996
was $83,000 and $98,000.
F-57
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
11--ENVIRONMENTAL MATTERS
The ownership and/or operation of underground storage tanks is subject to
federal, state and local laws and regulations.
Prior to 1996, LCFS was involved in evaluating and cleaning up
environmental contamination caused by releases of petroleum products at its
stores. The costs related to this process are reimbursable from state programs
in both Florida and Georgia, which are funded from taxes and fees paid based on
the purchase of petroleum products. The Company has not been able to reasonably
estimate that amount which will be reimbursed by the state of Georgia;
therefore, amounts expended for clean-up in Georgia have generally been
expensed and although some portion of this amount may be reimbursed in the
future the Company has not recorded a receivable for such amounts. LCFS has
recorded receivables for amounts recoverable from the state of Florida and
outside engineering firms and has provided an allowance on environmental
receivables of $1,558,000 and $1,139,000 as of December 30, 1995 and December
28, 1996 and $1,249,000 (unaudited) as of September 27, 1997. This allowance is
an estimate of amounts that LCFS has incurred that may not be reimbursed by the
state of Florida and outside engineering firms.
In prior years, LCFS entered into agreements with outside engineering
firms to assume the clean-up of contamination sites in Florida. Under these
arrangements LCFS was still responsible for the clean-up of the sites but LCFS
did not incur significant expenditures to complete the clean-up of existing
sites. LCFS had expended funds which were submitted to the State for
reimbursement by the outside engineering firms. These amounts, which represent
approximately 48% of the gross environmental receivable, will be reimbursed
directly to the engineering firms who will in-turn reimburse LCFS.
During 1996, new legislation was enacted by the State of Florida which
replaced the State's previous reimbursement program. All expenditures incurred
through March 29, 1995 and submitted for reimbursement by December 31, 1996
will be evaluated and reimbursed on the same basis as prior submissions. Under
the new legislation, the State has assumed the responsibility for clean-up of
registered sites assessed and reported to the State under the previous program,
but not yet remediated, exclusive of tank or other hardware replacement.
Georgia Underground Storage Tank Fund--Remediation of contaminated sites
in Georgia will be reimbursed under the state program for eligible costs to a
maximum of $1,000,000 per site. A $10,000 deductible applies to each site. All
LCFS sites in Georgia qualify for coverage from this fund. LCFS does not
currently expect remediation at any of its sites to exceed $1,000,000 of
coverage.
Florida Underground Storage Tank Fund--Remediation of contaminated sites
in Florida is eligible for reimbursement under the state's program. For
incidents discovered and reported to the state prior to July 1, 1992, the state
will reimburse for all eligible remediation costs to a maximum of $1,000,000
per incident with an annual aggregate of $2,000,000 per facility. For incidents
discovered
F-58
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
from July 1, 1992 to June 30, 1993, the state will reimburse for all eligible
reimbursement costs to a maximum of $1,000,000 subject to a $1,000 deductible.
For incidents discovered from July 1, 1993 to December 31, 1993, the state will
reimburse for all eligible reimbursement costs to a maximum of $1,000,000
subject to a $5,000 deductible. For incidents discovered from January 1, 1994
to December 31, 1996 the maximum reimbursement was reduced to $300,000 per site
with a $10,000 deductible. For incidents discovered subsequent to December 31,
1996, the maximum reimbursement was reduced to $150,000 per site with a $10,000
deductible. For incidents discovered subsequent to December 31, 1998 no costs
will be eligible for reimbursement under this program. LCFS is responsible for
all costs in excess of the state limits. Notwithstanding this schedule of
limits, certain of the LCFS sites are covered under the other Florida "trust
fund" programs pursuant to which the state will pay all required costs.
During 1997 management of the Company did a comprehensive review of the
status of its stores as it relates to environmental remediation and as a result
decided to record an environmental contamination charge as of September 27,
1997 of approximately $3,381,000 (Unaudited).
In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 96-1, Environmental Remediation Liabilities. SOP 96-1 provides
authoritative guidance on specific accounting issues that are present in the
recognition, measurement, display and disclosure of environmental remediation
liabilities. The provisions of this SOP are effective for fiscal years
beginning after December 15, 1996. The Company's management does not believe
the adoption of this statement will have a material impact on the Company's
financial statements.
12--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of all of the Company's financial instruments
approximates their fair value.
13--SUBSEQUENT EVENT (UNAUDITED)
On October 23, 1997, The Pantry, Inc. purchased all of the capital stock
of LCFS for $132.7 million in cash and repaid all outstanding indebtedness of
LCFS.
F-59
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Quick Stop Food Mart, Inc.
Fayetteville, North Carolina
We have audited the accompanying balance sheets of Quick Stop Food Mart,
Inc. as of December 31, 1996 and 1997, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Quick Stop Food
Mart, Inc. as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Cherry, Bekaert & Holland, L.L.P.
Fayetteville, North Carolina
March 6, 1998, except for Note 10,
as to which the date is February 24, 1999
F-60
<PAGE>
QUICK STOP FOOD MART, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
----------------------- -----------
1996 1997 1998
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents................ $ 1,489,685 $ 930,995 $ 2,209,473
Receivables (net of allowance for
doubtful accounts of $30,000 in 1996 and
$33,000 in 1997 and 1998)............... 971,690 1,241,442 965,351
Inventories.............................. 3,303,988 3,805,653 3,334,167
Other current assets..................... 147,765 140,265 292,520
----------- ----------- -----------
TOTAL CURRENT ASSETS................. 5,913,128 6,118,355 6,801,511
----------- ----------- -----------
PROPERTY AND EQUIPMENT
Land and buildings....................... 6,794,281 9,615,335 9,912,660
Store and office equipment............... 16,135,535 21,651,228 22,345,714
Transportation equipment................. 937,019 1,026,034 1,094,310
Leasehold improvements................... 2,575,573 3,117,212 3,277,948
Construction-in-progress................. 2,308,181 137,347 23,006
----------- ----------- -----------
28,750,589 35,547,156 36,653,638
Less accumulated depreciation.......... 12,826,346 14,609,791 16,071,013
----------- ----------- -----------
NET PROPERTY AND EQUIPMENT........... 15,924,243 20,937,365 20,582,625
----------- ----------- -----------
OTHER NONCURRENT ASSETS.................... 1,510,193 1,724,495 1,799,870
----------- ----------- -----------
$23,347,564 $28,780,215 $29,184,006
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt........ $ 1,121,949 $ 804,606 $ 5,941,863
Line of credit........................... -- 600,000 1,300,000
Bonds payable related party.............. 25,829 25,829 25,829
Accounts payable and accrued expenses.... 7,750,842 7,995,854 7,788,880
----------- ----------- -----------
TOTAL CURRENT LIABILITIES............ 8,898,620 9,426,289 15,056,572
----------- ----------- -----------
LONG-TERM DEBT............................. 2,002,604 5,529,179 --
----------- ----------- -----------
TOTAL LIABILITIES.................... 10,901,224 14,955,468 15,056,572
----------- ----------- -----------
STOCKHOLDERS' EQUITY
Common stock (par value $1). Authorized
100,000 shares; issued and outstanding
1,026 shares in 1996 and 1,078 shares in
1997 and 1998........................... 1,026 1,078 1,078
Additional paid-in capital............... 671,577 886,446 886,446
Retained earnings........................ 11,773,737 12,937,223 13,239,910
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY........... 12,446,340 13,824,747 14,127,434
----------- ----------- -----------
$23,347,564 $28,780,215 $29,184,006
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-61
<PAGE>
QUICK STOP FOOD MART, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended June
Years Ended December 31, 30,
-------------------------------------- -----------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net Sales............... $135,467,154 $143,568,524 $164,503,534 $78,222,131 $75,922,825
Cost of goods sold...... 111,059,632 119,888,214 137,102,870 65,945,552 63,290,730
------------ ------------ ------------ ----------- -----------
Gross Profit.......... 24,407,522 23,680,310 27,400,664 12,276,579 12,632,095
Operating and
administrative
expenses............... 21,639,341 21,812,494 24,569,641 11,878,685 11,278,924
------------ ------------ ------------ ----------- -----------
Income from
operations........... 2,768,181 1,867,816 2,831,023 397,894 1,353,171
Other income............ 407,372 466,743 254,463 184,370 149,516
------------ ------------ ------------ ----------- -----------
Net income............ $ 3,175,553 $ 2,334,559 $ 3,085,486 $ 582,264 $ 1,502,687
============ ============ ============ =========== ===========
</TABLE>
See Notes to Financial Statements
F-62
<PAGE>
QUICK STOP FOOD MART, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------- Six Months Ended
1995 1996 1997 June 30, 1998
----------- ----------- ----------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
COMMON STOCK
Beginning of year..... $ 1,023 $ 1,023 $ 1,026 $ 1,078
Additional shares
issued (3 shares in
1996 and 52 shares in
1997)................ -- 3 52 --
----------- ----------- ----------- -----------
End of year........... $ 1,023 $ 1,026 $ 1,078 $ 1,078
=========== =========== =========== ===========
ADDITIONAL PAID-IN
CAPITAL
Beginning of year..... $ 649,198 $ 649,198 $ 671,577 $ 886,446
Additions............. -- 22,379 214,869 --
----------- ----------- ----------- -----------
End of year........... $ 649,198 $ 671,577 $ 886,446 $ 886,446
=========== =========== =========== ===========
RETAINED EARNINGS
Beginning of year..... $ 9,236,916 $11,131,019 $11,773,737 $12,937,223
Net income............ 3,175,553 2,334,559 3,085,486 1,502,687
Stockholder
distributions........ (1,281,450) (1,691,841) (1,922,000) (1,200,000)
----------- ----------- ----------- -----------
End of year........... $11,131,019 $11,773,737 $12,937,223 $13,239,910
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-63
<PAGE>
QUICK STOP FOOD MART, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
-------------------------------------- ----------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income............. $ 3,175,553 $ 2,334,559 $ 3,085,486 $ 582,264 $1,502,687
Adjustments to
reconcile net income
to net cash provided
by operating
activities --
Depreciation and
amortization........ 1,778,181 1,880,460 2,514,142 1,084,392 1,465,309
(Gain) loss on
disposal of property
and equipment....... (68,573) 17,114 89,722 -- --
(Increase) decrease
in receivables...... 13,954 (53,488) (269,752) 20,381 276,091
(Increase) decrease
in inventories...... 119,566 (392,916) (501,665) (397,216) 471,486
(Increase) decrease
in other current
assets.............. (248,229) 91,243 7,500 (36,576) (152,255)
(Increase) decrease
in other noncurrent
assets.............. (237,213) (355,925) (223,322) 142,680 (79,463)
Increase (decrease)
in accounts payable
and accrued
expenses............ 436,565 1,253,749 245,012 355,484 (206,973)
----------- ----------- ------------ ----------- ----------
NET CASH PROVIDED
BY OPERATING
ACTIVITIES........ 4,969,804 4,774,796 4,947,123 1,751,409 3,276,882
----------- ----------- ------------ ----------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from sale of
property and
equipment............. 155,000 45,575 1,852,021 -- --
Additions to property
and equipment......... (1,248,986) (6,613,166) (9,459,986) (4,455,070) (1,106,482)
----------- ----------- ------------ ----------- ----------
NET CASH USED BY
INVESTING
ACTIVITIES........ (1,093,986) (6,567,591) (7,607,965) (4,455,070) (1,106,482)
----------- ----------- ------------ ----------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from issuance
of debt............... 1,285,000 -- 20,936,250 4,304,469 700,000
Principal payments on
debt.................. (2,202,716) (461,494) (17,127,019) (254,765) (391,922)
Proceeds from sale of
stock................. -- 22,382 214,921 214,921 --
Stockholder
distributions......... (1,281,450) (1,691,841) (1,922,000) (1,300,000) (1,200,000)
----------- ----------- ------------ ----------- ----------
NET CASH FLOWS
PROVIDED (USED) BY
FINANCING
ACTIVITIES........ (2,199,166) (2,130,953) 2,102,152 2,964,625 (891,922)
----------- ----------- ------------ ----------- ----------
NET INCREASE
(DECREASE) IN CASH
AND CASH
EQUIVALENTS....... 1,676,652 (3,923,748) (558,690) 260,964 1,278,478
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD.... 3,736,781 5,413,433 1,489,685 1,489,685 930,995
----------- ----------- ------------ ----------- ----------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD................. $ 5,413,433 $ 1,489,685 $ 930,995 $ 1,750,649 $2,209,473
=========== =========== ============ =========== ==========
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid.......... $ 356,158 $ 295,729 $ 537,603 $ 240,106 $ 310,571
=========== =========== ============ =========== ==========
</TABLE>
See Notes to Financial Statements.
F-64
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
The Corporation operates convenience stores under the name of "Quick
Stop" in North and South Carolina. Revenues are generated primarily by the sale
of various merchandise and petroleum products to the general public.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Statements of Cash Flows
For purposes of the statements of cash flows, the Corporation considers
all highly liquid debt instruments purchased with a maturity date of three
months or less to be cash equivalents.
Inventories
Substantially all merchandise inventories are stated at the lower of cost
or market using the retail last-in, first-out (LIFO) inventory method. Gasoline
inventories are stated at the lower of cost or market using the LIFO method.
The current cost of inventories valued under the first-in, first-out, (FIFO)
method exceeded their LIFO carrying values by approximately $1,738,000,
$1,717,000, and $1,717,000 at December 31, 1996 and 1997, and June 30, 1998
respectively.
Property and Equipment
Property and equipment is stated at cost. Maintenance and repairs are
charged to operations as incurred, and renewals and betterments are
capitalized. Gains or losses on disposals are credited or charged to
operations.
Depreciation
Depreciation and amortization is charged to income over the estimated
useful lives of assets using the straight-line method for financial statement
purposes.
Stockholders' Equity
All stockholders have equal voting rights according to the number of
shares held. Distributions are primarily made to compensate for the individual
tax impact of Subchapter "S" earnings passed through to each stockholder.
F-65
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Advertising
The Corporation expenses advertising costs as incurred. Advertising costs
for the years ended 1995, 1996 and 1997 were approximately $253,000, $299,000
and $207,000, respectively.
Income Taxes
The Corporation has elected by unanimous consent of its stockholders to
be taxed under the provisions of Subchapter "S" of the Internal Revenue code.
Under those provisions, the Corporation does not pay federal and state income
taxes on its taxable income. Instead, the stockholders are liable for
individual federal and state income taxes on their respective shares of the
Corporation's taxable income.
Profit-Sharing Plan
The Corporation sponsors a profit-sharing plan covering full-time
employees who meet specified age and length of service requirements.
