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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1999
Commission File Number 33-72574
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THE PANTRY, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-1574463
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 1410
1801 Douglas Drive
Sanford, North Carolina
27331-1410
(Address of principal executive offices)
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Registrant's telephone number, including area code: (919) 774-6700
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
common stock $.01 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting common stock held by non-
affiliates of the registrant as of December 16, 1999 was $48,047,249.
As of December 16, 1999, there were issued and outstanding 18,111,474
shares of the registrant's common stock.
Documents Incorporated by Reference
<TABLE>
<CAPTION>
Document Where Incorporated
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<S> <C>
1. Proxy Statement for the Annual Meeting of Stockholders Part III
to be held March 23, 2000
</TABLE>
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THE PANTRY, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
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Page
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Part I
Item 1: Business............................................................................... 1
Item 2: Properties............................................................................. 12
Item 3: Legal Proceedings...................................................................... 12
Item 4: Submission of Matters to a Vote of Security Holders.................................... 12
Part II
Item 5: Market for Our Common Equity and Related Stockholder Matters........................... 13
Item 6: Selected Financial Data................................................................ 14
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.. 16
Item 7A: Quantitative and Qualitative Disclosures About Market Risk............................. 27
Item 8: Consolidated Financial Statements and Supplementary Data............................... 28
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 69
Part III
Item 10: Our Directors and Executive Officers................................................... 69
Item 11: Executive Compensation................................................................. 69
Item 12: Security Ownership of Certain Beneficial Owners and Management......................... 69
Item 13: Certain Relationships and Related Transactions......................................... 69
Part IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 70
</TABLE>
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PART I
This Annual Report on Form 10-K contains 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,
our industry, and related economic conditions, include among other things:
. Our anticipated acquisitions and growth strategies, including our
strategy to double our store base
. Anticipated trends in our businesses
. Future expenditures for capital projects including the cost of
environmental compliance
. Our ability to pass along cigarette price increases to our customers
without a decrease in cigarette sales
. Our ability to successfully deal with Year 2000 issues that may arise in
our operations
. Our ability to control costs, including our ability to achieve cost
savings in connection with our acquisitions
We have tried, wherever possible, to identify forward-looking statements by
using words such as "anticipate," "believe," "estimate," "expect," "intend,"
and similar expressions. These forward-looking statements are subject to
numerous risks and uncertainties, including without limitation risks related
to our dependence on gasoline and tobacco sales, our acquisition strategy, our
rapid growth since 1996, our dependence on one principal wholesaler, the
intense competition in the convenience store and retail gasoline industries,
our dependence on favorable weather conditions in spring and summer months,
the concentration of our stores in the southeastern United States, our history
of losses, extensive environmental regulation of our business, governmental
regulation, control of The Pantry by one principal stockholder, our dependence
on senior management, the failure of The Pantry and others to be year 2000
compliant and other risk factors identified in Exhibit 99.1 to this Annual
Report on Form 10-K. As a result of these risks actual results may differ from
the forward-looking statements included in this Annual Report on Form 10-K.
Item 1. Business
General
The Pantry, Inc., founded in 1967, is a leading operator of convenience
stores in the Southeast. As of September 30, 1999, we operated 1,215
convenience stores under the names "The Pantry(R)," "Lil' Champ(R)," "Quick
Stop(R)," "Depot," "Food Chief(R)," "Express Stop(R)," "Dash N(TM)," "Smokers
Express(TM)," "ETNA" and "Sprint(TM)" located throughout North and South
Carolina, Florida, western Kentucky, Tennessee, Virginia, southern Indiana and
Georgia. Our stores offer a broad selection of merchandise and services
designed to appeal to the convenience needs of our customers, including
tobacco products, beer, soft drinks, self-service fast food and beverages,
publications, dairy products, groceries, health and beauty aids, video games
and money orders. We also sell lottery products in our Kentucky, Virginia,
Indiana and Georgia stores. We also sell self-service gasoline at 1,152 Pantry
stores, 862 of which sell gasoline under brand names including Amoco, British
Petroleum ("BP"), Chevron, Citgo, Exxon, Shell and Texaco. Since 1995,
merchandise sales (including commissions from services) and gasoline sales
have each averaged approximately 47.2% and 52.8% of total revenues,
respectively.
During 1996, Freeman Spogli & Co. and Chase Manhattan Capital Corporation
acquired a controlling interest in our stock through a series of transactions
which included the purchase of common stock from certain stockholders and the
purchase of newly issued common and preferred stock. The table below shows the
number, types and overall beneficial ownership percentage of our outstanding
securities owned by Freeman Spogli & Co. and Chase as of December 16, 1999:
<TABLE>
<CAPTION>
Percentage Beneficial
Name Number and type of securities owned Ownership
---- ----------------------------------- ---------------------
<S> <C> <C>
Freeman Spogli & Co. .9,769,524 shares of common stock and warrants 59.2%(1)
to purchase 2,346,000 shares of common stock
Chase (and its
affiliates) .2,298,438 shares of common stock 12.7%
</TABLE>
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(1) Including shares underlying warrants.
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On June 8, 1999, we offered and sold 6,250,000 shares of our common stock
in our initial public offering. The initial offering price was $13.00 per
share and we received $75.6 million in net proceeds, before expenses. We used
the net proceeds to:
. repay $19.0 million in indebtedness under our 1999 bank credit facility;
. redeem $17.5 million in outstanding preferred stock;
. pay $6.5 million in accrued dividends on the preferred stock;
. fund acquisitions closed during the fourth quarter ($30.2 million);
. pay $2.4 million in fees and expenses associated with our IPO
Operations
For a discussion of our fiscal year 1999 operating results see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In fiscal year 1999, we acquired or opened 300 convenience stores located
in North Carolina, South Carolina, Florida, Georgia and Virginia. In addition,
we closed 39 convenience stores. The net increase in store count and timing of
these acquisitions materially impacted our results of operations and
comparisons to prior periods.
Our senior management team has implemented specific strategies including
focusing on merchandising, improving gasoline offering, reducing expenses
through strengthened vendor relationships and tightened expense controls,
increasing capital expenditures and growing through acquisitions and new store
development.
Merchandise Sales. For the year ended September 30, 1999, our merchandise
sales were 43.6% of total revenues. The following table highlights certain
information with respect to our merchandise sales for the last three fiscal
years:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------
Sept. 25, Sept. 24, Sept. 30,
1997 1998 1999
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<S> <C> <C> <C>
Merchandise sales (in millions)............... $202.4 $460.8 $731.7
Average merchandise sales per store (in
thousands)................................... $525.8 $533.3 $666.4
Comparable store merchandise sales............ 8.5% 5.3% 9.6%
Merchandise gross margins (after purchase
rebates, mark-downs, inventory spoilage,
inventory shrink and LIFO reserve)........... 34.4% 34.0% 33.1%
</TABLE>
The increase in average merchandise sales per store is primarily due to the
addition of acquired stores which on average have comparatively higher
merchandise volume and fiscal year 1999 comparable store merchandise growth of
9.6%. Based on purchase and sales information, we estimate that cigarette
inflation during fiscal year 1999 accounted for 3% to 4% of the 9.6% increase
in comparable store sales.
Our stores generally carry approximately 4,750 stock keeping units. We
offer a full line of convenience products, including tobacco products, beer,
soft drinks, self-service fast foods and beverages (including fountain
beverages and coffee), candy, newspapers and magazines, snack foods, dairy
products, canned goods and groceries, health and beauty aids and other
immediate consumables. The products we merchandise are influenced by the mix,
size and location of the stores we acquire.
We purchase over 50% of our merchandise from a single wholesale grocer,
McLane Company, Inc. We purchase the products at McLane's cost plus an agreed
upon percentage, reduced by any promotional allowances and volume rebates
offered by manufacturers and McLane. In addition, we receive per store annual
service allowances from McLane which are amortized over the remaining term of
the agreement, which is four years.
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McLane may terminate the agreement upon a default in payment or if we become
insolvent. However, we believe there are adequate alternative sources
available to purchase this merchandise should a change from McLane become
necessary or desirable. We purchase the balance of our merchandise from a
variety of other distributors under contract terms of up to four years. We do
not have contracts with a number of these vendors.
Based on merchandise purchase and sales information, we estimate sales by
category for the last three fiscal years as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------
Sept. 25, Sept. 24, Sept. 30,
1997 1998 1999
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<S> <C> <C> <C>
Tobacco products.............................. 26.6% 27.6% 34.1%
Beer and wine................................. 15.1 17.2 16.6
Packaged beverages............................ 17.0 16.0 15.2
Self-service fast foods and beverages ........ 7.1 6.5 5.5
General merchandise, health and beauty care... 6.3 6.4 6.6
Candy......................................... 5.0 4.6 3.9
Salty snacks.................................. 4.4 4.5 4.1
Newspapers and magazines...................... 5.2 3.8 3.0
Dairy products................................ 2.9 3.5 3.6
Bread and cakes............................... 2.2 2.1 1.9
Grocery and other merchandise................. 8.2 7.8 5.5
---- ---- ----
Total....................................... 100% 100% 100%
==== ==== ====
</TABLE>
The increase in tobacco products is primarily due to an increase in retail
prices following significant cost increases and increases in our average unit
volume per store. Cigarette prices increased 33.4% during fiscal 1999. The
largest increase occurred on November 23, 1998, when major cigarette
manufacturers increased prices by $0.45 per pack. In September, 1999
manufacturers raised cigarette prices an additional $0.10 per pack. In
general, we have passed price increases to our customers. However, during
fiscal 1999 as in years past, major cigarette manufacturers offered rebates to
retailers, and we passed along these rebates to our customers. We make no
assurances that major cigarette manufacturers will continue to offer these
rebates or that any resulting increase in prices to our customers will not
have a material adverse effect on our cigarette sales and gross profit
dollars.
As of September 30, 1999, we operated quick service restaurants or food
service locations within 194 of our locations. In 139 of these stores, we
offer products from nationally branded food franchises including Subway(R),
Church's(R), Taco Bell(R), Blimpies(R), Papa G's Pizza(R), TCBY(R), Hot
Stuff(R), Dairy Queen(R), A&W Root Beer(R), Pizza Hut(R), Sobicks Subs(R),
Long John Silver's(R) and Hardee's(R). In addition, we offer a variety of
proprietary food service programs featuring breakfast biscuits, fried chicken,
deli and other hot food offerings in 55 of our locations.
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Gasoline Operations. For the year ended September 30, 1999, our gasoline
revenues were 55.0% of total revenues. The following table highlights certain
information regarding our gasoline operations for the last three fiscal years:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------
Sept. 25, Sept. 24, Sept. 30,
1997 1998 1999
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<S> <C> <C> <C>
Gasoline sales ($ in millions)............... $220.2 $510.0 $923.8
Gasoline gallons sold (in millions).......... 179.4 466.8 855.7
Average gallons sold per store (in
thousands).................................. 501.2 603.9 834.8
Comparable store gallon growth............... 7.2% 4.8% 5.9%
Average retail price per gallon.............. $ 1.23 $ 1.09 $ 1.08
Average gross profit per gallon ($ in
cents)...................................... $0.128 $0.134 $0.123
Locations selling gasoline................... 364 884 1,152
Number of Company-owned branded locations.... 300 667 851
Number of Company-owned unbranded locations.. 35 192 279
Number of third-party locations (branded &
unbranded).................................. 29 25 22
Number of locations with pay-at-the-pump
credit card readers......................... 125 379 682
Number of locations with multi-product
dispensers.................................. 142 697 945
</TABLE>
The increase in average gallons sold per store is primarily due to the
addition of acquired stores which on average have comparatively higher gallon
volume and fiscal year 1999 same store gallon growth of 5.9%. The decrease in
gross profit per gallon in fiscal 1999 is primarily due to rising crude oil
prices, particularly in the second and fourth quarters and stores acquired in
fiscal year 1999 which on average have comparatively lower gasoline margins.
In fiscal year 1999, the gasoline markets were volatile with domestic crude
oil hitting a low in February 1999 of approximately $12 per barrel and highs
in September 1999 exceeding $26 per barrel. Generally, we pass along wholesale
gasoline cost changes to our customers through retail price changes. Our
ability to pass along wholesale cost changes is influenced by market
conditions and competition. 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. We make no assurances that significant increases in
gasoline wholesale prices will not effect demand for gasoline within our
markets. Historically, we have not entered into gasoline futures contracts or
other hedging transactions that may lock in gasoline prices for a period of
time or reduce the volatility of our gasoline costs.
We purchase our gasoline from major oil companies and independent refiners.
We operate a mix of branded and unbranded locations and we evaluate our
gasoline offering on a local market level. Of the 1,152 stores that sold
gasoline as of September 30, 1999, 862 (including third-party locations
selling under these brands) or 75% were branded under the Amoco, BP, Chevron,
Citgo, Exxon, Shell or Texaco brand names. We purchase our branded gasoline
and diesel fuel from major oil companies under supply agreements. The fuel is
purchased at the stated rack price, or market price, quoted at each terminal.
The terms of these supply agreements range from five to thirteen years and
generally contain minimum annual purchase requirements as well as provisions
for various payments to us based on volume of purchases and vendor allowances.