Contributions are determined annually based on a percentage of net income as
approved by the Board of Directors. Contributions amounted to $367,000 in 1995
$278,000 in 1996 and $386,000 in 1997. The Board of Directors intends to
terminate the plan after receipt of a determination letter from the IRS. No
contributions were made to the plan after December 31, 1997.
Environmental Remediation
The Corporation accrues environmental remediation costs if it is probable
that an asset has been impaired or a liability incurred at the financial
statement date and the amount can be reasonably be estimated.
Unaudited Interim Financial Statements
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
NOTE 2--CASH AND CASH EQUIVALENTS
The Corporation maintains cash and cash equivalent balances at several
financial institutions in North and South Carolina. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. At December 31, 1996 and 1997, the Corporation's uninsured bank
balances totalled approximately $1,339,000 and $760,000, respectively.
NOTE 3--LINES OF CREDIT
The Corporation has entered into four credit line arrangements with a
local bank providing maximum borrowings of $15,750,000. Amounts borrowed under
these agreements are due on May 31, 1998 and require monthly interest payments
at the prevailing prime rate minus 1/4%. On May 31, 1998, any unpaid principal
balances shall be set up as a term note. The credit lines are guaranteed by
related parties and secured by inventory, accounts receivable, and equipment.
F-66
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
These credit lines and certain other long term debt obligations contain
restrictions on the combined amounts of stockholders' compensation, dividends
which may be paid, the issuance of additional debt, and other covenants. In
addition, the loan agreements provide that certain financial ratios and other
financial requirements be maintained.
The lines of credit were renewed on May 31, 1998 for a year under the
same terms. These obligations were repaid in full on July 2, 1998 in connection
with the sale of assets (see Note 10).
No advances were outstanding at December 31, 1996; advances outstanding
at December 31, 1997, and June 30, 1998, totalled $600,000 and $1,300,000,
respectively.
NOTE 4--BONDS PAYABLE RELATED PARTY
Bonds payable related party includes obligations to majority stockholders
that are due currently and includes interest at the applicable federal rate.
The obligations are unsecured.
NOTE 5--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1996 1997 1998
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Notes payable to individuals, due in
monthly installments of $4,371 including
interest at 7.5%; collateralized by
Deeds of Trust.......................... $ 221,146 $ 184,016 $ 164,364
Notes payable to bank, due in monthly
installments of approximately $48,700
plus interest ranging from the
prevailing prime rate minus 1/4% to the
prevailing prime rate plus 1/2%;
collateralized by inventories, property
and equipment, assignment of leases on
certain properties, and Deeds of Trust.. 2,535,298 5,950,639 5,667,300
Note payable to bank, due in monthly
installments of $15,747 including
interest at 6.75%. The loan is
collaterized by inventories and property
and equipment........................... 368,109 199,130 110,199
---------- ---------- ---------
3,124,553 6,333,785 5,941,863
Less current installments................ 1,121,949 804,606 5,941,863
---------- ---------- ---------
$2,002,604 $5,529,179 $ --
========== ========== =========
</TABLE>
Maturities of long-term debt at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
December 31
-----------
<S> <C>
1998......................................................... $804,606
1999......................................................... 697,313
2000......................................................... 1,684,049
2001......................................................... 1,611,178
2002......................................................... 1,536,639
----------
$6,333,785
==========
</TABLE>
Interest expense for years ended December 31, 1995, 1996 and 1997
totalled approximately $354,000, $293,000 and $553,000, respectively.
F-67
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In connection with the sale of assets and corporate dissolution described
in Note 10, the notes payable balances outstanding at June 30, 1998, were
repaid during 1998 and 1999. Accordingly, these balances have been reflected as
current liabilities at June 30, 1998.
NOTE 6--STOCK OPTION PLANS
In accordance with a non-qualified stock option plan for key employees,
options have been granted to purchase 281 shares of common stock. The purchase
price of these options are fixed at prices ranging from $4,000 to $7,461 per
share.
Options granted, exercised and canceled during 1995, 1996 and 1997 are as
follows,
<TABLE>
<CAPTION>
December 31,
--------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Options outstanding on January 1.......................... 148 148 145
Granted................................................... -- -- --
Exercised................................................. -- 3 52
Canceled.................................................. -- -- --
Options outstanding at December 31........................ 148 145 93
</TABLE>
The weighted average exercise price for options outstanding at December
31, 1995, 1996 and 1997 was $6,175, $6,220 and $7,461. Options exercised during
1996 and 1997 had a weighted average exercise price of $4,000 in each year.
All options outstanding at December 31, 1997, were exercised on July 1,
1998, for $7,461 per share, in connection with the sale of assets and corporate
dissolution (see Note 10).
NOTE 7--STOCKHOLDER DISTRIBUTIONS
During the years ended December 31, 1995, 1996, and 1997, and the six-
month period ended June 30, 1998, the Corporation made distributions to its
stockholders of amounts estimated to compensate for the individual tax impact
of Sub chapter "S" earnings passed through to each stockholder. Total
distributions amounted to approximately $1,281,000, $1,692,000, $1,922,000, and
$1,200,000 in each of the respective periods.
NOTE 8--SALE TO RELATED PARTY
During 1997, the Corporation sold land and buildings with a book value of
approximately $1,697,000 to a related party, realizing a gain of approximately
$5,000.
NOTE 9--COMMITMENTS AND CONTINGENT LIABILITIES
Lessee Arrangements
The Corporation conducts substantially all of its operations utilizing
leased facilities. Some of the operating leases provide that the Corporation
pay taxes, maintenance and other occupancy expenses applicable to leased
premises. Generally, the leases provide for renewal for various periods at
stipulated rates. Some leases also provide for contingent rents, which are
based on store sales. These contingent amounts are payable in addition to
minimum rental payments.
F-68
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
At December 31, 1997, minimum rental payments under noncancellable
operating leases are as follows:
<TABLE>
<CAPTION>
Years Ending Related Parties Other
------------ --------------- ----------
<S> <C> <C>
1998............................................ $ 1,505,118 $1,080,622
1999............................................ 1,505,118 879,891
2000............................................ 1,505,118 848,379
2001............................................ 1,505,118 705,236
2002............................................ 1,505,118 565,215
Thereafter...................................... 4,013,647 2,116,449
----------- ----------
Total minimum lease payments.................. $11,539,237 $6,195,792
=========== ==========
</TABLE>
Rental expense charged to operations is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rentals under operating leases.... $2,469,107 $2,948,423 $3,125,215
Contingent rentals under operating
leases................................... 15,604 20,573 24,955
---------- ---------- ----------
$2,484,711 $2,968,996 $3,150,170
========== ========== ==========
</TABLE>
The principal owners of the Corporation and other companies which they
own or with which they are associated are considered related parties. Rental
expense listed above included minimum rental payments to related parties of
approximately $1,466,000, $1,485,000 and $1,521,000 for years ended December
31, 1995, 1996 and 1997, respectively.
Lessor Arrangements
The Corporation subleases facilities to others primarily through
noncancellable operating leases with terms ranging from five to twenty years.
The following is a schedule of future minimum rental income for noncancellable
operating leases with remaining terms of one year or more at December 31, 1997:
<TABLE>
<CAPTION>
Years Ending
------------
<S> <C>
1998........................................................ $ 160,572
1999........................................................ 157,642
2000........................................................ 132,642
2001........................................................ 120,792
2002........................................................ 105,192
Thereafter.................................................. 452,890
----------
Total minimum rental income.................................. $1,129,730
==========
</TABLE>
The Corporation has guaranteed the repayment of principal and interest on
certain obligations of a related corporation. These obligations are
collateralized by all inventories and equipment of the Corporation. At December
31, 1997 and June 30, 1998 such guarantees totalled approximately $3,300,000
and $3,150,000, respectively.
F-69
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
At December 31, 1997 and June 30, 1998 the Corporation had letters of
credit outstanding totaling $350,000 and $250,000, respectively, which may be
drawn upon to cover a corrective action arising from operating underground
storage tanks and to cover workers' compensation claims.
At December 31, 1997 and June 30, 1998 the Corporation had contracted
with outside parties for approximately $800,000 for various construction
projects.
The Corporation is subject to laws and regulations relating to the
protection of the environment. While it is not possible to quantify with
certainty the potential impact of actions regarding environmental matters,
particularly any future remediation and other compliance efforts, in the
opinion of management, compliance with the present environmental protection
laws will not have a material adverse effect on the financial position,
competitive position, or capital expenditures of the Corporation.
The Corporation is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially affect
the financial position of the Corporation.
NOTE 10--SUBSEQUENT EVENT--SALE OF ASSETS AND CORPORATE DISSOLUTION
Effective July 2, 1998, the Corporation sold certain assets to The
Pantry, Inc., including the operating assets of the Corporation's seventy-five
(75) convenience stores, inventory and the "Quick Stop" name. The sales price
was $50,000,000 in cash, plus inventory at cost. The Corporation retained
primarily cash and cash equivalents, real estate and debt associated with the
real estate.
In connection with the acquisition, the Corporation changed its name from
"Quick Stop Food Mart, Inc." to "Southern Carolina Property, Inc." paid off all
line of credit balances and equipment loans outstanding at July 2, 1998, and
negotiated long term real estate operating leases with The Pantry, Inc. In
addition, certain operating lease obligations between the Corporation and
related parties were renegotiated between these related parties and The Pantry,
Inc.
All stock options outstanding at December 31, 1997, were exercised prior
to July 2, 1998, for $7,461 per share.
Effective January 29, 1999, the board of directors elected to dissolve
the Corporation and distribute all remaining assets and liabilities to the
shareholders. The Corporation is currently redeeding real estate and
renegotiating mortgages associated with the real estate.
F-70
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Express Stop, Inc.
Fayetteville, North Carolina
We have audited the accompanying balance sheet of Express Stop, Inc. as
of December 31, 1997, and the related statement of income, retained earnings,
and cash flows for the year then ended. These financial statements are the
representation of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Express Stop, Inc.
as of December 31, 1997 and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ Griffin, Maxwell, & Frazelle, P.A.
Fayetteville, North Carolina
September 25, 1998
F-71
<PAGE>
EXPRESS STOP, INC.
BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents (Note 2)............... $1,654 $1,315
Certificates of deposit.......................... 279 283
Accounts receivable: (Note 5)
Trade.......................................... 36 13
Merchandise distributors....................... 353 158
Credit cards................................... 190 252
Inventories (Notes 3 and 5)...................... 1,364 1,393
Prepaid expenses and other....................... 34 86
------ ------
Total current assets......................... 3,910 3,500
------ ------
LONG-TERM RECEIVABLES AND OTHER ASSETS
Environmental remediation receivables (Note 11).. 1,100 1,100
Advances to affiliated companies, unsecured...... 116 251
Investment in partnership (Note 4)............... 109 149
Other (Note 12).................................. 77 185
------ ------
1,402 1,685
------ ------
PROPERTY AND EQUIPMENT (Note 5)
Equipment........................................ 4,387 4,146
Vehicles......................................... 160 137
Leasehold improvements........................... 914 1,026
Construction and equipment installations in
progress........................................ -- 575
------ ------
5,461 5,884
Less accumulated depreciation and amortization... 3,337 3,271
------ ------
2,124 2,613
------ ------
$7,436 7,798
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt (Note 5).... $ 177 $ 532
Accounts payable:
Trade.......................................... 2,151 1,751
Other.......................................... 69 60
Accrued expenses:
Salaries....................................... 185 102
Profit sharing................................. 25 --
Other.......................................... 58 69
------ ------
Total current liabilities.................... 2,665 2,514
------ ------
LONG-TERM DEBT, less current maturities (Note 5)... 1,073 612
------ ------
OTHER NONCURRENT LIABILITIES
Environmental remediation liabilities (Note 11).. 1,100 1,100
Deferred income, net (Note 7).................... 81 76
Other............................................ 56 56
------ ------
1,237 1,232
------ ------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 11)
STOCKHOLDERS' EQUITY
Common stock, par value $15 per share, authorized
and issued 2,000 shares........................... 30 30
Retained earnings................................ 2,431 3,410
------ ------
2,461 3,440
------ ------
$7,436 $7,798
====== ======
</TABLE>
See Notes to Financial Statements.
F-72
<PAGE>
EXPRESS STOP, INC.
STATEMENTS OF INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------ ---------------------------
December 31, September 30, September 30,
1997 1997 1998
------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues:
Merchandise sales................... $18,439 $13,630 $15,910
Fuel sales (Note 6)................. 29,984 22,631 20,384
Video sales......................... 1,432 1,042 1,402
Commissions and other (Note 10)..... 347 176 233
------- ------- -------
50,202 37,479 37,929
------- ------- -------
Cost of sales:
Merchandise......................... 13,960 10,241 12,028
Fuel (Note 6)....................... 27,222 20,714 18,257
------- ------- -------
41,182 30,955 30,285
------- ------- -------
Gross Profit...................... 9,020 6,524 7,644
------- ------- -------
Operating expenses: (Notes 7, 8, 9 and
10)
Store expenses...................... 5,291 3,901 3,889
General and administrative.......... 851 611 721
Depreciation and amortization....... 753 537 572
------- ------- -------
6,895 5,049 5,182
------- ------- -------
Income from operations................ 2,125 1,475 2,462
------- ------- -------
Financial revenue (expense):
Interest and dividends.............. 49 32 66
Interest expense.................... (122) (95) (89)
Gain on sale of equipment........... 5 7 48
Equity in partnership earnings (Note
4)................................. 42 31 41
------- ------- -------
(26) (25) 66
------- ------- -------
Net income............................ $ 2,099 $ 1,450 $ 2,528
======= ======= =======
</TABLE>
See Notes to Financial Statements.
F-73
<PAGE>
EXPRESS STOP, INC.
STATEMENTS OF RETAINED EARNINGS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
December 31, September 30, September 30,
1997 1997 1998
------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Balance, beginning.................... $ 1,370 $1,370 $2,431
Net income............................ 2,099 1,450 2,528
Less cash dividends on common stock,
$519.00, $419.00, and $775.00 per
share, respectively.................. (1,038) (838) (1,549)
------- ------ ------
Balance, ending....................... $ 2,431 $1,982 $3,410
======= ====== ======
</TABLE>
See Notes to Financial Statements.
F-74
<PAGE>
EXPRESS STOP, INC.
STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
December 31, September 30, September 30,
1997 1997 1998
------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers......... $ 49,723 $ 36,881 $ 37,650
Cash paid to suppliers and
employees........................... (47,037) (35,676) (35,393)
Other operating revenue.............. 347 175 233
Interest and dividends received...... 49 32 66
Interest paid........................ (122) (95) (89)
-------- -------- --------
Net cash provided by operating
activities........................ 2,960 1,317 2,467
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certificates of deposit.. (161) (161) (4)
Repayments by (advances to)
affiliated companies................ (26) 90 (135)
Purchase of property and equipment... (689) (512) (1,124)
Proceeds from sale of equipment...... 19 47 111
Partnership distributions received... 42 32 1
-------- -------- --------
Net cash used in investing
activities........................ (815) (504) (1,151)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings... -- 200 269
Principal payments on long-term
borrowings.......................... (81) -- --
Repayments to affiliates............. (195) (209) (375)
Dividend payments to shareholders.... (1,038) (838) (1,549)
-------- -------- --------
Net cash used in financing
activities........................ (1,314) (847) (1,655)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents..................... 831 (34) (339)
Cash and cash equivalents at beginning
of period............................ 823 823 1,654
-------- -------- --------
Cash and cash equivalents at end of
period............................... $ 1,654 $ 789 $ 1,315
======== ======== ========
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income........................... $ 2,099 $ 1,450 $ 2,528
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization....... 773 537 572
Distributive share of partnership
income............................. (42) (31) (41)
Gain on sale of assets.............. (5) (7) (48)
Change in assets and liabilities:
Accounts receivable................. (257) (422) 19
Inventory........................... (208) (227) (29)
Prepaid expenses.................... 29 24 (52)
Deposits............................ 134 -- --
Other assets........................ (43) -- 29
Accounts payable.................... 410 79 (389)
Accrued expenses.................... 37 (86) (97)
Deferred income..................... 33 -- (25)
-------- -------- --------
Net cash provided by operating
activities........................ $ 2,960 $ 1,317 $ 2,467
======== ======== ========
</TABLE>
See Notes to Financial Statements
F-75
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
The Company's operations consist primarily of the operation of
convenience stores located in North and South Carolina.
A summary of the Company's significant accounting policies follows:
Estimates:
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Statements of cash flows:
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity date of three months
or less to be cash equivalents.
Financial instruments:
The carrying value of cash, receivables and accounts payable approximate
fair value due to the short maturity of these instruments. The fair value of
investment in partnership is not subject to estimation because of its illiquid
nature. The fair values of long-term debt, which are approximately equal to
their carrying values, are estimated based on interest rates commercially
available for the same or similar debt.
Inventories:
Inventories are valued at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
Property and equipment:
Property and equipment is stated at cost, less accumulated depreciation
and amortization. Depreciation is provided primarily by the use of accelerated
methods over the estimated useful lives of the assets.
Impairment of assets:
The Company reviews long-lived assets on a store-by-store basis whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If an evaluation were required, the projected
future undiscounted cash flows attributable to each store would be compared to
the carrying value of the long-lived assets of that store to determine if a
write-down to fair value is required.
F-76
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Investment in partnership:
Investment in partnership is accounted for using the equity method. The
initial investment was recorded at cost. Subsequently, the carrying amount has
been increased to reflect the Company's share of income, and has been reduced
to reflect the Company's share of losses and cash distributions.
Advertising:
The Company expenses advertising as incurred. Advertising expense was
$57,000 for the year ended December, 31, 1997.
Income taxes:
The Company, with the consent of its stockholders, has elected to be
taxed under sections of the federal and state income tax law, which provide
that, in lieu of corporation income taxes, the stockholders separately account
for their pro rata shares of the Company's items of income, deductions, losses
and credits. Therefore, these statements do not include any provision for
corporation income taxes.
Unaudited interim financial statements
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
NOTE 2--CASH
The Company maintains cash deposits in several commercial banks. The
amounts on deposit at December 31, 1997 exceeded the insurance limits provided
by the Federal Deposit Insurance Corporation by approximately $1,667,000.
NOTE 3--INVENTORIES
Inventories consist of the following: (in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
<S> <C> <C>
Merchandise..................................... $ 987 $1,059
Fuel............................................ 377 334
------ ------
$1,364 $1,393
====== ======
</TABLE>
F-77
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 4--INVESTMENT IN PARTNERSHIP
The Company owns a 50% interest in a general partnership (Mexican
Express) which sells branded food items in two of the Company's store
locations. The Company has included $43,000 of income in the statement of
operations for the year ended December 31, 1997.
NOTE 5--LINE OF CREDIT AND LONG-TERM DEBT
The Company, its stockholders and an affiliated partnership have been
granted a financing arrangement which provides for 1) a term loan up to
$1,700,000, payable $23,500 per month including interest; 2) a term loan up to
$950,000, payable $12,500 per month including interest; 3) a term loan up to
$750,000, payable $9,900 per month including interest; and 4) a line of credit
of up to $500,000 payable accrued interest only per month with credit line due
upon demand. Interest on the first two advances is calculated at LIBOR rate
plus 2.15%. Interest on the third and fourth advances is calculated at LIBOR
rate plus 2.00%. Collateral includes equipment with a cost of $2,719,000 and a
book value of $1,103,000, inventory with a book value of $575,000, accounts
receivable of $288,000, deed of trust on property owned by affiliates, and the
personal guarantee of the stockholders. Total advances to all parties to this
agreement amounted to $1,805,000 as of December 31, 1997. All of these advances
were made subject to the term loan agreements described in 1) and 2) above.
Long-term debt consists of the following as of December 31, 1997: (in
thousands)
<TABLE>
<S> <C>
Outstanding advances under the above financing agreement........... $1,190
Note payable to bank, due in monthly installments of $435 including
interest at 7.59% to September, 2006 collateralized by equipment
with a book value of $61,000 and a deed of trust on real estate
owned by the stockholders......................................... 33
Note payable to utility company, due in monthly installments of
$1,082 including interest at 7% to March, 2000. Collateralized by
equipment with a book value of $22,000............................ 27
------
1,250
Less current maturities............................................ 177
------
$1,073
======
</TABLE>
The prime rate of interest was 8.50% and the LIBOR rate was 5.95% as of
December 31, 1997.
Approximate principal maturities of long-term debt for the years
following December 31, 1997 are as follows: (in thousands)
<TABLE>
<S> <C>
1998................................................................ $177
1999................................................................ 192
2000................................................................ 197
2001................................................................ 210
2002................................................................ 227
Later............................................................... 247
------
$1,250
======
</TABLE>
F-78
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of September 30, 1998, the Company and its stockholders and affiliates
had borrowed $750,000 subject to the term loan agreement described in 3) above
and $500,000 subject to the line of credit described in 4) above, to finance
the construction and equipping of two additional stores. (Unaudited)
NOTE 6--EXCISE AND USE TAXES
The Company collects and remits various Federal and State excise and use
taxes on petroleum products. Sales and cost of sales included approximately
$9,655,000 of such taxes for the year ended December 31, 1997.
NOTE 7--DEFERRED INCOME
The Company has received funds from a major oil company in conjunction
with a modernization assistance program to help pay for new or newly modernized
retail outlets. The Company opened one such outlet in 1994, two in 1996, and
one in 1997. Amounts received are amortized over 15 years. The unamortized
amount is refundable to the oil company if the Company changes brands of
gasoline carried. As of December 31, 1997 accumulated amortization was $12,500,
and $7,000 was credited to expense in 1997.
NOTE 8--DEFINED CONTRIBUTION RETIREMENT PLAN
The Company has adopted a defined contribution retirement plan covering
all employees who have completed three years of service. Contributions totaled
$25,000 for the year ended December 31, 1997.
NOTE 9--LEASE COMMITMENTS AND RENTAL EXPENSE
The Company leases store buildings, land, store equipment and office
facilities under operating leases. The real estate leases require the payment
by the Company of property taxes, utilities and routine maintenance.
Rent expense for operating leases of real estate and equipment amounted
to $725,000 and $257,000, respectively for the year ended December 31, 1997.
Future minimum lease payments as of December 31, 1997 for operating
leases with an initial or remaining term in excess of one year are as follows:
(in thousands)
<TABLE>
<CAPTION>
Real Estate Equipment
----------- ---------
<S> <C> <C>
1998................................................. $ 700 $160
1999................................................. 521 107
2000................................................. 437 7
2001................................................. 437 --
2002................................................. 408 --
Thereafter........................................... 2,031 --
------ ----
$4,534 $274
====== ====
</TABLE>
F-79
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 10--RELATED PARTY TRANSACTIONS
The majority of the above leases are with the stockholders or with
entities controlled by the stockholders. Rents paid under these real estate and
equipment leases amounted to $583,000 and $195,000, respectively for the year
ended December 31, 1997.
Commissions and other income include $80,000 paid to the Company by
entities controlled by the stockholders, for accounting, data processing and
administrative services provided.
NOTE 11--COMMITMENTS AND CONTINGENCIES
The State of South Carolina Administrative Law Judge Division has
affirmed a decision by the Department of Revenue to revoke the business license
of one of the Company's stores because of an alleged violation of the South
Carolina Video Games Machine Act. The Company has appealed this action, and the
order has been stayed by the Court of Common Pleas for Richmond County, South
Carolina. No further action has been taken or is expected, and the Company does
not anticipate that any material loss will be incurred.
The South Carolina Department of Health and Environmental Control has
made inquiries about a third party settlement received by the Company for
damages incurred by the faulty supply and installation of petroleum tanks and
equipment at one of its stores. The purpose of the inquiry is to determine if
any outside funding source would have to be exhausted prior to payment of
future remediation costs at this site. No action has been taken or is expected
to be commenced, and the Company intends to vigorously contest this matter if
it is asserted in the future. The Company has deferred $56,000 of the
settlement received from the third party. Legal counsel has estimated that the
potential loss, although unlikely, could range from $0 to $82,000 in excess of
the deferral.
The Company is involved in certain other legal proceedings arising in the
course of normal business activities. In the opinion of management, the
ultimate settlement of these proceedings will not have a material adverse
effect on the financial statements.
The shareholders have contracted for the construction of two new store
buildings in the total amount of $1,335,000. None of these funds were expended
as of December 31, 1997.
The Company is subject to Federal and state environmental laws and
regulations governing the use and maintenance of underground storage tanks
(USTs). These laws and regulations require expenditures for compliance, and
establish requirements for the installation and upgrading of tank systems,
continual monitoring and inspection, recordkeeping, identification of leaking
or otherwise defective tank systems, and possible corrective actions.
The Environmental Protection Agency has required that leak detection
procedures be implemented at all stores, and that corrosion protection and
overfill/spill prevention devices be installed by the end of 1998. The Company
anticipates that it will meet the 1998 deadline for all of its USTs.
North and South Carolina have established trust funds for the sharing,
recovery, and reimbursement of costs incurred as a result of releases from
USTs. The Company participates in these programs by virtue of the payment of
registration fees on each UST and taxes on the purchase
F-80
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
of motor fuels. The trust funds essentially provide insurance of up to
$1,000,000 per site for cleanup of environmental contamination, exclusive of
per-site deductibles, contamination which occurred prior to the establishment
of the trusts, and the removal and disposal of defective USTs.
As of December 31, 1997, the Company is responsible for the remediation
of contamination at six sites. $1,100,000 has been accrued for these estimated
future remediation costs. The Company expects to recover all of these
expenditures from either trust funds ($750,000) or insurance companies
($350,000). Reimbursement from the state trust funds will be dependent on the
continued financial viability of the funds.
Although the Company is not aware of releases or contamination at other
locations which it operates, any such event could require material remediation
costs, some or all of which may not be reimbursable from trust funds, insurance
or other third parties.
NOTE 12--SUBSEQUENT EVENTS
In May 1998, the Company sold its store operation located in Mebane,
North Carolina to an unrelated third party. The sales price was $240,000 for
fixtures and equipment and $50,000 for inventory, and a gain of $33,000 was
realized upon completion of the transaction. The Company took a note receivable
from the buyer, collateralized by a security agreement on the assets acquired,
in the amount of $145,000, repayable in sixty monthly installments of $2,940
including interest at 8.00%.
At September 25, 1998, the Company has reached an agreement in principal
to sell substantially all of its operating assets to The Pantry, Inc. The sales
price is $20,300,000 plus the cost of inventory acquired. $2,500,000 of the
purchase price is subject to an escrow agreement until March 1999, and may be
forfeited upon the occurrence of specific events or conditions relating to the
operating of video poker machines in the State of South Carolina.
F-81
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Miller Enterprises, Inc. and
Peninsular Petroleum Company:
We have audited the accompanying combined balance sheets of MILLER
ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY, (Florida corporations) as
of April 2, 1997 and April 1, 1998 and the related combined statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended April 1, 1998. These financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Miller Enterprises, Inc.