We purchase the balance of our gasoline from a variety of independent fuel
distributors. There are 20 gasoline terminals in our operating areas, allowing
us to choose from more than one distribution point for most of our stores. Our
inventories of gasoline (both branded and unbranded) turn approximately every
seven days.
As of September 30, 1999, we owned the gasoline operations at 1,130
locations and at 22 locations had gasoline operations that were operated under
third-party arrangements. At company-operated locations, we own the gasoline
storage tanks, pumping equipment and canopies, and retain 100% of the gross
profit received from gasoline sales. In fiscal 1999, these locations accounted
for approximately 98% of total gallons sold. 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
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1999, third-party locations accounted for approximately 2% of the total
gallons we sold. We are phasing out third-party arrangements because our owned
operations are more profitable.
Commission Revenue. For the year ended September 30, 1999, our commissions
from services represented 1.4% of total revenue. Our commission revenue is
derived from amusement and video gaming, lottery ticket sales, money orders,
public telephones, car wash and other ancillary product and service offerings.
This category is an important aspect of our merchandise operations because it
attracts new customers as well as provides additional services for existing
customers. The following table highlights certain information regarding
commissions and the sources of commissions from services for the last three
fiscal years:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------
Sept. 25, Sept. 24, Sept. 30,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Commission Revenue ($ in Millions)........... $ 4.8 $14.1 $23.4
Average commission revenue per store (in
thousands).................................. $12.4 $16.4 $21.3
Sales by category:
Amusement and video gaming................. 44.6% 25.1% 28.9%
Lottery ticket sales....................... 13.3 39.3 26.9
Money orders............................... 22.1 14.9 13.6
Public telephones.......................... 10.5 13.3 12.3
Car wash................................... -- 1.7 8.0
Other...................................... 9.5 5.7 10.3
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Total.................................... 100% 100% 100%
===== ===== =====
</TABLE>
The increases in commission revenues are primarily attributable to
acquisitions, comparable store revenue growth and the addition of new services
including car washes, automatic teller machines and other ancillary products.
In October, 1999, the South Carolina legislature passed a law which makes it
illegal to own or operate video poker machines effective July 1, 2000 unless
approved by a statewide referendum. On October 14, 1999, the South Carolina
Supreme Court ruled that the referendum called for was unconstitutional. After
invalidating the referendum, the South Carolina Supreme Court upheld the
remainder of the law. Accordingly, effective July 1, 2000, video poker will be
banned in South Carolina, which could adversely impact our results of
operations. In fiscal year 1999, we earned approximately $6.7 million from
video poker in South Carolina. We anticipate a decline in video gaming
commission in fiscal 2000 to approximately $3.5 million. We believe increased
commission revenue from acquired locations, additional ancillary services and
more favorable vendor contract terms will offset a majority of this decline.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Store Locations. As of September 30, 1999, we operated 1,215 convenience
stores located primarily in suburban areas of rapidly growing markets,
coastal/resort areas and smaller towns. Almost 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 at September 30, 1999:
<TABLE>
<CAPTION>
Number of Percent of
State Stores Total Stores
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<S> <C> <C>
Florida............................................... 533 43.8%
North Carolina........................................ 336 27.7
South Carolina........................................ 232 19.1
Kentucky.............................................. 45 3.7
Indiana............................................... 20 1.6
Tennessee............................................. 19 1.6
Virginia.............................................. 18 1.5
Georgia............................................... 12 1.0
----- ----
Total............................................... 1,215 100%
===== ====
</TABLE>
5
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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
---------------------------------------
Sept. 26, Sept. 25, Sept. 24, Sept. 30,
1996 1997 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Number of stores at beginning of
period........................... 403 379 390 954
Opened or acquired................ 4 36 653 300
Closed or sold.................... (28) (25) (89) (39)
--- --- --- -----
Number of stores at end of
period........................... 379 390 954 1,215
=== === === =====
</TABLE>
We continually evaluate the performance of each of our stores to determine
whether any particular store should be closed or sold based on sales and
profitability trends. In deciding to close or sell an underperforming store,
we consider many factors like:
. store location
. lease term and rate
. merchandise sales and gross profits
. gasoline volumes and margins
. the stores contribution to corporate overhead
Although closing or selling underperforming stores reduces revenues, our
operating results typically improve as these stores are generally
unprofitable.
Acquisitions. During the last two fiscal years, we have expanded our market
area to the southeastern states of Florida, Georgia and Virginia, making us
the second largest independent convenience store chain in the United States
(based on number of stores as of September 30, 1999) with 1,215 stores located
primarily in the Southeast. We focus on acquiring chains within our existing
and contiguous market areas. In evaluating potential acquisition candidates,
we consider a number of factors, including strategic fit and desirability of
location, price, ability to improve productivity and profitability of a
location through the implementation of our operating strategy and financial
impact.
In fiscal 1999, we acquired 297 convenience stores located in North
Carolina, South Carolina, Florida, Georgia and Virginia in eight separate
transactions. These acquisitions were primarily funded from borrowings under
our bank credit facility, as amended, the IPO and cash on hand.
In fiscal 1998, we acquired 643 convenience stores located in North
Carolina, South Carolina, Florida and Virginia in eight separate transactions.
These acquisitions were primarily funded from borrowings under the acquisition
facility contained in our 1998 bank credit facility, an equity investment, and
cash on hand. In addition, we opened six new stores located in major cities
and resort areas of North and South Carolina.
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 exit and entrance ramps that provide convenient access to the
store location. In selecting sites for new stores, we use an evaluation
process designed to enhance our return on investment. This process focuses on
market area demographics, population density, traffic volume, visibility,
ingress and egress and economic development in the market area. We also review
the location of competitive stores and customer activity at those stores.
Upgrading of Store Facilities and Equipment. During fiscal 1998 and fiscal
1999, we upgraded the facilities and equipment at many of our existing and
acquired store locations, including gasoline equipment
6
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upgrades. These upgrades cost approximately $34.0 million in fiscal 1998 and
$25.4 million in fiscal 1999. During this period, we were reimbursed $4.4
million through long-term contracts with gasoline suppliers. This 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. Typically upgrades for stores include:
. improvements to interior fixtures and equipment for self-service food
and beverages,
. interior lighting,
. in-store restrooms for customers,
. exterior lighting, and
. signage.
The upgrading program for our gasoline operations includes:
. the addition of automated gasoline dispensing and payment systems, such
as multi-product dispensers and pay-at the pump credit card readers,
. enhancement of customer convenience and service, and
. the installation of underground storage tank leak detection and other
equipment in accordance with applicable Environmental Protection Agency
environmental regulations.