and Peninsular Petroleum Company as of April 2, 1997 and April 1, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended April 1, 1998 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Jacksonville, Florida
February 18, 1999
F-82
<PAGE>
MILLER ENTERPRISES, INC. AND
PENINSULAR PETROLEUM COMPANY
COMBINED BALANCE SHEETS
APRIL 2, 1997, APRIL 1, 1998, AND DECEMBER 30, 1998
<TABLE>
<CAPTION>
April 2, April 1, December 30,
1997 1998 1998
------------ ------------ ------------
(Unaudited)
ASSETS
------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents......... $ 13,905,044 $ 12,282,797 $ 10,648,576
Accounts and notes receivable..... 3,846,452 4,878,095 5,507,034
Inventories....................... 7,401,844 4,659,131 5,862,141
Prepaid expenses and other........ 1,383,597 1,605,777 1,854,862
------------ ------------ ------------
Total current assets............ 26,536,937 23,425,800 23,872,613
------------ ------------ ------------
Property and equipment.............. 42,230,649 44,624,853 52,203,049
Less accumulated depreciation..... (23,183,642) (19,728,258) (21,393,897)
------------ ------------ ------------
Property and equipment, net....... 19,047,007 24,896,595 30,809,152
------------ ------------ ------------
Other assets:
Receivables due from
stockholders..................... 4,513,171 4,669,053 4,784,387
Note receivable from related
party............................ -- -- 1,272,595
Other assets...................... 438,181 172,985 2,161,993
------------ ------------ ------------
Total other assets.............. 4,951,352 4,842,038 8,218,975
------------ ------------ ------------
Total assets.................... $ 50,535,296 $ 53,164,433 $ 62,900,740
============ ============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY
-----------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable.................. $ 13,341,528 $ 10,205,305 $ 12,542,871
Income taxes payable.............. 3,409,519 3,461,841 3,069,184
Accrued payroll expenses.......... 872,192 680,124 853,973
Accrued self-insurance reserves... 1,613,670 1,564,454 1,026,754
Other accrued expenses and
liabilities...................... 3,084,949 2,330,980 3,134,328
Current portion of long-term
debt............................. 1,071,270 1,238,976 1,530,675
------------ ------------ ------------
Total current liabilities....... 23,393,128 19,481,680 22,157,785
Long-term debt, less current
portion............................ 7,645,975 6,602,138 9,762,094
Other noncurrent liabilities........ 1,507,965 2,270,353 5,426,394
------------ ------------ ------------
Total liabilities............... 32,547,068 28,354,171 37,346,273
------------ ------------ ------------
Commitments and contingencies (Notes
1, 7, 8, 9, 10, and 12)
Stockholders' equity:
Capital stock..................... 6,877,922 6,163,314 6,163,314
Additional paid-in capital........ 749,577 1,019,663 1,019,663
Retained earnings................. 10,360,729 17,627,285 18,371,490
------------ ------------ ------------
Total stockholders' equity...... 17,988,228 24,810,262 25,554,467
------------ ------------ ------------
Total liabilities and stockholders'
equity............................. $ 50,535,296 $ 53,164,433 $ 62,900,740
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-83
<PAGE>
MILLER ENTERPRISES, INC. AND
PENINSULAR PETROLEUM COMPANY
COMBINED STATEMENTS OF INCOME
For the Years Ended March 27, 1996, April 2, 1997, and April 1, 1998
and For the Nine Months Ended December 25, 1997 and December 30, 1998
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
---------------------------------------- --------------------------
March 27, April 2, April 1, December 25, December 30,
1996 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $136,626,214 $148,222,390 $122,554,607 $ 97,853,788 $ 80,886,319
Gasoline sales........ 113,623,513 139,233,090 145,186,322 108,962,544 106,293,593
Commissions........... 2,843,857 2,740,526 2,720,675 2,027,707 1,609,443
Other................. 99,110 139,981 138,745 130,073 151,792
------------ ------------ ------------ ------------ ------------
Total revenues...... 253,192,694 290,335,987 270,600,349 208,974,112 188,941,147
------------ ------------ ------------ ------------ ------------
Cost of sales:
Merchandise........... 93,672,065 100,427,933 79,136,610 65,137,202 50,700,620
Gasoline.............. 98,232,796 122,936,536 126,285,061 94,925,918 91,656,914
------------ ------------ ------------ ------------ ------------
Total cost of
sales.............. 191,904,861 223,364,469 205,421,671 160,063,120 142,357,534
------------ ------------ ------------ ------------ ------------
Gross Profit............ 61,287,833 66,971,518 65,178,678 48,910,992 46,583,613
------------ ------------ ------------ ------------ ------------
Operating Expenses:
Store expenses........ 41,483,791 44,727,224 42,205,094 33,468,781 31,760,582
General and
administrative
expenses............. 13,044,366 14,739,025 15,540,929 9,755,926 10,772,133
Depreciation and
amortization......... 3,327,063 3,276,034 3,153,420 2,284,203 2,552,342
------------ ------------ ------------ ------------ ------------
Total operating
expenses........... 57,855,220 62,742,283 60,899,443 45,508,910 45,085,057
------------ ------------ ------------ ------------ ------------
Income from operations.. 3,432,613 4,229,235 4,279,235 3,402,082 1,498,556
Other Income (Expenses):
Interest income....... 12,456 78,312 267,129 127,395 92,975
Interest expense...... (517,408) (457,480) (389,641) (295,641) (223,091)
Gain on sale of fixed
assets............... 425,219 97,229 10,639,819 10,639,819 --
Other (expense)
income............... 30,874 129,991 (237,274) (149,081) 66,138
------------ ------------ ------------ ------------ ------------
Total other
(expense) income... (48,859) (151,948) 10,280,033 10,322,492 (63,978)
------------ ------------ ------------ ------------ ------------
Income before income
taxes.................. 3,383,754 4,077,287 14,559,268 13,724,574 1,434,578
Income tax expense...... 1,186,206 1,463,472 5,472,857 5,340,591 425,322
------------ ------------ ------------ ------------ ------------
Net income.............. $ 2,197,548 $ 2,613,815 $ 9,086,411 $ 8,383,983 $ 1,009,256
============ ============ ============ ============ ============
Pro forma tax adjustment
on
S Corporation income... 103,739 108,100 150,330 60,863 126,990
------------ ------------ ------------ ------------ ------------
Pro forma net income.... $ 2,093,809 $ 2,505,715 $ 8,936,081 $ 8,323,120 $ 882,266
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-84
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended March 27, 1996, April 2, 1997, and April 1, 1998
<TABLE>
<CAPTION>
Miller Enterprises, Inc.
--------------------------------------------------------------
Class A Class B Peninsular
Preferred Stock Common Stock Common Stock Additional Common Stock
------------------- --------------- ------------- Paid-In -------------- Retained
Shares Amount Shares Amount Shares Amount Capital Shares Amount Earnings Total
------- ---------- ------- ------ ------ ------ ---------- ------ ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March
29, 1995......... 695,860 $6,958,620 277,938 $2,779 16,251 $163 $ 464,295 10,000 $10,000 $ 6,250,133 $13,685,990
Net income........ -- -- -- -- -- -- -- -- -- 2,197,548 2,197,548
Shareholder
distributions.... -- -- -- -- -- -- -- -- -- (105,000) (105,000)
Purchase and
retirement of
stock............ (3,955) (39,550) (1,541) (15) -- -- -- -- -- (56,450) (96,015)
Issuance of common
stock............ -- -- -- -- 2,032 20 105,293 -- -- -- 105,313
------- ---------- ------- ------ ------ ---- ---------- ------ ------- ----------- -----------
Balance at March
27, 1996......... 691,905 6,919,070 276,397 2,764 18,283 183 569,588 10,000 10,000 8,286,231 15,787,836
Net income........ -- -- -- -- -- -- -- -- -- 2,613,815 2,613,815
Shareholder
distributions.... -- -- -- -- -- -- -- -- -- (450,000) (450,000)
Purchase and
retirement of
stock............ (5,412) (54,120) (1,581) (16) -- -- -- -- -- (89,317) (143,453)
Issuance of common
stock............ -- -- -- -- 4,092 41 179,989 -- -- -- 180,030
------- ---------- ------- ------ ------ ---- ---------- ------ ------- ----------- -----------
Balance at April
2, 1997.......... 686,493 6,864,950 274,816 2,748 22,375 224 749,577 10,000 10,000 10,360,729 17,988,228
Net income........ -- -- -- -- -- -- -- -- -- 9,086,411 9,086,411
Shareholder
distributions.... -- -- -- -- -- -- -- -- -- (650,000) (650,000)
Purchase and
retirement of
stock............ (71,441) (714,410) (23,668) (237) -- -- -- -- -- (1,169,855) (1,884,502)
Issuance of common
stock............ -- -- -- -- 3,972 39 270,086 -- -- -- 270,125
------- ---------- ------- ------ ------ ---- ---------- ------ ------- ----------- -----------
Balance at April
1, 1998.......... 615,052 $6,150,540 251,148 $2,511 26,347 $263 $1,019,663 10,000 $10,000 $17,627,285 $24,810,262
======= ========== ======= ====== ====== ==== ========== ====== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-85
<PAGE>
MILLER ENTERPRISES, INC. AND
PENINSULAR PETROLEUM COMPANY
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 27, 1996, APRIL 2, 1997, AND APRIL 1, 1998,
AND FOR THE NINE MONTHS ENDED DECEMBER 25, 1997, AND DECEMBER 30, 1998
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
-------------------------------------- --------------------------
March 27, April 2, April 1, December 25, December 30,
1996 1997 1998 1997 1998
----------- ----------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............. $ 2,197,548 $ 2,613,815 $ 9,086,411 $ 8,383,983 $ 1,009,256
----------- ----------- ------------ ------------ -----------
Adjustments to
reconcile net income
to net cash provided
by (used in )
operating activities:
Depreciation and
amortization........ 3,327,063 3,276,034 3,153,420 2,284,203 2,552,342
Deferred income tax
(benefit)
provision........... (622,904) (169,655) 1,119,392 1,475,811 543,451
Gain on sales of
assets.............. (425,219) (97,229) (10,639,819) (10,639,819) --
Loss on investment in
Eli Witt Company.... -- 743,757 -- -- --
Stock issued as
compensation........ 105,313 180,030 270,125 -- --
Changes in assets and
liabilities:
Accounts and notes
receivable........ 269,538 (1,462,545) (1,031,643) 1,289,534 (628,939)
Inventories........ (616,684) (402,283) 417,273 227,096 (1,203,010)
Prepaid expenses
and other assets.. (546,022) 223,858 (406,329) (1,387,618) (2,525,463)
Accounts payable... 847,906 2,029,929 (3,136,223) (4,415,711) 2,337,566
Accrued expenses
and other
liabilities....... 2,128,656 (830,598) (691,580) (466,093) 2,941,115
----------- ----------- ------------ ------------ -----------
Total
adjustments...... 4,467,647 3,491,298 (10,945,384) (11,632,597) 4,017,062
----------- ----------- ------------ ------------ -----------
Net cash provided
by (used in)
operating
activities....... 6,665,195 6,105,113 (1,858,973) (3,248,614) 5,026,318
----------- ----------- ------------ ------------ -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Proceeds from sales of
assets................ 1,161,579 768,010 15,225,292 15,018,477 11,833
Purchases of property
and equipment......... (6,497,411) (2,332,016) (11,382,933) (6,492,767) (9,749,027)
Proceeds from sale of
investment in Eli Witt
Company............... -- 750,000 -- -- --
----------- ----------- ------------ ------------ -----------
Net cash (used in)
provided by
investing
activities....... (5,335,832) (814,006) 3,842,359 8,525,710 (9,737,194)
----------- ----------- ------------ ------------ -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal payments on
long-term debt........ (3,517,902) (2,552,850) (1,071,131) (6,013,846) (119,379)
Borrowings on long-term
debt.................. 3,738,944 2,382,978 -- -- 3,571,034
Shareholder
distributions......... (105,000) (450,000) (650,000) (650,000) (375,000)
Purchase and retirement
of stock.............. (96,015) (143,453) (1,884,502) (1,884,502) --
----------- ----------- ------------ ------------ -----------
Net cash provided
by (used in)
financing
activities....... 20,027 (763,325) (3,605,633) (8,548,348) 3,076,655
----------- ----------- ------------ ------------ -----------
NET INCREASE (DECREASE)
IN CASH................ 1,349,390 4,527,782 (1,622,247) (3,271,252) (1,634,221)
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 8,027,872 9,377,262 13,905,044 13,905,044 12,282,797
----------- ----------- ------------ ------------ -----------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 9,377,262 $13,905,044 $ 12,282,797 $ 10,633,792 $10,648,576
=========== =========== ============ ============ ===========
SUPPLEMENTAL
DISCLOSURES:
Income taxes paid...... $ 990,219 $ 2,446,000 $ 4,815,500 $ 3,165,500 $ 1,424,000
=========== =========== ============ ============ ===========
Interest paid.......... $ 490,067 $ 403,499 $ 392,714 $ 295,941 $ 222,563
=========== =========== ============ ============ ===========
NONCASH INVESTING
ACTIVITY:
Purchase of property
and equipment for note
payable............... $ -- $ -- $ 195,000 $ 195,000 $ --
=========== =========== ============ ============ ===========
Sale of property and
equipment for note
receivable............ $ 108,028 $ -- $ -- $ -- $ 1,272,595
=========== =========== ============ ============ ===========
</TABLE>
F-86
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
March 27, 1996, April 2, 1997, and April 1, 1998
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description and Principles of Combination
These financial statements are the combined financial statements of
Miller Enterprises, Inc. (a C corporation) and Peninsular Petroleum Company (an
S corporation) (collectively the "Companies"). These entities are combined as
they are under common control by a group of related parties. Miller
Enterprises, Inc. ("Miller") currently owns and operates convenience stores
throughout central Florida. Peninsular Petroleum Company ("Peninsular")
operates a petroleum-shipping business, where approximately 95% of its shipping
is derived from the convenience stores owned by Miller. All intercompany
transactions are eliminated in the combination. On January 28, 1999, the
shareholders of the Companies sold the stock of Miller and Peninsular and
certain real property owned by other related entities to Lil' Champ Food
Stores, Inc., a subsidiary of The Pantry, a convenience store company
headquartered in Sanford, North Carolina (Note 11).
Fiscal Year-Ends and Combined Periods
Miller operates under a 52- to 53-week fiscal year. The fiscal years
ended March 27, 1996, April 2, 1997, and April 1, 1998 were comprised of 52
weeks, 53 weeks, and 52 weeks, respectively. Peninsular operates on a calendar
year basis. For purposes of the combination, the calendar years ended December
31, 1995, 1996, and 1997 were combined with Miller's fiscal years ended
March 27, 1996, April 2, 1997, and April 1, 1998, respectively.
Unaudited Financial Statements
In the opinion of management, the unaudited statements of income and cash
flows for the nine months ended December 25, 1997 and December 30, 1998 and the
unaudited balance sheet as of December 30, 1998 include all adjustments (which
include only normal recurring adjustments) necessary to present the financial
position and results of operations and cash flows for those periods in
accordance with generally accepted accounting principles.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash held at banks and
money market instruments with original maturity dates of less than three
months.
F-87
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
Inventories
Inventories are stated at the lower of cost or market, which is defined
as net realizable value. Cost is determined using the last-in, first-out
("LIFO") method for merchandise inventories and the first-in, first-out
("FIFO") method for gasoline and other inventories. Such inventory value is
approximately $4,800,000 and $2,596,000 for merchandise inventories and
$2,602,000 and $2,063,000 for gasoline and other inventories as of April 2,
1997 and April 1, 1998, respectively. Merchandise inventories would have been
$3,442,000 and $2,254,000 higher if the FIFO method was used in 1997 and 1998
respectively. Net income of approximately $814,000, was recorded in fiscal 1998
as a result of the liquidation of LIFO inventory quantities.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on the following useful lives:
<TABLE>
<S> <C>
Buildings............................... 15-30 years
Furniture and equipment................. 7-10 years
Leasehold improvements, equipment under Shorter of initial lease term or
lease.................................. estimated useful life of asset
</TABLE>
The cost and accumulated depreciation of assets sold or retired are
removed from the respective accounts, and any gain or loss from sale or
retirement of property and equipment is recognized in the accompanying
statements of income. Maintenance and repair costs are charged to expense as
incurred, and major renewals and betterments are capitalized.
Property and equipment and other long-lived assets are evaluated
periodically for other than temporary impairment. If circumstances suggest that
their values may be impaired and the related write-downs would be material, an
assessment of recoverability is performed prior to any write-down of the asset.
Income Taxes
Miller records deferred tax assets and liabilities based on the
differences between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes, referred to as temporary differences.
Deferred tax assets or liabilities at the end of each period are determined
using the currently enacted tax rates to apply to taxable income in the periods
in which the particular deferred tax asset or liability is expected to be
settled or realized.
Peninsular is an S corporation, and accordingly, does not provide for
federal or state income taxes. Each shareholder in this entity reports their
share of the profits and losses, and federal and state income taxes are
computed on each shareholders' total income from all sources. Pro forma income
tax expense is disclosed on the combined income statement assuming the same
effective rate as Miller.
F-88
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
Self-Insurance Reserves
Miller is partially self-insured for workers' compensation and has
included reserves estimated by a third-party administrator and a third-party
actuary, in current and other noncurrent liabilities in the accompanying
combined balance sheets of approximately $1,981,000, and $1,637,000 for 1997
and 1998, respectively. Miller also has related receivables, included in
accounts and notes receivable in the accompanying combined balance sheets,
from the State of Florida Disability Fund in the amounts of approximately
$647,000 and $818,000 for 1997 and 1998, respectively.
Reclassifications
Certain 1996 and 1997 amounts have been reclassified to conform with the
1998 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of April 2, 1997 and
April 1, 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Land.............................................. $ 1,616,671 $ 4,521,630
Buildings......................................... 535,950 523,455
Equipment and fixtures............................ 22,902,401 21,619,208
Construction in progress.......................... 1,591,983 2,662,241
Leasehold improvements............................ 15,583,644 15,298,319
----------- -----------
42,230,649 44,624,853
Less accumulated depreciation and amortization.... (23,183,642) (19,728,258)
----------- -----------
$19,047,007 $24,896,595
=========== ===========
</TABLE>
3. RECEIVABLES DUE FROM STOCKHOLDERS AND NOTE RECEIVABLE FROM RELATED PARTY
Receivables due from stockholders represent receivables for life
insurance premiums paid by Miller that are collateralized by assignments of
the related life insurance policies, with an aggregate face value of
$20,000,000. The policies were purchased to ensure business continuity by
providing funding for obligations arising from stock buy-sell agreements among
stockholders.
Note receivable from related party relates to a note for property sold
to a related party at cost.
F-89
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
4.LONG-TERM DEBT
At April 2, 1997 and April 1, 1998, long-term debt consisted of the
following (the prime rate at April 1, 1998 was 8.5%):
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Revolving line of credit payable to bank with
interest at prime, providing borrowings up to
$5,000,000, maturing April 30, 1999, unsecured..... $5,000,000 $5,000,000
Notes payable to a bank in equal monthly
installments aggregating $66,223, including
interest ranging from the prime rate to the prime
rate plus .75%, collateralized by equipment........ 2,298,544 1,618,322
Other notes, generally due in monthly installments
of principal plus variable interest rates ranging
from the prime rate to the prime rate plus .5% or a
fixed interest rate of 8.75%....................... 1,418,701 1,222,792
---------- ----------
8,717,245 7,841,114
Less current maturities............................. (1,071,270) (1,238,976)
---------- ----------
$7,645,975 $6,602,138
========== ==========
</TABLE>
Peninsular Petroleum Company has an unsecured line of credit of $500,000.
Interest on the unpaid balance accrues at the bank's prime rate and is paid
monthly. No amount was outstanding at April 1, 1998 and April 2, 1997.
Certain of the Companies' debt agreements contain restrictive financial
covenants, including minimum current ratio, tangible net worth, debt to net
worth, and debt service coverage, all as defined in the agreements.
The scheduled annual maturities of long-term debt are as follows as of
April 1, 1998:
<TABLE>
<S> <C>
1999.......................................................... $1,238,976
2000.......................................................... 5,820,805
2001.......................................................... 494,481
2002.......................................................... 105,072
2003.......................................................... 79,273
Thereafter.................................................... 102,507
----------
Total....................................................... $7,841,114
==========
</TABLE>
F-90
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
5.STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
At April 2, 1997 and April 1, 1998, individual equity and capital
accounts of Miller and Peninsular were as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Miller Enterprises, Inc.:
Preferred stock, $10 par value; 760,000 shares
authorized, 686,493 and 615,052 shares issued and
outstanding in 1997 and 1998, respectively.......... $ 6,864,950 $ 6,150,540
Class A common stock, $.01 par value; 2,500,000
shares authorized, 274,816 and 251,148 shares issued
and outstanding in 1997 and 1998, respectively...... 2,748 2,511
Class B common stock, $.01 par value; 2,500,000
shares authorized, and 22,375 and 26,347 shares
issued and outstanding in 1997 and 1998,
respectively........................................ 224 263
Additional paid-in capital........................... 749,577 1,019,663
Retained earnings.................................... 9,819,653 17,345,741
----------- -----------
$17,437,152 $24,518,718
=========== ===========
Peninsular Petroleum Company:
Common stock, $1 par value; 10,000 shares authorized,
issued and outstanding.............................. $ 10,000 $ 10,000
Retained earnings.................................... 541,076 281,544
----------- -----------
$ 551,076 $ 291,544
=========== ===========
Total combined stockholders' equity................ $17,988,228 $24,810,262
=========== ===========
</TABLE>
6.INCOME TAXES
The components of income tax expense (benefit) for the years ended March
27, 1996, April 2, 1997, and April 1, 1998 are summarized below:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................. $1,544,691 $1,394,429 $3,720,658
State................................... 264,419 238,698 632,807
---------- ---------- ----------
1,809,110 1,633,127 4,353,465
---------- ---------- ----------
Deferred:
Federal................................. (531,718) (144,858) 966,463
State................................... (91,186) (24,797) 152,929
---------- ---------- ----------
(622,904) (169,655) 1,119,392
---------- ---------- ----------
$1,186,206 $1,463,472 $5,472,857
========== ========== ==========
</TABLE>
F-91
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
As of April 2, 1997 and April 1, 1998, deferred tax (liabilities) assets
are comprised of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Depreciation...................................... $ (736,986) $ (986,025)
Deferred gain on sale of assets................... -- (961,060)
Other............................................. (343,079) (204,839)
----------- -----------
Deferred tax liabilities........................ (1,080,065) (2,151,924)
----------- -----------
Accrued compensation.............................. 376,645 469,445
Insurance reserves................................ 626,667 422,226
Environmental expenses............................ 59,856 113,857
Other............................................. 60,456 70,563
----------- -----------
Deferred tax assets............................. 1,123,624 1,076,091
----------- -----------
$ 43,559 $(1,075,833)
=========== ===========
</TABLE>
As of April 2, 1997 and April 1, 1998, net current deferred income tax
assets totaled $700,963 and $490,686, respectively, and net noncurrent deferred
income tax liabilities totaled $(657,404) and $(1,566,519), respectively. All
deferred tax assets are considered to be realizable due to projected future
taxable income; thus, no valuation allowance has been recorded.
Reconciliation of income taxes at the federal statutory rate (34%) to
actual taxes for the years ended March 27, 1996, April 2, 1997 and April 1,
1998 provided are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Tax provision at federal statutory
rate.................................. $1,150,476 $1,386,277 5,095,744
Tax provision at state rate, net of
federal income tax benefit............ 122,830 148,006 492,467
Effect of S corporation income......... (103,739) (108,100) (150,330)
Permanent differences:
Other................................ 16,637 37,289 34,976
---------- ---------- ----------
$1,186,206 $1,463,472 $5,472,857
========== ========== ==========
</TABLE>
F-92
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
7.OPERATING LEASES
The Company leases all of its convenience stores, of which approximately
60% are leased from related parties. Lease terms generally range up to 15
years, with options to renew for additional 5-year periods. Certain of the
leases provide for contingent rentals based on sales in excess of stipulated
amounts or based on increases in the costs of insurance or taxes.
Future minimum rental commitments under noncancelable operating leases as
of April 1, 1998 are as follows:
<TABLE>
<CAPTION>
Total Lease Net Lease
Obligations Subleases Obligations
----------- ---------- -----------
<S> <C> <C> <C>
1999...................................... $ 7,788,946 $ 340,463 $ 7,448,483
2000...................................... 8,008,866 266,023 7,742,843
2001...................................... 6,231,174 250,023 5,981,151
2002...................................... 5,540,094 246,526 5,293,568
Thereafter................................ 27,251,519 806,290 26,445,229
----------- ---------- -----------
$54,820,599 $1,909,325 $52,911,274
=========== ========== ===========
</TABLE>
For the fiscal years ended March 27, 1996, April 2, 1997, and April 1,
1998, total rental expense included in store expenses was approximately
$6,711,636, $7,970,000, and $8,666,000, respectively. Rental expense paid to
related parties and stockholders was approximately $3,050,000, $4,480,000, and
$4,872,000 in 1996, 1997, and 1998, respectively.
8.EMPLOYEE BENEFIT PLANS
Retirement Plans
Miller sponsors a 401(k) and profit-sharing plan (the "401(k)") and an
employee stock ownership plan (the "ESOP") covering eligible employees. With
respect to employer contributions, participants in the plans vest after five
years of service. On December 18, 1997, the trustees approved the termination
and liquidation of the ESOP and the purchase by Miller of all capital stock
owned by the ESOP at its fair value. Miller matches 50% of employee
contributions to the 401(k) up to 6% of the employee's salary. Miller
contributed approximately $208,000, $252,000, and $271,000 for the years ended
March 27, 1996, April 2, 1997, and April 1, 1998, respectively. Peninsular also
sponsors a 401(k) plan covering eligible employees. Matching contributions to
this plan were not significant.
Incentive Cash/Restricted Stock Bonus Plan
Miller sponsors an incentive cash/restricted stock bonus plan whereby
Miller may award cash or Class B (restricted voting rights) common stock to key
employees based on a percentage of earnings, as defined in the bonus plan.
Expenses related to this plan were approximately $105,000, $180,000, and
$270,000 in 1996, 1997, and 1998, respectively.
F-93
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
9. ENVIRONMENTAL COMPLIANCE
The ownership and/or operation of underground gasoline storage tanks is
subject to federal, state, and local laws and regulations.
Miller meets federal and state financial responsibility requirements
through the retention of third-party insurance coverage. In addition, Miller's
facilities are generally covered under the State of Florida's superfund. Miller
has an agreement with an environmental consulting and engineering firm (the
"Firm") whereby the Firm will make contamination assessments, prepare
contamination reports, and manage site remediation activities and required
agency coordination for the Miller's properties. The Firm will provide all
labor, materials, supplies, equipment, transportation, and supervision required
to perform the rehabilitation services. Under the terms of the agreement, the
Firm is paid solely by reimbursement from the State of Florida's superfund.
10. LITIGATION
In the normal course of conducting business, the Companies are involved
in various routine claims, disputes, and litigation. In the opinion of
management, the resolution of these claims, disputes, and litigation as of
period-end will not have a material adverse effect on the financial position,
results of operations, or liquidity of the Companies.
11. GAIN ON SALE OF ASSETS
On September 24, 1997, Miller Enterprises sold certain assets, consisting
primarily of inventory and fixed assets to SuperValu Operations, Inc. for net
cash proceeds of $15.1 million, resulting in a pre-tax gain of approximately
$10.5 million.
12. SUBSEQUENT EVENT
On January 28, 1999, the shareholders of the Companies sold the stock of
Miller and Peninsular and certain real property owned by other related entities
to Lil' Champ Food Stores, Inc., a subsidiary of The Pantry, a convenience
store company headquartered in Sanford, North Carolina, for $82,000,000,
subject to adjustment in accordance with the terms of the purchase agreement.
Per the purchase agreement, certain assets amounting to approximately
$7,700,000 were distributed to the shareholders of Miller prior to the
transaction and all of the outstanding debt of Miller and the debt related to
the real property purchased from the other related entities was repaid.
F-94
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
The Pantry, Inc.
Sanford, North Carolina
We have audited the accompanying statement of net assets acquired from
Miller Brothers and Circle Investments, Ltd. as of Janaury 28, 1999, by The
Pantry, Inc. This statement is the responsibility of The Pantry, Inc.'s
management. Our responsibility is to express an opinion on the statement based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the accompanying statement of net assets acquired
presents fairly, in all material respects, the net assets acquired as of
January 28, 1999 by The Pantry, Inc. from Miller Brothers and Circle
Investments, Ltd., in conformity with generally accepted principles.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
March 30, 1999
F-95
<PAGE>
THE PANTRY, INC.
STATEMENT OF NET ASSETS ACQUIRED FROM
MILLER BROTHERS AND CIRCLE INVESTMENTS, LTD.
As of January 28, 1999
(in thousands)
<TABLE>
<S> <C>
Assets acquired:
Land................................................................. $19,608
Buildings............................................................ 29,060
--------
Total assets acquired.................................................. 48,668
Deferred income taxes.................................................. 2,218
--------
Net assets acquired.................................................... $ 46,450
========
</TABLE>
See accompanying notes to statement of assets acquired.
F-96
<PAGE>
THE PANTRY, INC.
NOTES TO STATEMENT OF NET ASSETS ACQUIRED
As of January 28, 1999
1. Background
On January 28, 1999, The Pantry, Inc. (the "Company") acquired the real
estate assets of Miller Brothers and Circle Investments, Ltd., in connection
with the acquisition of 100% of the outstanding capital stock of Miller
Enterprises, Inc. (together the "Miller Acquisition"). Miller Enterprises, Inc.
is a leading operator of convenience stores, operating 121 stores located in
central Florida and operated under the name "Handy Way". The assets acquired
from Miller Brothers and Circle Investments, Ltd., ("Circle") represent real
estate, including land and buildings, leased to and used in the convenience
store operations of Miller Enterprises, Inc.
The accompanying statement relates solely to the net assets acquired by
the Company and is not intended to represent the complete financial position of
Miller Brothers and Circle.
2. Summary of Significant Accounting Policies
The Miller Acquisition, including the net assets acquired from Miller
Brothers and Circle, has been accounted for using purchase accounting. In
accordance with Accounting Principles Board Opinion No. 16, Business
Combinations ("APB 16"), the acquired assets have been recorded at their fair
values at the date of acquisition, utilizing internal and third-party
appraisals.
Deferred income taxes have been provided for the difference between the
tax basis of the assets ($43,124,000, as established in the acquisition
agreement) and the fair value of the assets determined in accordance with APB
16.
The preliminary purchase price allocation for the Miller Acquisition
results in estimated goodwill of $19,760,000. Such estimate is subject to
change pending completion of appraisals and other final allocations related to
Miller Enterprises, Inc. For purposes of the accompanying statement of net
assets acquired, no goodwill has been allocated, pending the finalization of
the fair values of the assets and liabilities acquired of Miller Enterprises,
Inc.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements.