For further discussion of EPA and other environmental regulations see
"Government Regulation and Environmental Matters."
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, 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.
Competition
The convenience store and retail gasoline industries are highly
competitive. The performance of individual stores can be affected by changes
in traffic patterns and the type, number and location of competing 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 availability of
experienced management and hourly employees may adversely affect the
convenience store industry in general and our stores in particular.
We compete with numerous other convenience stores, supermarkets, drug
stores, fast food operations and other similar retail outlets. In addition,
our stores offering self-service gasoline compete with gasoline service
stations and, more recently, supermarkets. In some of our markets, our
competitors have been in existence longer and have greater financial,
marketing and other resources than we have.
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. We continue
to enhance these systems through modification and redesign in order to meet
management reporting requirements and operational needs.
7
<PAGE>
Over the last year, we have expanded our computer system with the addition
of new local area network systems, improved end user computer hardware and
software and replaced older point of sale systems. This has helped to
streamline operations and improve productivity at our corporate office, among
field management staff and at our stores.
In addition, these new and expanding systems have provided the foundation
for a strategic information systems initiative. In fiscal 1998, we selected
and began implementation of a leading convenience store accounting and
management reporting system, Resource Management Series from Professional
Datasolutions, Inc., a wholly owned subsidiary of McLane.
In addition to facilitating integration of future acquisitions, these
upgrades will enable us to:
. adjust merchandise margin and mix,
. monitor inventory levels,
. implement pricing by geographic area,
. improve receiving and pricing accuracy,
. increase expense control and management reporting, and
. improve communication between individual stores and headquarters.
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), Big Chill(R), Lil' Champ(R), Quick
Stop(R), Zip Mart(R), DepotTM, Food Chief(R), Express Stop(R), 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 our company and our
convenience stores. We are not aware of any facts which would negatively
impact our continuing use of any of the above trade names, service marks or
trademarks.
Government Regulation and Environmental Matters
Many aspects of our operations are subject to regulation under federal,
state and local laws. We describe below the most significant of the
regulations that impact all aspects of our operations.
Storage and Sale of Gasoline. We are subject to various federal, state and
local environmental laws. We make financial expenditures in order to comply
with regulations governing underground storage tanks adopted by federal,
state, and local regulatory agencies. In particular, at the federal level, the
Resource Conservation and Recovery Act of 1976, as amended, requires the EPA
to establish a comprehensive regulatory program for the detection, prevention
and cleanup of leaking underground storage tanks.
Federal and state regulations require us to provide and maintain evidence
that we are taking financial responsibility for corrective action and
compensating third parties in the event of a release from our underground
storage tank systems. In order to comply with the applicable requirements, we
maintain surety bonds in the aggregate amount of approximately $900,000 in
favor of state environmental agencies in the states of North Carolina,
Virginia, South Carolina, and Georgia and a letter of credit in the aggregate
amount of $1.1 million issued by a commercial bank in favor of state
environmental agencies in the states of Florida, Tennessee, Indiana and
Kentucky and rely upon the reimbursement provisions of applicable state trust
funds. In Florida, we meet our financial responsibility requirements by state
trust fund coverage through December 31, 1998. After that time we met such
requirements through a combination of private commercial liability insurance
and a letter of credit.
8
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Regulations enacted by the EPA in 1988 established requirements for:
. installing underground storage tank systems;
. upgrading underground storage tank systems;
. taking corrective action in response to releases;
. closing underground storage tank systems;
. keeping appropriate records; and
. 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. All of our Florida facilities
meet or exceed those rules. The following is an overview of the requirements
imposed by these regulations:
. Leak Detection. We utilize several approved leak detection methods for
all company-owned underground storage tank systems. Daily and monthly
inventory reconciliations are completed at the store level and at the
corporate support center. The daily and monthly reconciliation data is
also analyzed using statistical inventory reconciliation which compares
the reported volume of gasoline purchased and sold with the capacity of
each underground storage tank system and highlights discrepancies. We
believe we are in material compliance with the leak detection
requirements applicable to our underground storage tanks.
. Corrosion Protection. The 1988 EPA regulations require that all
underground storage tank systems have corrosion protection by December
22, 1998. We began installing non-corrosive fiberglass tanks and piping
in 1982. Our underground storage tank systems have been protected from
corrosion either through the installation of fiberglass tanks or
upgrading steel underground storage tanks with interior fiberglass
lining or the installation of cathodic protection. All of the
underground storage tank systems at our stores are in material
compliance with these 1988 EPA regulations.
. Overfill/Spill Prevention. The 1988 EPA regulations require that all
sites have overfill/spill prevention devices by December 22, 1998. We
have installed these devices on all company-owned underground storage
tank systems to meet these regulations. All company-owned underground
storage tank systems are in material compliance with these 1988 EPA
regulations.
State Trust Funds. All states in which we operate or have operated
underground storage tank systems have established trust funds for the sharing,
recovering and reimbursing of certain cleanup costs and liabilities incurred
as a result of releases from underground storage tank systems. These trust
funds, which essentially provide insurance coverage for the cleanup of
environmental damages caused by the operation of underground storage tank
systems, are funded by an underground storage tank registration fee and a tax
on the wholesale purchase of motor fuels within each state. We have paid
underground storage tank registration fees and gasoline taxes to each state
where we operate to participate in these 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 or
occurrence for the cleanup of environmental contamination, and most provide
coverage for third-party liabilities. Costs for which we do not receive
reimbursement include:
. the per-site deductible;
. costs incurred in connection with releases occurring or reported to
trust funds prior to their inception;
. removal and disposal of underground storage tank systems; and
. costs incurred in connection with sites otherwise ineligible for
reimbursement from the trust funds.
9
<PAGE>
The trust funds require us to pay deductibles ranging from $10,000 to
$100,000 per occurrence depending on the upgrade status of our underground
storage tank system, the date the release is discovered/reported and the type
of cost for which reimbursement is sought. The Florida trust fund will not
cover releases first reported after December 31, 1998. We obtained private
insurance coverage for remediation and third party claims arising out of
releases reported after December 31, 1998. We believe that this coverage
exceeds federal and Florida financial responsibility regulation. We may spend
up to $2.3 million for remediation. In addition, we estimate that state trust
funds established in our operating areas or other responsible third parties
(including insurers) may spend up to $13.1 million on our behalf. To the
extent those third parties do not pay for remediation as we anticipate, we
will be obligated to make such payments. This could materially adversely
affect our financial condition and results of operations. Reimbursements from
state trust funds will be dependent upon the continued maintenance and
continued solvency of the various funds.
Sale of Alcoholic Beverages. In certain areas where stores are located,
state or local laws limit the hours of operation for the sale of alcoholic
beverages. State and local regulatory agencies have the authority to approve,
revoke, suspend or deny applications for and renewals of permits and licenses
relating to the sale of alcoholic beverages. These agencies may also impose
various restrictions and sanctions. In many states, retailers of alcoholic
beverages have been held responsible for damages caused by intoxicated
individuals who purchased alcoholic beverages from them. While the potential
exposure for damage claims as a seller of alcoholic beverages is substantial,
we have adopted procedures intended to minimize such exposure. In addition, we
maintain general liability insurance which may mitigate the cost of any
liability.
Video Poker Licenses. In 1999, the South Carolina legislature passed a law
which makes it illegal to own or operate video poker machines effective July
1, 2000 unless approved by a statewide referendum. On October 14, 1999, the
South Carolina Supreme Court ruled that the referendum called for was
unconstitutional. After invalidating the referendum, the South Carolina
Supreme Court upheld the remainder of the law. Accordingly, effective July 1,
2000, video poker will be banned in South Carolina, which could adversely
impact our results of operations.
Store Operations. Our stores are subject to regulation by federal agencies
and to licensing and regulations by state and local health, sanitation,
safety, fire and other departments relating to the development and operation
of convenience stores, including regulations relating to zoning and building
requirements and the preparation and sale of food. Difficulties in obtaining
or failures to obtain the required licenses or approvals could delay or
prevent the development of a new store in a particular area.
Our operations are also subject to federal and state laws governing such
matters as wage rates, overtime, working conditions and citizenship
requirements. At the federal level, there are proposals under consideration
from time to time to increase minimum wage rates and to introduce a system of
mandated health insurance which could affect our results of operations.
Employees
As of September 30, 1999, we employed approximately 7,216 full-time and
1,809 part-time employees. Fewer part-time employees are employed during the
winter months than during the peak spring and summer seasons. Approximately
8,474 of our employees are employed in our stores and 551 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.
Subsequent Events
We acquired 64 stores located in Georgia (49), North Carolina (7), South
Carolina (7) and Florida (1) in four separate transactions after fiscal year
end 1999. These transactions were primarily funded from borrowings under our
bank credit facility and cash on hand.
10
<PAGE>
Subsequent to September 30, 1999, we entered into an amendment to our bank
credit facility and borrowed an additional $75.0 million under our term loan
facility. This term loan generally carries the same terms and conditions as
our existing term loan facility. Proceeds from the term loan were used to
prepay amounts outstanding under our acquisition facility and to fund
acquisitions closed after September 30, 1999. We have commitments for an
additional $25.0 million term loan that is expected to fund on January 31,
2000 with proceeds to be used to finance future acquisitions. With these
transactions, we have approximately $79.0 million in additional borrowing
capacity to fund future acquisitions.
Executive Officers
The following table provides information on our executive officers. There
are no family relationships between any of our executive officers or
directors:
<TABLE>
<CAPTION>
Name Age Position with our company
---- --- -------------------------
<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......... 57 Senior Vice President, Finance and Chief Financial Officer
Douglas M. Sweeney...... 60 Senior Vice President, Operations
Daniel J. McCormack..... 56 Senior Vice President, Marketing
</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 Pamida Holding Corporation and Transamerica Income
Shares, Inc. From December 1991 to November 1995, Mr. Sodini was Chief
Executive Officer and a director of Purity Supreme, Inc. 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
Supreme, Inc.
William T. Flyg has served as our Senior Vice President, Finance and Chief
Financial Officer since January 1997. Mr. Flyg was employed by Purity Supreme,
Inc. as Chief Financial Officer from January 1992 until the Company was sold
in November 1995, at which time he continued as an employee of Purity Supreme
Inc. 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 Supreme, Inc.
Daniel J. McCormack has served as our Vice President, Marketing since March
1996 and was promoted in February, 1999 to Senior Vice President. From 1989 to
February 1996, Mr. McCormack was Director of Purchasing of Purity Supreme,
Inc.
11
<PAGE>
Item 2. Properties
We own the real property at 392 of our stores and lease the real property
at 823 of our stores. Management believes that none of these leases is
individually material. Most of these leases are net leases requiring us to pay
taxes, insurance and maintenance costs. The aggregate rental paid for fiscal
1999 was $36.6 million. The following table lists the expiration dates of our
leases, including renewal options:
<TABLE>
<CAPTION>
Number
Lease Expiration of Stores
---------------- ---------
<S> <C>
2000-2001.......................................................... 27
2002-2008.......................................................... 144
2009-2013.......................................................... 137
2014-2018.......................................................... 77
2019-2023.......................................................... 57
2024-2028.......................................................... 84
2029 and thereafter................................................ 297
</TABLE>
Management anticipates that it will be able to negotiate acceptable
extensions of the leases that expire for those locations that we intend to
continue operating. Beyond payment of our contractual lease obligations
through the end of the term, early termination of these leases would result in
no significant penalty to us.
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 lease our Lil' Champ(R) corporate
headquarters in Jacksonville, Florida. Management believes that our
headquarters are adequate for our present and foreseeable needs.
Item 3. Legal Proceedings
We are party to various legal actions in the ordinary course of our
business. We believe these actions are routine in nature and incidental to the
operation of our business. While the outcome of these actions cannot be
predicted with certainty, we believe that the ultimate resolution of these
matters 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 underground storage tank systems. For more
information about these cleanup costs and liabilities see "Item 1. Business --
Government Regulation and Environmental Matters."
Item 4. Submission of Matters to a Vote of Security Holders
None.
12
<PAGE>
PART II
Item 5. Market for Our Common Equity and Related Stockholder Matters
(a) Market Information--We have only one class of common equity, our common
stock, $.01 par value per share. Our common stock represents our only voting
securities. There are 18,111,474 shares of common stock issued and outstanding
as of December 16, 1999. Our common stock is traded on the NASDAQ Stock Market
under the symbol "PTRY". The following table sets forth for each fiscal
quarter the high and low sale prices per share of common stock since the IPO
as reported on the NASDAQ National Market System through September 30, 1999.
<TABLE>
<CAPTION>
Price Range
--------------- Dividends on
Fiscal 1999 High Low common stock
----------- -------- ------ ------------
<S> <C> <C> <C>
First quarter................................... N/A N/A --
Second quarter.................................. N/A N/A --
Third quarter................................... 13 5/8 12 7/8 --
Fourth quarter.................................. 18 11/16 10 3/4 --
</TABLE>
(b) Holders--As of December 16, 1999, there were 70 holders of record of
our common stock.