Actual amounts could differ from these estimates.
F-97
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Taylor Oil Company
We have audited the accompanying unconsolidated balance sheets of Taylor
Oil Company as of December 31, 1997 and 1998 and the related unconsolidated
statements of income, changes in shareholders equity and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying financial statements include only the financial position
and related results of operations and cash flows of Taylor Oil Company. As
discussed in note 7, the Company reflects its investment in Triad Terminal
Company, a wholly owned subsidiary, at cost. Generally accepted accounting
principles require that the financial position and results of operations of
majority owned subsidiaries be consolidated with those of the parent company.
However, in our opinion, presentation of consolidated financial statements
would currently be misleading as these statements are to be utilized in the
sale of the Companys retail operations. As such, inclusion of the financial
position, results of operations and cash flows of Triad Terminal Company would
diminish the usefulness of these financial statements for their intended
purpose.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Taylor Oil Company
as of December 31, 1997 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Edwards, Falls & Renegar, P.L.L.C.
Winston-Salem, North Carolina
February 12, 1999
F-98
<PAGE>
TAYLOR OIL COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 2,739,844 $ 3,116,388
Receivables.......................................... 1,258,015 1,142,935
Inventories (Note 3)................................. 3,208,083 2,706,987
Prepaid expenses..................................... 138,229 158,404
Notes receivable (Note 4)............................ 212,732 418,025
----------- -----------
Total current assets............................... 7,556,903 7,542,739
----------- -----------
Operational property and equipment, net (Note 5)....... 12,048,953 11,628,753
----------- -----------
Other assets:
Environmental receivables............................ 116,670 --
Notes receivable (Note 4)............................ 585,165 167,140
Investment property, net............................. 349,769 329,846
Investment in subsidiary (Note 7).................... 1,035,000 2,235,000
Cash value of life insurance......................... 2,302,320 2,654,932
----------- -----------
Total other assets................................. 4,388,924 5,386,918
=========== ===========
Total assets........................................... $23,994,780 $24,558,410
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
TAYLOR OIL COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1998
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Current maturities of long-term debt (Note 9)........ $ 194,687 $ 291,407
Accounts payable.....................................
Trade.............................................. 2,976,407 2,429,091
Money orders....................................... 488,145 250,856
Accrued compensation and related taxes............... 331,552 365,857
Other accrued taxes.................................. 1,071,319 1,261,783
----------- -----------
Total current liabilities........................ 5,062,110 4,598,994
----------- -----------
Noncurrent liabilities
Long-term debt (Note 9).............................. 2,123,474 1,932,027
Environmental costs.................................. 184,796 110,929
----------- -----------
Total noncurrent liabilities..................... 2,308,270 2,042,956
----------- -----------
Shareholders equity
Common stock, $10 par value, 300,000 shares
authorized; 200,000 issued and outstanding.......... 2,000,000 2,000,000
Additional paid-in capital........................... 163,800 1,363,800
Retained earnings.................................... 14,460,600 14,552,660
----------- -----------
Total shareholders equity........................ 16,624,400 17,916,460
----------- -----------
Total liabilities and shareholders equity.............. $23,994,780 $24,558,410
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-100
<PAGE>
TAYLOR OIL COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Merchandise sales..................... $ 22,707,097 $ 22,661,868 $ 25,586,745
Petroleum sales....................... 105,208,948 98,440,549 84,591,573
Commissions........................... 137,711 142,569 267,518
------------ ------------ ------------
Total revenues...................... 128,053,756 121,244,986 110,445,836
------------ ------------ ------------
Cost of sales
Merchandise........................... 15,874,846 15,453,283 17,022,253
Petroleum............................. 95,257,354 87,474,554 74,421,614
------------ ------------ ------------
Total cost of sales................. 111,132,200 102,927,837 91,443,867
------------ ------------ ------------
Gross profit............................ 16,921,556 18,317,149 19,001,969
------------ ------------ ------------
Operating expenses
Store expenses........................ 11,265,038 9,793,200 9,920,619
Store expenses--related parties (Note
6)................................... 1,196,982 1,187,408 1,188,978
General and administrative expenses... 1,887,641 1,932,235 1,926,520
Impairment of long-lived assets....... 261,319 -- 219,420
Depreciation and amortization......... 1,653,319 1,892,212 1,986,879
------------ ------------ ------------
Total operating expenses............ 16,264,299 14,805,055 15,242,416
------------ ------------ ------------
Income from operations.................. 657,257 3,512,094 3,759,553
Other income, net of expenses........... 207,611 159,426 272,507
------------ ------------ ------------
Net income.............................. $ 864,868 $ 3,671,520 $ 4,032,060
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-101
<PAGE>
TAYLOR OIL COMPANY
STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------------
Additional Total
Number Par Paid-in Retained Shareholders'
of Shares Value Capital Earnings Equity
--------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1,
1996................... 200,000 $2,000,000 $ 163,800 $12,104,212 $14,268,012
Net income............ -- -- -- 864,868 864,868
Dividends paid........ -- -- -- (1,130,000) (1,130,000)
------- ---------- ---------- ----------- -----------
BALANCES, DECEMBER 31,
1996................... 200,000 2,000,000 163,800 11,839,080 14,002,880
Net income............ -- -- -- 3,671,520 3,671,520
Dividends paid........ -- -- -- (1,050,000) (1,050,000)
------- ---------- ---------- ----------- -----------
BALANCES, DECEMBER 31,
1997................... 200,000 2,000,000 163,800 14,460,600 16,624,400
Net income............ -- -- -- 4,032,060 4,032,060
Property
contribution......... -- -- 1,200,000 -- 1,200,000
Dividends paid........ -- -- -- (3,940,000) (3,940,000)
------- ---------- ---------- ----------- -----------
BALANCES, DECEMBER 31,
1998................... 200,000 $2,000,000 $1,363,800 $14,552,660 $17,916,460
======= ========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-102
<PAGE>
TAYLOR OIL COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $ 864,868 $3,671,520 $4,032,060
Adjustments to reconcile net income to net cash
provided by operating activities
Impairment of long-lived assets............... 261,319 -- 219,420
Depreciation and amortization................. 1,673,242 1,912,134 2,006,801
Loss (gain) on sale of property and
equipment.................................... 99,860 51,795 (8,958)
Provision for environmental expenses.......... 65,708 2,415 42,803
Increase in cash value of life insurance...... (307,005) (329,395) (352,612)
Changes in operating assets and liabilities
Receivables and prepaids..................... (76,707) 211,697 94,905
Inventories................................... (623,352) 470,145 501,096
Accounts payable.............................. 1,063,344 (1,002,313) (784,605)
Accrued expenses.............................. (995,384) 684,334 224,769
---------- ---------- ----------
Net cash provided by operating activities...... 2,025,893 5,672,332 5,975,679
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in notes receivable.................. (120,000) (600,000) --
Collections on notes receivable............... 293,044 60,538 212,732
Proceeds from sale of property and equipment.. 448,195 134,836 118,500
Capital expenditures.......................... (3,149,431) (2,299,660) (1,895,640)
Proceeds from sale of investment in
affiliate.................................... -- 900,000 --
---------- ---------- ----------
Net cash used in investing activities.......... (2,528,192) (1,804,286) (1,564,408)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (repayments of) credit
lines........................................ 1,200,000 (2,000,000) --
Principal repayments of long-term debt........ (230,049) (1,165,539) (94,727)
Net proceeds from issuance of long-term debt.. 1,000,000 2,000,000 --
Dividends paid................................ (1,130,000) (1,050,000) (3,940,000)
---------- ---------- ----------
Net cash provided by (used in) financing
activities.................................... 839,951 (2,215,539) (4,034,727)
---------- ---------- ----------
Net increase in cash and cash equivalents...... 337,652 1,652,507 376,544
Cash and cash equivalents, beginning of year... 749,685 1,087,337 2,739,844
---------- ---------- ----------
Cash and cash equivalents, end of year......... $1,087,337 $2,739,844 $3,116,388
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest......... $ 177,592 $ 95,775 $ 58,436
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-103
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization:
The Company is engaged primarily in retail sales of petroleum products
and convenience items through stores located in North Carolina and Virginia.
Basis of presentation:
The financial statements include only the accounts of Taylor Oil Company.
These statements do not include the accounts of Triad Terminal Company, a
wholly owned subsidiary, which is engaged in the petroleum thruput and storage
business.
Cash equivalents:
The Company considers all highly liquid debt instruments with a maturity
of three months or less to be cash equivalents.
Inventories:
Inventories are valued at the lower of cost or market with cost
determined by the last-in, first-out (LIFO) method.
Depreciation:
Depreciation expense is computed using the straight-line method over the
estimated useful lives of the assets.
Long-lived assets:
In accordance with SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, assets held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of particular assets may not be recoverable.
For purposes of evaluating the recoverability of long-lived assets, the
recoverability test is performed using undiscounted net cash flows of the
individual stores and consolidated undiscounted net cash flows for long lived
assets not identifiable to individual stores.
Environmental cleanup matters:
The Company expenses environmental expenditures related to existing
conditions resulting from past or current operations and from which no current
or future benefit is discernible. Expenditures which extend the life of the
related property or mitigate or prevent future environmental contamination are
capitalized. The Company determines its liability on a site by site basis and
records an undiscounted liability when it is probable and can be reasonably
estimated. The Companys estimated costs are reduced by anticipated
reimbursements from state administered trust funds.
F-104
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Futures contracts:
The Company periodically enters into futures contracts to hedge its
exposure to price fluctuations on crude oil and refined products transactions.
Recognized gains and losses on hedge contracts are reported as a component of
the related transaction.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2--CONCENTRATIONS OF CREDIT RISK AND CONTINGENT LIABILITIES
Financial instruments which potentially subject the company to credit
risk consist of temporary cash investments, trade accounts receivable and notes
receivable. The Company regularly maintains cash balances in excess of
federally insured limits only with financial institutions of high credit
standing. Credit risk with respect to retail accounts receivable is limited due
to the large number of customers in different industries and localities, all of
whom are regularly reviewed for credit worthiness. Wholesale accounts
receivable risk is minimized by performing ongoing credit evaluations of each
customers financial condition. Risk of loss from notes receivable, which
generally arise from the sale of company properties, is limited by maintaining
a deed of trust on the underlying property.
Taylor Oil Company is contingently liable as a guarantor of a $1,000,000
line of credit and two letters of credit totaling $750,000 for related
corporations.
Historically, the Companys credit losses have been insignificant.
NOTE 3--INVENTORIES
<TABLE>
<CAPTION>
December 31,
1997 1998
---------- ----------
<S> <C> <C>
Inventories at FIFO cost
Merchandise...................................... $1,674,158 $2,171,856
Petroleum products............................... 2,409,994 1,218,674
---------- ----------
4,084,152 3,390,530
Less adjustment to LIFO cost
Merchandise...................................... (204,953) (229,360)
Petroleum products............................... (671,116) (454,183)
---------- ----------
Inventories at LIFO cost........................... $3,208,083 $2,706,987
========== ==========
</TABLE>
F-105
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following summarizes the income effect from application of the LIFO
(last-in, first-out) inventory costing method as opposed to the FIFO (first-in,
first-out) method:
<TABLE>
<CAPTION>
Increase (Decrease) in
Income
Year Ended December 31,
----------------------------
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Merchandise.................................. ($ 38,555) $ 15,536 ($24,407)
Petroleum products........................... (665,054) 651,884 216,933
--------- -------- --------
($703,609) $667,420 $192,526
========= ======== ========
</TABLE>
NOTE 4--NOTES RECEIVABLE
<TABLE>
<CAPTION>
December 31,
1997 1998
-------- --------
<S> <C> <C>
Notes receivable (3) from buyers of Company property
and equipment, secured by deeds of trust, payable in
monthly installments and balloon payments with
interest at nine and one-half percent................ $247,897 $235,165
Note receivable from shareholder, unsecured, payable
in quarterly installments of $50,000 plus interest at
eight percent, through September, 2000............... 550,000 350,000
-------- --------
797,897 585,165
Less principal due within one year.................... (212,732) (418,025)
-------- --------
Noncurrent notes receivable........................... $585,165 $167,140
======== ========
</TABLE>
Maturities of notes receivable are as follows:
<TABLE>
<S> <C>
1999.............................................................. $418,025
2000.............................................................. 155,559
2001.............................................................. 6,080
2002.............................................................. 5,501
--------
$585,165
========
</TABLE>
NOTE 5--OPERATIONAL PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
1997 1998
----------- -----------
<S> <C> <C>
Land............................................. $ 2,556,686 $ 2,786,686
Buildings........................................ 4,110,521 4,404,954
Petroleum equipment.............................. 17,069,454 16,980,210
Other equipment.................................. 533,495 594,488
Leasehold improvements........................... 2,993,319 2,985,785
Vehicles......................................... 491,925 502,141
Petroleum tank bottoms........................... 168,260 --
Construction in progress......................... 12,960 --
----------- -----------
27,936,620 28,254,264
Less accumulated depreciation.................... (15,887,667) (16,625,511)
----------- -----------
$12,048,953 $11,628,753
=========== ===========
</TABLE>
F-106
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 6--CONVENIENCE STORE LEASES
As of December 31, 1998, the Company leases 38 convenience store
properties, of which 30 are owned by Taylor Oil Company shareholders or other
related parties. Two other ancillary properties are leased by Taylor, one of
which is subleased. The following is a schedule of Taylors minimum future lease
payments per these operating lease agreements, most of which are for initial 10
year terms with renewal options.
<TABLE>
<CAPTION>
Gross Sublease
Rentals Income Net Rentals
------------ -------- -----------
<S> <C> <C> <C>
1999..................................... $ 1,356,660 $25,800 $ 1,330,860
2000..................................... 1,266,870 -- 1,266,870
2001..................................... 1,072,260 -- 1,072,260
2002..................................... 1,064,860 -- 1,064,860
2003..................................... 1,009,805 -- 1,009,805
Thereafter............................... 4,775,180 -- 4,775,180
------------ ------- -----------
$ 10,545,635 $25,800 $10,519,835
============ ======= ===========
</TABLE>
Total net rent expense for 1996, 1997 and 1998 was $1,308,267, $1,361,498
and $1,369,278 respectively. Of these totals, related parties were paid
$1,196,982 in 1996, $1,187,408 in 1997 and $1,188,978 in 1998.