(c) Dividends--During the last two fiscal years, we have not paid any cash
dividends on our common stock. We intend to retain earnings to support
operations and to finance expansion and do not intend to pay cash dividends on
the common stock for the foreseeable future. The payment of cash dividends in
the future will depend upon our ability to remove certain loan restrictions
and other factors such as our earnings, operations, capital requirements,
financial condition and other factors deemed relevant by our Board of
Directors. The payment of any cash dividends is prohibited under restrictions
contained in the indentures relating to the senior subordinated notes and our
bank credit facility.
(d) Recent Sales of Unregistered Securities--In November 1998, Peter
Starrett, one of our directors, purchased 22,185 shares of our common stock
for a purchase price of $250,125. The shares of common stock sold to Mr.
Starrett were sold in reliance upon Section 4(2) of the Securities Act as a
transaction not involving any public offering. Mr. Starrett represented to us
that he is an "accredited investor" as such term is defined in Rule 501 of
Regulation D promulgated under the Securities Act. No underwriter was engaged
in connection with this sale of securities.
13
<PAGE>
Item 6. Selected Financial Data
The following table sets forth historical consolidated financial data and
store operating data for the periods indicated. The selected historical annual
consolidated financial data is derived from, and is qualified in its entirety
by, our annual Consolidated Financial Statements, including those contained
elsewhere in this report. The information should be read in conjunction with
"Item 1. Business," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Consolidated Financial Statements
and related notes thereto included elsewhere in this report. In the table,
dollars are in millions except per store and per gallon data.
<TABLE>
<CAPTION>
September 28, September 26, September 25, September 24, September 30,
1995 1996 1997 1998(f) 1999
------------- ------------- ------------- ------------- -------------
(52 weeks) (52 weeks) (52 weeks) (52 weeks) (53 weeks)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Merchandise sales...... $187.4 $188.1 $202.4 $ 460.8 $ 731.7
Gasoline sales......... 187.2 192.7 220.2 510.0 923.8
Commissions............ 4.5 4.0 4.8 14.1 23.4
------ ------ ------ ------- -------
Total revenues....... 379.1 384.8 427.4 984.9 1,678.9
Cost of Sales:
Merchandise............ 122.0 126.0 132.8 304.0 489.3
Gasoline............... 161.2 167.6 197.3 447.6 818.8
------ ------ ------ ------- -------
Gross profit......... 95.9 91.2 97.3 233.3 370.8
Store operating
expense................ 56.2 57.8 60.2 140.1 214.4
General and
administrative
expenses............... 18.1 17.8 16.8 32.8 48.5
Unusual charges......... -- 4.6(e) -- 1.0(g) --
Depreciation and
amortization........... 11.5 9.1 9.5 27.6 42.8
------ ------ ------ ------- -------
Income from operations.. 10.1 1.9 10.8 31.8 65.2
Interest expense........ (13.2) (12.0) (13.0) (28.9) (41.3)
Income (loss) before
other items............ (3.3) (8.1) (1.0) 4.7 24.8
Extraordinary loss...... -- -- -- (8.0)(h) (3.6)(i)
Net income (loss)....... $ (4.2) $ (8.1) $ (1.0) $ (3.3) $ 10.4
Net income (loss)
applicable to common
shareholders........... $ (4.2) $(10.8) $ (6.3) $ (6.3) $ 6.2
Earnings (loss) per
share before
extraordinary loss:
Basic.................. $(0.64) $(1.89) $(1.08) $ (0.18) $ 0.71
Diluted................ $(0.64) $(1.89) $(1.08) $ (0.16) $ 0.65
Weighted average shares
outstanding
Basic.................. 5,100 5,688 5,815 9,732 13,768
Diluted................ 5,100 5,688 5,815 11,012 15,076
Dividends paid on common
stock.................. -- -- -- -- --
Other Financial Data:
EBITDA(a)............... $ 21.5 $ 15.6 $ 20.3 $ 60.5 $ 108.0
Net cash provided by
(used in):
Operating activities... $ 11.9 $ 5.4 $ 7.3 $ 48.0 $ 68.6
Investing activities... (15.3) (7.2) (25.1) (285.4) (228.9)
Financing activities... (1.0) (3.9) 15.8 268.4 157.1
Capital
expenditures(b)........ 16.7 7.1 14.7 42.1 47.4
Ratio of earnings to
fixed charges(c)....... -- -- -- 1.1 1.4
Store Operating Data:
Number of stores (end of
period)................ 403 379 390 954 1,215
Average sales per store:
Merchandise sales (in
thousands)............ $462.7 $481.1 $525.8 $ 533.3 $ 666.4
Gasoline gallons (in
thousands)............ 440.3 450.0 501.2 603.9 834.8
Comparable store sales
growth(d):
Merchandise............ (0.8)% 2.8 % 8.5% 5.3% 9.6%
Gasoline gallons....... 0.5 % (4.3)% 7.2% 4.8% 5.9%
Operating Data:
Merchandise gross
margin................. 34.9% 33.0% 34.4% 34.0% 33.1%
Gasoline gallons sold
(in millions).......... 160.3 160.7 179.4 466.8 855.7
Average retail gasoline
price per gallon....... $ 1.17 $ 1.20 $ 1.23 $ 1.09 $ 1.08
Average gasoline gross
profit per gallon...... $0.162 $0.156 $0.128 $ 0.134 $ 0.123
Store expense as a
percentage of total
revenues............... 14.8% 15.0% 14.1% 14.2% 12.8%
General and
administrative expense
as a percentage of
total revenues......... 4.8% 4.6% 3.9% 3.3% 2.9%
Operating income as a
percentage of total
revenues............... 2.7% 0.5% 2.5% 3.2% 3.9%
Balance Sheet Data (end
of period):
Working capital
(deficiency)........... $ (0.8) $ (6.5) $ (8.2) $ (9.0) $ (27.5)
Total assets............ 127.7 120.9 142.8 554.8 793.7
Total debt and capital
lease obligations...... 101.8 101.4 101.3 340.7 455.6
Shareholders' equity
(deficit).............. (16.3) (27.5) (17.9) 39.3 104.2(j)
</TABLE>
14
<PAGE>
NOTES TO SELECTED FINANCIAL DATA
(a) "EBITDA" represents income from operations before depreciation and
amortization, merger integration costs, restructuring charges, and impairment
of long-lived assets. EBITDA is not a measure of performance under generally
accepted accounting principles, and should not be considered as a substitute
for net income, cash flows from operating activities and other income or cash
flow statement data prepared in accordance with generally accepted accounting
principles, or as a measure of profitability or liquidity. We have included
information concerning EBITDA as one measure of an issuer's historical ability
to service debt. EBITDA should not be considered as an alternative to, or more
meaningful than, income from operations or cash flow as an indication of our
operating performance.
(b) Purchases of assets to be held for sale are excluded from these
amounts.
(c) For purposes of determining the ratio of earnings to fixed charges: (i)
earnings consist of income (loss) before income tax benefit (expense) and
extraordinary item plus fixed charges and (ii) fixed charges consist of
interest expense, amortization of deferred financing costs, preferred stock
dividends and the portion of rental expense representative of interest (deemed
to be one-third of rental expense). Our earnings were inadequate to cover
fixed charges by $3.6 million, $14.3 million, and $6.3 million for fiscal
years 1995, 1996, and 1997, respectively.
(d) The stores included in calculating comparable store sales growth are
stores that were under management and in operation for both fiscal years of
the comparable period; therefore, acquired stores, new stores and closed
stores are not included.
(e) During 1996, we recorded restructuring charges of $1.6 million pursuant
to a formal plan to restructure our corporate offices. Also during fiscal
1996, we early-adopted SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of. In addition,
pursuant to SFAS 121, we evaluated our long-lived assets for impairment on a
store-by-store basis. Based on this evaluation, we recorded an impairment loss
of $0.4 million for property and equipment and $2.6 million for goodwill.
(f) For a further discussion of the Lil' Champ acquisition and its impact
on the comparability of the periods reflected in Selected Financial Data, see
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(g) 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.
(h) 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 completed a tender offer and consent solicitation with respect to
our senior notes. The tender offer resulted in our purchasing $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, we incurred an extraordinary loss of
approximately $8.0 million related to cost of the tender offer and consent
solicitation and write-off of deferred financing costs.
(i) On January 28, 1999, we redeemed $49.0 million in principal amount of
our senior notes and paid accrued and unpaid interest up to, but not
including, the date of purchase and a 4% call premium. We recognized an
extraordinary loss of approximately $3.6 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 our bank credit facility, and the write-off of deferred financing costs
related to our repayment of our former bank credit facility.
(j) On June 8, 1999, we offered and sold 6,250,000 shares of our common
stock in the IPO. The initial offering price was $13.00 per share and we
received $75.6 million in net proceeds, before expenses.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis is provided to increase understanding
of, and should be read in conjunction with, the Consolidated Financial
Statements and accompanying notes. Additional discussion and analysis related
to fiscal year 1999 is contained in our Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and 8-K/A and our Registration Statement on Form
S-1, as amended, effective June 8, 1999.
Introduction
Fiscal year 1999 was an exceptional year for The Pantry and its most
successful in terms of revenues, operating profits, and net income. We earned
record net income of $10.4 million in 1999 compared to a net loss of $3.3
million in 1998. Results of operations for both 1999 and 1998 included a $3.6
million (net of taxes) and $8.0 million associated with the refinancing of our
senior notes and credit facilities. Before these extraordinary items, we
earned $14 million in 1999 compared to $4.7 million in 1998 or an increase of
200%. These improved operating results were the result of :
. the increased sales and earnings associated with acquired stores,
. our same store sales and earnings growth,
. the continued operating improvements in terms of merchandising,
operating and overhead expenses, and
. the lower extraordinary charges discussed above.
In fiscal year 1999, we hit the following organizational milestones:
. we acquired and successfully integrated 297 stores making us the second
largest independently operated convenience store chain in the country,
. we redeemed and refinanced the remaining portion of our 12% senior notes
with borrowings under our new bank facility, and
. we completed our IPO on June 8, 1999 raising $75.6 million in net
proceeds, before expenses.
We intend to 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. Strategically, we continue to seek acquisition candidates and to
implement our operating principles in acquired stores.
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.
The table below provides information concerning the largest acquisitions we
have completed during the last three fiscal years:
<TABLE>
<CAPTION>
Number of
Acquisition Date Company Acquired Trade Name Store Locations Stores
- ------------------------ --------------------------- ------------ -------------------------------- ---------
<S> <C> <C> <C> <C>
July 22, 1999........... R&H Maxxon, Inc. Depot Food South Carolina, Northern Georgia 53
July 8, 1999............ Dilmar Oil Company Food Chief Eastern South Carolina 29
February 25, 1999....... Taylor Oil Company ETNA North Carolina , Virginia 60
January 28, 1999........ Miller Enterprises, Inc. Handy Way North-central Florida 121
November 5, 1998........ Express Stop, Inc. Express Stop Southeast North Carolina,
Eastern South Carolina 22
October 22, 1998........ A. G. Oil Company, Inc. Dash-N East-central North Carolina 10
July 15, 1998........... Stallings Oil Company, Inc. Zip Mart Central North Carolina, Virginia 42
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Number of
Acquisition Date Company Acquired Trade Name Store Locations Stores
- ------------------------ ------------------------------ ------------ ------------------------- ---------
<S> <C> <C> <C> <C>
July 2, 1998............ Quick Stop Food Mart, Inc. Quick Stop Southeast North Carolina,
Coastal South Carolina 75
May 2, 1998............. United Fuels Corporation, Inc. Sprint Gainesville, Florida 10
March 19, 1998.......... Wooten Oil Company, Inc. Kwik Mart Eastern North Carolina 23
October 23, 1997........ Lil' Champ Food Stores, Inc. Lil' Champ Northeast Florida 440(a)
June 12, 1997........... Carolina Ice Company, Inc. Freshway Eastern North Carolina 15
April 17, 1997.......... Gregorie Oil Co., Inc. Gregorie Oil South Carolina 15
</TABLE>
- --------
(a) Net of the disposition of 48 convenience stores located throughout eastern
Georgia.
Subsequent to September 30, 1999 we acquired 64 stores located in Georgia
(49), North Carolina (7), South Carolina (7) and Florida (1) in four separate
transactions. These transactions were primarily funded from borrowings under
our bank credit facility and cash on hand.
We seek to improve the productivity and profitability of acquired stores by
implementing our merchandising and gasoline initiatives, eliminating
duplicative costs, reducing overhead and centralizing functions such as
purchasing and information technology. 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 we can achieve
revenue increases or cost savings with respect to any acquisition.
Impact of Acquisitions. These acquisitions and the related transactions
have had a significant impact on our financial condition and results of
operations since each of their respective transaction dates. Due to the method
of accounting for acquisitions, the Consolidated Statements of Operations for
the fiscal years presented includes results of operations for each of the
acquisitions from the date of each acquisition only. For fiscal year 1999
acquisitions, the Consolidated Balance Sheets as of September 24, 1998 and the
Consolidated Statements of Operations for fiscal years September 24, 1998 and
September 25, 1997 do not include the assets, liabilities, and results of
operations relating to these acquisitions. As a result, comparisons to prior
fiscal year results and prior balance sheets are impacted materially and
obscure the underlying performance of same store results.