NOTE 7--EQUITY INVESTMENTS
In May 1998, Taylor Oil Company shareholders made a contribution to the
Company of their twenty-five percent interest in Triad Terminal Company, a
pipeline terminal and petroleum storage facility. This capital contribution,
the market value of which was $1,200,000, increased Taylors ownership of Triad
to one hundred percent. Prior to April 1997, Taylor also owned a fifty percent
interest in Triad Terminal Company of Selma which was sold, at that time, to
Triad Terminal Company.
The Company reflects its investment in Triad Terminal Company at cost.
Generally accepted accounting principles require that the financial position
and results of operations of majority owned subsidiaries be consolidated with
those of the parent company. These financial statements therefore do not
present the financial position or results of operations of Taylor Oil Company
in accordance with generally accepted accounting principles for consolidated
entities.
The following is a summary of transactions between Taylor and these
related parties:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Taylor management services income.............. $456,000 $448,602 $444,000
Taylor expenses
Thruput and storage.......................... $383,535 $204,276 $364,142
Convenience store rentals.................... $232,692 $186,598 $203,640
</TABLE>
F-107
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 8--BANK LINES OF CREDIT
The Company has established credit lines totaling $5,000,000 with a North
Carolina bank consisting of a seasonal line for $3,000,000 and a revolving term
line for $2,000,000. Interest on both lines, which is based on LIBOR, is
payable monthly. Advances from the seasonal line, of which there were none at
December 31, 1998, are to be repaid annually. The revolving term loan
stipulates monthly payments equal to .00833 of the principal balance
outstanding with any remaining unpaid principal due on June 1, 2003. At
December 31, 1998, $2,000,000 was owed on the revolving term line of which
$199,920 has been reported as a current liability with the balance included in
long-term debt.
NOTE 9--LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
----------------------
<S> <C> <C>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Notes payable (2) to sellers for purchase of
convenience store property and equipment,
payable in quarterly installments with interest
at nine percent................................ $ 318,161 $ 223,434
Revolving term line--Note 8..................... 2,000,000 2,000,000
---------- ----------
2,318,161 2,223,434
Less principal due within one year.............. (194,687) (291,407)
---------- ----------
Noncurrent debt................................. $2,123,474 $1,932,027
========== ==========
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1999........................................................... $ 291,407
2000........................................................... 257,648
2001........................................................... 248,290
2002........................................................... 225,769
2003........................................................... 1,200,320
-----------
$ 2,223,434
===========
</TABLE>
NOTE 10--INCOME TAXES
Taylor Oil Company operates as an S corporation whereby only incidental
income taxes are paid at the corporate level. The earnings and other tax
attributes of the corporation flow through to the shareholders and become part
of their individual income tax returns.
NOTE 11--EMPLOYEE PROFIT SHARING PLAN
Taylor maintains a combination 401(k)/profit sharing plan for the benefit
of all employees meeting age and length of service requirements. Under the
plan, for each $1 of salary deferred by plan participants, up to three percent
of total compensation, Taylor will contribute $1. Taylor makes additional
contributions for the benefit of all eligible employees, with discretionary
contributions allocated based on participant compensation. Total Company
retirement plan expense was $300,000 for 1996, $338,000 for 1997 and $388,000
for 1998.
F-108
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 12--SUBSEQUENT EVENT
On January 14, 1999, Taylor Oil Company executed an agreement with The
Pantry, Inc. to sell its retail operations no later than March 18, 1999. The
Company, or its shareholders, will continue to own the convenience store real
property which will be leased to The Pantry pursuant to concurrently negotiated
long-term lease agreements. Taylor will pay severance benefits to its employees
aggregating approximately $1.3 million shortly after the sale is consummated.
F-109
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
The Pantry, Inc.
Common Stock
----------------
PROSPECTUS
----------------
Merrill Lynch & Co.
NationsBanc Montgomery Securities LLC
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses expected to be
incurred by the Company in connection with the sale and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimated except the Securities and Exchange
Commission registration fee, the National Association of Securities Dealers,
Inc. filing fee and the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
Payable by
the Company
-----------
<S> <C>
SEC registration fee........................................... $27,800
National Association of Securities Dealers, Inc. filing fee.... 10,500
Nasdaq National Market listing fee............................. *
Accounting fees and expenses................................... *
Legal fees and expenses........................................ *
Printing expenses.............................................. *
Premium related to Director's and Officer's liability
insurance..................................................... *
Registrar and Transfer Agent's fees............................ *
Miscellaneous fees and expenses................................ *
-------
Total........................................................ $ *
=======
</TABLE>
- --------
* To be provided by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the DGCL provides for the indemnification of officers,
directors and other corporate agents in terms sufficiently broad to indemnify
such persons under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act").
The Company intends to enter into agreements to indemnify its directors.
These agreements, among other things, will indemnify the Company's directors
for certain expenses (including attorneys' fees) and liabilities (including
judgments, fines, ERISA excise taxes and penalties, penalties and amounts paid
in settlement) incurred by such person in any action or proceeding, including
but not limited to any action by or in the right of the Company, on account of
services by that person as a director of the Company or as a director or
officer of any other company or enterprise that the person provides services to
at the request of the Company. The Company has purchased directors' and
officers' liability insurance. In the event that the Company shall be obligated
to pay the expenses and liabilities of any proceeding against its directors,
the Company will be entitled to assume the defense thereof. The Company will
not be obligated to indemnify any director or officer when it is determined
that such director's or officer's actions were in violation of the law or in
bad faith.
II-1
<PAGE>
The Purchase Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Company, and its directors and officers, severally but not
jointly, and by the Company of the Underwriters, for certain liabilities,
including liabilities arising under the Securities Act, and affords certain
rights of contribution with respect thereto.
Item 15. Recent Sales of Unregistered Securities
In November 1995, the Company sold (i) 329 shares of its common stock and
75.012 shares of its Series A preferred stock to Freeman Spogli in
consideration of $125,120 in cash, and (ii) 13,700 shares of its common stock
and 3,123.600 shares of its Series A preferred stock to affiliates of Chase in
consideration of $5,206,000 in cash.
In December 1996, the Company sold 17,500 shares of its Series B
preferred stock and warrants to purchase 46,000 shares of common stock to
Freeman Spogli in consideration of an aggregate of $17,500,002 in cash.
In October 1997, the Company sold (i) 59,421 shares of its common stock
to Freeman Spogli in consideration of $26,739,450 in cash, (ii) 11,690 shares
of its common stock to Chase in consideration of $5,260,500 in cash, and (iii)
889 shares of its common stock to Peter J. Sodini in consideration of (x)
$185,450 in cash and (y) $215,050 in the form of a secured promissory note to
the Company. Also in October 1997, all of the Company's issued and outstanding
Series A preferred stock was contributed back to The Pantry and cancelled.
In July 1998, the Company sold (i) 36,190 shares of its common stock to
Freeman Spogli in consideration of $20,809,250 in cash and (ii) 7,288 shares of
its common stock to Chase in consideration of $4,190,600 in cash.
The sale and issuance of the securities described above were deemed to be
exempt from registration under the Securities Act in reliance upon Section 4(2)
thereof, as transactions not involving a public offering. The purchasers in
such private offerings represented their intention to acquire the securities
for investment only and not with a view to distribution thereof. Appropriate
legends were affixed to the stock certificates issued in such transactions. All
recipients had adequate access, through employment or other relationships, to
information about the Company. No underwriter was employed with respect to any
such sales.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
The following Exhibits are attached hereto and incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Purchase Agreement.
2.1(1) Stock Purchase Agreement dated August 26, 1997 by and between PH
Holding Corporation ("PH Holding") and Docks U.S.A., Inc.
2.2(1) Assignment and Assumption Agreement dated October 23, 1997 between PH
Holding and The Pantry.
2.3(2) Asset Purchase Agreement dated June 5, 1998 between Quick Stop Food
Mart, Inc. and the Company.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
-------- -----------------------
<C> <S>
2.4(3) Asset Purchase Agreement dated July 6, 1998 between Stallings Oil
Company and the Company.
2.5(4) Asset Purchase Agreement dated September 28, 1998, as amended on
November 5, 1998, by and among Express Stop, Inc., Bryan Oil
Company, Inc., Market Express of Shallotte, Inc., Lennon Oil
Company and the Company.
2.6(9) Purchase Agreement dated November 30, 1998 among Lil Champ Food
Stores, Inc. and the Selling Shareholders of Miller: Thomas A.
Miller, Joseph E. Miller, The Miller Investments Trust U/A dated
October 11, 1995 and The George C. Miller, Jr. Estate Trust U/A
dated June 30, 1989, and Miller Brothers and Circle Investments,
Ltd. and Miller.
2.7(12) Asset Purchase Agreement dated January 14, 1999 between Taylor Oil
Company and the Pantry.
3.1(1) Restated Certificate of Incorporation of The Pantry, as amended to
date.
3.2(11) Bylaws of The Pantry, as amended to date.
4.1(5) Indenture dated as of October 23, 1997 among The Pantry, Sandhills,
Lil' Champ (together with Sandhills, the "Guarantors") and United
States Trust Company of New York, as Trustee, with respect to the
10 1/4% Senior Subordinated Notes due 2007 (including the form of
10 1/4% Senior Subordinated Note due 2007).
4.2** Amended and Restated Registration Rights Agreement dated July 2,
1998 among The Pantry, FS Equity Partners III, L.P. ("FSEP III"),
FS Equity Partners IV, L.P. ("FSEP IV") FS Equity Partners
International, L.P. ("FSEP International"), Peter J. Sodini, Chase
Manhattan Capital, L.P., CB Capital Investors, L.P., and Baseball
Partners.
4.3** Amended and Restated Stockholders' Agreement dated July 2, 1998
among The Pantry, FSEP III, FSEP IV, FSEP International, Chase
Manhattan Capital, L.P., CB Capital Investors, L.P., Baseball
Partners and Peter J. Sodini.
10.1(6)(7) The Pantry, Inc. 1998 Stock Option Plan adopted January 1, 1998.
10.2** Form of Incentive Stock Option Agreement.
10.3(1) Stock Purchase Agreement dated October 23, 1997 among The Pantry,
FSEP III, FSEP International, CB Capital Investors, L.P. and Peter
J. Sodini.
10.4(1) Contribution to Capital Agreement dated October 23, 1997 among The
Pantry, FSEP III, FSEP International, Chase Manhattan Capital,
L.P., and Baseball Partners.
10.5(1) Stock Pledge Agreement dated October 23, 1997 between Peter J.
Sodini and The Pantry.
10.6(1) Secured Promissory Note dated October 23, 1997 between Peter J.
Sodini and The Pantry.
10.7(1)(7) Employment Agreement dated June 3, 1996 between Dennis R. Crook and
The Pantry (same form of agreement with Daniel McCormack and
Douglas Sweeney).
10.8(10) Amended and Restated Credit Agreement dated as of January 27, 1999
among The Pantry, the financial institutions listed therein
(collectively, "Lenders"), First Union National Bank ("First
Union"), as administrative agent, and Canadian Imperial Bank of
Commerce ("CIBC"), as syndication agent for Lenders.
10.9(1) Company Security Agreement dated as of October 23, 1997 between The
Pantry and First Union, as administrative agent.
10.10(1) Company Pledge Agreement dated as of October 23, 1997 between The
Pantry and First Union, as administrative agent.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.11(1) Company Trademark Security Agreement dated as of October 23, 1997
between The Pantry and First Union, as administrative agent.
10.12(1) Collateral Account Agreement dated as of October 23, 1997 between
The Pantry and First Union, as administrative agent.
10.13(1)(7) Employment Agreement dated October 1, 1997 between Peter J. Sodini
and The Pantry.
10.14(1) Form of Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (North
Carolina) dated October 23, 1997 among The Pantry, David R.
Cannon, as Trustee, and First Union as Agent.
10.15(1) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (South
Carolina) dated October 23, 1997 between The Pantry and First
Union, as Agent.
10.16(1) Form of Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (Tennessee)
dated October 23, 1997 among The Pantry, David R. Cannon, as
Trustee, and First Union, as Agent.
10.17(1) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases (Kentucky) dated October 23, 1997
between The Pantry and First Union, as Agent.
10.18(1) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (Indiana) dated
as of October 23, 1997 between The Pantry and First Union, as
Agent.
10.19(1) Form of Mortgage, Security Agreement, Assignment of Rents and
Leases and Fixture Filing (Florida) dated October 23, 1997
between Lil' Champ and First Union, as Agent.
10.20(1) Form of Deed to Secure Debt, Security Agreement, and Assignment of
Rents (Georgia) dated October 23, 1997 between Lil' Champ and
First Union, as Agent.
10.21** Form of Subsidiary Guaranty.
10.22** Form of Subsidiary Security Agreement.
10.23** Form of Subsidiary Pledge Agreement.
10.24** Form of Subsidiary Trademark Security Agreement.
10.25(8) The Pantry Inc. 1998 Stock Subscription Plan.
10.26** Form of Stock Subscription Agreement.
10.27** Stock Purchase Agreement dated July 2, 1998 among The Pantry, FSEP
IV and CB Capital Investors, L.P.
10.28** Distribution Service Agreement dated as of March 29, 1998 among
The Pantry, Lil' Champ and McLane Company, Inc., as amended
(asterisks located within the exhibit denote information which
has been deleted pursuant to a request for confidential treatment
filed with the Securities and Exchange Commission).
12.1** Statement re Computation of Earnings to Fixed Charges Ratio.
21.1** Subsidiaries of The Pantry.
23.1* Consent of Riordan & McKinzie (included as part of Exhibit 5.1).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of Cherry, Bekaert & Holland, L.L.P.
23.5 Consent of Griffin, Maxwell, Frazelle, P.A.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
23.6 Consent of Edwards, Falls & Renegar, P.L.L.C.
23.7 Consent of Arthur Andersen LLP.
23.8 Consent of Deloitte & Touche LLP.
24.1** Powers of Attorney (included on signature page).
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
(1) Incorporated by reference to the exhibit designated by the same number in
the Company's Registration Statement on Form S-4 (Registration No. 333-
42811) (the "Form S-4").
(2) Incorporated by reference to the exhibit designated by exhibit number 2.1
in the Company's Current Report on Form 8-K dated July 17, 1998.
(3) Incorporated by reference to the exhibit designated by exhibit number 2.3
in the Company's Current Report on Form 8-K dated July 17, 1998.
(4) Incorporated by reference to the exhibit designated by exhibit number 2.1
in the Company's Current Report on Form 8-K dated November 6, 1998.
(5) Incorporated by reference to the exhibit designated by exhibit number 4.5
in the Company's Form S-4.
(6) Incorporated by reference to the exhibit designated by the same number in
the Company's Quarterly Report on Form 10-Q for the quarterly period ended
December 25, 1997.
(7) Represents a management contract or compensation plan arrangement.
(8) Incorporated by reference to the exhibit designated by the same number in
the Company's Annual Report on Form 10-K dated December 23, 1998.
(9) Incorporated by reference to the exhibit designated by exhibit 2.1 in the
Company's Current Report on Form 8-K dated February 5, 1999.
(10) Incorporated by reference to the exhibit designated by exhibit 10.1 in the
Company's Current Report on Form 8-K dated February 5, 1999.
(11) Incorporated by reference to the exhibit designated by the same number in
the Company's Annual Report on Form 10-K for the year ended September 28,
1995.
(12) Incorporated by reference to the exhibit designated by exhibit number 2.1
in the Company's Current Report on Form 8-K dated March 12, 1999.
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
Schedule
--------
<C> <S>
Schedule II Valuation and Qualifying Accounts
</TABLE>
Schedules other than those referred to above have been omitted because
they are not applicable or not required or because the information is included
elsewhere in the Consolidated Financial Statements or the Notes thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by
II-5
<PAGE>
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sanford,
State of North Carolina, on the 2nd day of April, 1999.
THE PANTRY, INC.
/s/ William T. Flyg
By: _________________________________
William T. Flyg
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President, Chief Executive April 2, 1999
____________________________________ Officer and Director
Peter J. Sodini (Principal Executive
Officer)
/s/ William T. Flyg Senior Vice President and April 2, 1999
____________________________________ Chief Financial Officer
William T. Flyg (Principal Financial
Officer)
/s/ Joseph J. Duncan Vice President and Corporate April 2, 1999
____________________________________ Controller (Principal
Joseph J. Duncan Accounting Officer)
* Director April 2, 1999
____________________________________
William M. Wardlaw
* Director April 2, 1999
____________________________________
Charles P. Rullman
* Director April 2, 1999
____________________________________
Jon D. Ralph
* Director April 2, 1999
____________________________________
Todd W. Halloran
* Director April 2, 1999
____________________________________
Christopher C. Behrens
* Director April 2, 1999
____________________________________
Peter M. Starrett
</TABLE>
/s/ William T. Flyg
*By: _____________________
William T. Flyg
Attorney-in-Fact
II-7
<PAGE>
THE PANTRY, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars In Thousands)
<TABLE>
<CAPTION>
Additions Deductions
Balance at Charged to Additions for Payments Balance
Beginning of Costs and Charged to or Write- at End
Period Expenses Goodwill offs of Period
------------ ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Year ended September 26,
1996:
Allowance for doubtful
accounts............. $ 251 $ (46) -- $ (55) $ 150
Reserve for
environmental
issues............... 5,720 617 -- (105) 6,232
Reserve for closed
stores............... 463 707 -- (210) 960
Deferred tax asset
valuation allowance.. 573 1,209 -- -- 1,782
------- ------ ------ ----- -------
$7,007 $2,487 -- (370) $ 9,124
======= ====== ====== ===== =======
Year ended September 25,
1997:
Allowance for doubtful
accounts............. $ 150 $ -- -- $ -- $ 150
Reserve for
environmental
issues............... 6,232 1,574 -- -- 7,806
Reserve for closed
stores............... 960 -- -- (10) 950
Deferred tax asset
valuation allowance.. 1,782 (96) $ -- -- 1,686
------- ------ ------ ----- -------
$ 9,124 $1,478 -- $ (10) $10,592
======= ====== ====== ===== =======
Year ended September 24,
1998:
Allowance for doubtful
accounts............. $ 150 $ 130 -- $ -- $ 280
Reserve for
environmental
issues............... 7,806 6,181 3,150 -- 17,137
Reserve for closed
stores............... 950 50 603 -- 1,603
Deferred tax asset
valuation allowance.. 1,686 750 -- -- 2,436
------- ------ ------ ----- -------
$10,592 $7,111 $3,753 $ -- $21,456
======= ====== ====== ===== =======
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.1* Form of Purchase Agreement.
2.1(1) Stock Purchase Agreement dated August 26, 1997 by and between PH
Holding Corporation ("PH Holding") and Docks U.S.A., Inc.
2.2(1) Assignment and Assumption Agreement dated October 23, 1997 between
PH Holding and The Pantry.
2.3(2) Asset Purchase Agreement dated June 5, 1998 between Quick Stop Food
Mart, Inc. and the Company.
2.4(3) Asset Purchase Agreement dated July 6, 1998 between Stallings Oil
Company and the Company.
2.5(4) Asset Purchase Agreement dated September 28, 1998, as amended on
November 5, 1998, by and among Express Stop, Inc., Bryan Oil
Company, Inc., Market Express of Shallotte, Inc., Lennon Oil
Company and the Company.
2.6(9) Purchase Agreement dated November 30, 1998 among Lil Champ Food
Stores, Inc. and the Selling Shareholders of Miller: Thomas A.
Miller, Joseph E. Miller, The Miller Investments Trust U/A dated
October 11, 1995 and The George C. Miller, Jr. Estate Trust U/A
dated June 30, 1989, and Miller Brothers and Circle Investments,
Ltd. and Miller.
2.7(12) Asset Purchase Agreement dated January 14, 1999 between Taylor Oil
Company and The Pantry.
3.1(1) Restated Certificate of Incorporation of The Pantry, as amended to
date.
3.2(11) Bylaws of The Pantry, as amended to date.
4.1(5) Indenture dated as of October 23, 1997 among The Pantry, Sandhills,
Lil' Champ (together with Sandhills, the "Guarantors") and United
States Trust Company of New York, as Trustee, with respect to the
10 1/4% Senior Subordinated Notes due 2007 (including the form of
10 1/4% Senior Subordinated Note due 2007).
4.2** Amended and Restated Registration Rights Agreement dated July 2,
1998 among The Pantry, FS Equity Partners III, L.P. ("FSEP III"),
FS Equity Partners IV, L.P. ("FSEP IV") FS Equity Partners
International, L.P. ("FSEP International"), Peter J. Sodini, Chase
Manhattan Capital, L.P., CB Capital Investors, L.P., and Baseball
Partners.
4.3** Amended and Restated Stockholders' Agreement dated July 2, 1998
among The Pantry, FSEP III, FSEP IV, FSEP International, Chase
Manhattan Capital, L.P., CB Capital Investors, L.P., Baseball
Partners and Peter J. Sodini.
10.1(6)(7) The Pantry, Inc. 1998 Stock Option Plan adopted January 1, 1998.
10.2** Form of Incentive Stock Option Agreement.
10.3(1) Stock Purchase Agreement dated October 23, 1997 among The Pantry,
FSEP III, FSEP International, CB Capital Investors, L.P. and Peter
J. Sodini.
10.4(1) Contribution to Capital Agreement dated October 23, 1997 among The
Pantry, FSEP III, FSEP International, Chase Manhattan Capital,
L.P., and Baseball Partners.
10.5(1) Stock Pledge Agreement dated October 23, 1997 between Peter J.
Sodini and The Pantry.
10.6(1) Secured Promissory Note dated October 23, 1997 between Peter J.
Sodini and The Pantry.
10.7(1)(7) Employment Agreement dated June 3, 1996 between Dennis R. Crook and
The Pantry (same form of agreement with Daniel McCormack and
Douglas Sweeney).
10.8(10) Amended and Restated Credit Agreement dated as of January 27, 1999
among The Pantry, the financial institutions listed therein
(collectively, "Lenders"), First Union National Bank ("First
Union"), as administrative agent, and Canadian Imperial Bank of
Commerce ("CIBC"), as syndication agent for Lenders.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.9(1) Company Security Agreement dated as of October 23, 1997 between
The Pantry and First Union, as administrative agent.
10.10(1) Company Pledge Agreement dated as of October 23, 1997 between The
Pantry and First Union, as administrative agent.
10.11(1) Company Trademark Security Agreement dated as of October 23, 1997
between The Pantry and First Union, as administrative agent.
10.12(1) Collateral Account Agreement dated as of October 23, 1997 between
The Pantry and First Union, as administrative agent.
10.13(1)(7) Employment Agreement dated October 1, 1997 between Peter J. Sodini
and The Pantry.
10.14(1) Form of Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (North
Carolina) dated October 23, 1997 among The Pantry, David R.
Cannon, as Trustee, and First Union as Agent.
10.15(1) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (South
Carolina) dated October 23, 1997 between The Pantry and First
Union, as Agent.
10.16(1) Form of Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (Tennessee)
dated October 23, 1997 among The Pantry, David R. Cannon, as
Trustee, and First Union, as Agent.
10.17(1) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases (Kentucky) dated October 23, 1997
between The Pantry and First Union, as Agent.
10.18(1) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (Indiana) dated
as of October 23, 1997 between The Pantry and First Union, as
Agent.
10.19(1) Form of Mortgage, Security Agreement, Assignment of Rents and
Leases and Fixture Filing (Florida) dated October 23, 1997
between Lil' Champ and First Union, as Agent.
10.20(1) Form of Deed to Secure Debt, Security Agreement, and Assignment of
Rents (Georgia) dated October 23, 1997 between Lil' Champ and
First Union, as Agent.
10.21** Form of Subsidiary Guaranty.
10.22** Form of Subsidiary Security Agreement.
10.23** Form of Subsidiary Pledge Agreement.
10.24** Form of Subsidiary Trademark Security Agreement.
10.25(8) The Pantry Inc. 1998 Stock Subscription Plan.
10.26** Form of Stock Subscription Agreement.
10.27** Stock Purchase Agreement dated July 2, 1998 among The Pantry, FSEP
IV and CB Capital Investors, L.P.
10.28** Distribution Service Agreement dated as of March 29, 1998 among
The Pantry, Lil' Champ and McLane Company, Inc., as amended
(asterisks located within the exhibit denote information which
has been deleted pursuant to a request for confidential treatment
filed with the Securities and Exchange Commission).
12.1** Statement re Computation of Earnings to Fixed Charges Ratio.
21.1** Subsidiaries of The Pantry.
23.1* Consent of Riordan & McKinzie (included as part of Exhibit 5.1).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Deloitte & Touche LLP.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
23.4 Consent of Cherry, Bekaert & Holland, L.L.P.
23.5 Consent of Griffin, Maxwell, Frazelle, P.A.
23.6 Consent of Edwards, Falls & Renegar, P.L.L.C.
23.7 Consent of Arthur Andersen LLP.
23.8 Consent of Deloitte & Touche LLP.
24.1** Powers of Attorney (included on signature page).
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
(1) Incorporated by reference to the exhibit designated by the same number in
the Company's Registration Statement on Form S-4 (Registration No. 333-
42811) (the "Form S-4").
(2) Incorporated by reference to the exhibit designated by exhibit number 2.1
in the Company's Current Report on Form 8-K dated July 17, 1998.
(3) Incorporated by reference to the exhibit designated by exhibit number 2.3
in the Company's Current Report on Form 8-K dated July 17, 1998.
(4) Incorporated by reference to the exhibit designated by exhibit number 2.1
in the Company's Current Report on Form 8-K dated November 6, 1998.
(5) Incorporated by reference to the exhibit designated by exhibit number 4.5
in the Company's Form S-4.
(6) Incorporated by reference to the exhibit designated by the same number in
the Company's Quarterly Report on Form 10-Q for the quarterly period ended
December 25, 1997.
(7) Represents a management contract or compensation plan arrangement.
(8) Incorporated by reference to the exhibit designated by the same number in
the Company's Annual Report on Form 10-K dated December 23, 1998.
(9) Incorporated by reference to the exhibit designated by exhibit 2.1 in the
Company's Current Report on Form 8-K dated February 5, 1999.
(10) Incorporated by reference to the exhibit designated by exhibit 10.1 in the
Company's Current Report on Form 8-K dated February 5, 1999.
(11) Incorporated by reference to the exhibit designated by the same number in
the Company's Annual Report on Form 10-K for the year ended September 28,
1995.
(12) Incorporated by reference to the exhibit designated by exhibit number 2.1
in the Company's Current Report on Form 8-K dated March 12, 1999.
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To The Board of Directors and Shareholders of
The Pantry, Inc.
Sanford, North Carolina
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-74221 of The Pantry, Inc. of our report on The Pantry, Inc. dated
December 18, 1998 (which expresses an unqualified opinion and includes an
explanatory paragraph relating to the adoption of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, in fiscal 1996), appearing
in the Prospectus, which is a part of this Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of The Pantry, Inc.,
listed in Item 16. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
April 1, 1999
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-74221 of The Pantry, Inc. of our report on Lil' Champ Food Stores, Inc. (a
wholly-owned subsidiary of Docks, U.S.A., Inc.) dated February 14, 1997,
appearing in the Prospectus, which is a part of this Registration Statement,
and to the reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Jacksonville, Florida
April 1, 1999
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion of our report dated March 6, 1998, except for Note
10, as to which the date is February 24, 1999, with respect to the balance
sheets of Quick Stop Food Mart, Inc. as of December 31, 1996 and 1997, and the
related statements of income, stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 1997, which report appears in
this Amendment No. 1 to the registration statement on Form S-1 (No. 333-74221)
of The Pantry, Inc. dated March 10, 1999, and to the reference to our firm
under the caption "Experts" in the prospectus.
/s/ Cherry, Bekaert & Holland, L.L.P.
Fayetteville, North Carolina
April 1, 1999
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the inclusion of our audit report on the balance sheet of
Express Stop, Inc. as of December 31, 1997 and the statements of income,
retained earnings, and cash flows for the year then ended, in the 1st amendment
to the Form S-1 Registration Statement of The Pantry, Inc., to be filed on or
about April 1, 1999, and to a reference in the Registration Statement to our
firm as experts in accounting and auditing.
/s/ Griffin, Maxwell & Frazelle, P.A.
Fayetteville, North Carolina
March 31, 1999
<PAGE>
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the use, in this Amendment No. 1 to Registration Statement No.
333-74221 of The Pantry, Inc. on Form S-1, of our report dated February 12,
1999 on the financial statements of Taylor Oil Company appearing in the
Prospectus which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Edwards, Falls & Renegar, P.L.L.C.
Winston-Salem, North Carolina
April 1, 1999
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use
of our report dated February 18, 1999 and to all references to our Firm
included in or made a part of this Registration Statement File No. 333-74221.
/s/ Arthur Andersen LLP
Jacksonville, Florida
April 1, 1999
<PAGE>
EXHIBIT 23.8
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-74221 of The Pantry, Inc. of our report dated March 30, 1999, on the
statement of net assets acquired from Miller Brothers and Circle Investments,
Ltd. as of January 28, 1999, appearing in the Prospectus, which is a part of
this Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
April 1, 1999