Results of Operations
Our operations for fiscal years 1997 and 1998 each contained 52 weeks and
fiscal year 1999 contained 53 weeks. The following table sets forth certain of
our results as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Revenues:
Merchandise sales................................ 47.4 % 46.8 % 43.6 %
Gasoline sales................................... 51.5 51.8 55.0
Commissions...................................... 1.1 1.4 1.4
----- ----- -----
Total revenues..................................... 100.0 100.0 100.0
----- ----- -----
Gross profit....................................... 22.7 23.7 22.1
----- ----- -----
Store operating.................................... 14.1 14.2 12.8
General and administrative expenses................ 3.9 3.3 2.9
Depreciation and amortization...................... 2.2 3.0 2.5
----- ----- -----
Income from operations............................. 2.5 3.2 3.9
Interest and other expenses........................ (2.7) (2.8) (2.4)
----- ----- -----
Income (loss) before income taxes and extraordinary
loss.............................................. (0.2) 0.5 1.5
Income tax expense................................. -- -- (0.6)
----- ----- -----
Income (loss) before extraordinary loss............ (0.2) 0.5 0.9
Extraordinary loss................................. -- (0.8) (0.2)
----- ----- -----
Net (loss) income.................................. (0.2)% (0.3)% 0.7 %
===== ===== =====
</TABLE>
17
<PAGE>
Fiscal 1999 Compared To Fiscal 1998
Total Revenue. Total revenue for fiscal 1999 was $1.7 billion compared to
$984.9 million for fiscal 1998, an increase of $694.0 million or 70.5%. The
increase in total revenue is primarily due to the revenue from stores acquired
in fiscal 1999 of $346.4 million, the effect of a full year of revenue from
fiscal 1998 acquisitions of $259.9 million, and comparable store revenue
growth of 6.9% or approximately $29.3 million. Also, the effect of an extra
week in fiscal 1999 contributed $39.4 million or 5.6% of the increase.
Comparable store sales increases at our locations are primarily due 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.
Merchandise Revenue. Total merchandise revenue for fiscal 1999 was $731.7
million compared to $460.9 million for fiscal 1998, an increase of $270.8
million or 58.8%. The increase in merchandise revenue is primarily due to the
revenue from stores acquired in fiscal 1999 of $133.8 million, the effect of a
full year of merchandise revenue from fiscal 1998 acquisitions of $92.7
million, and comparable store sales growth of 9.6% or approximately $20.3
million. Based on purchase and sales information, we estimate that cigarette
inflation during fiscal year 1999 accounted for 3% to 4% of the 9.6% increase
in comparable store sales. Also, the effect of an extra week in fiscal 1999
contributed $16.0 million.
Gasoline Revenue and Gallons. Total gasoline revenue for fiscal 1999 was
$923.8 million compared to $510.0 million for fiscal 1998, an increase of
$413.8 million or 81.1%. The increase in gasoline revenue is primarily due to
the revenue from stores acquired in fiscal 1999 of $208.2 million, the effect
of a full year of gasoline revenue from fiscal 1998 acquisitions of $165.2
million, and comparable store gasoline revenue growth of 3.8% or approximately
$7.9 million. Also, the effect of an extra week in fiscal 1999 contributed
$22.9 million. In fiscal 1999, our average retail price of gasoline was $1.08
which represents a $.01 decrease from fiscal 1998.
In fiscal 1999, total gasoline gallons were 855.7 million gallons compared
to 466.8 million gallons in fiscal 1998, an increase of 388.9 million gallons
or 83.3%. The increase in gasoline gallons is primarily due to gallon volume
of 189.4 million from stores acquired in fiscal 1999, the effect of a full
year of gasoline volume from 1998 acquisitions of 163.2 million and comparable
store gasoline volume increases of 5.9% or approximately 11.6 million gallons.
Also, the effect of an extra week in fiscal 1999 contributed 18.5 million
gallons. Fiscal 1999 same store gallon sales growth was 5.9% and is primarily
due 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 1999 was $23.4
million compared to $14.1 million for fiscal 1998, an increase of $9.3 million
or 65.7%. The increase in commission revenue is primarily due to revenue from
stores acquired in fiscal 1999 of $4.4 million, the effect of a full year of
commission revenue from 1998 acquisitions of $2.0 million and comparable store
commission revenue growth of 18.7% or $1.1 million. The effect of an extra
week in fiscal 1999 contributed $0.5 million. The South Carolina legislature
has passed a law banning video poker in South Carolina effective July 1, 2000.
Commission revenue from video poker in South Carolina represented
approximately $6.7 million or 26% of our total commission revenue in fiscal
1999. We anticipate a decline in video gaming commission in fiscal 2000 to
approximately $3.5 million. We believe increased commission revenue from
acquired locations, additional ancillary services and more favorable vendor
contract terms will offset a majority of this decline. See "Part I--Item 1.
Business."
Total Gross Profit. Total gross profit for fiscal 1999 was $370.8 million
compared to $233.4 million for fiscal 1998, an increase of $137.4 million or
58.9%. The increase in gross profit is primarily due to the gross profit from
stores acquired in fiscal 1999 of $72.1 million, the effect of a full year of
operations from stores acquired in 1998 of $50.7 million and the effect of an
extra week in fiscal 1999 of $3.0 million.
Merchandise Gross Margin. Merchandise gross margin in fiscal 1999 remained
relatively constant compared to fiscal 1998, decreasing only 9.0 basis points
despite significant cost inflation in the tobacco category. See "Inflation."
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Gasoline Gross Profit Per Gallon. Gasoline gross profit per gallon decreased
to $0.123 in fiscal 1999 from $0.134 in fiscal 1998 primarily due to rising
crude oil prices and its impact on wholesale fuels costs and lower average
margin in acquired locations.
Store Operating Expenses. Store operating expenses for fiscal 1999 were
$214.4 million compared to $140.1 million for fiscal 1998, an increase of
$74.3 million or 53.0%. The increase in store expenses is primarily due to the
operating and lease expenses associated with the stores acquired in fiscal
1999 of $47.9 million, the effect of a full year of expenses for stores
acquired in 1998 of $29.9 million, as well as, the effect of an extra week of
operations in fiscal 1999 of $3.8 million. As a percentage of total revenue,
store operating expenses decreased to 12.8% in fiscal 1999 from 14.2% in
fiscal 1998.
General and Administrative Expenses. General and administrative expenses for
fiscal 1999 were $48.5 million compared to $32.8 million for fiscal 1998, an
increase of $15.7 million or 47.9%. The increase in general and administrative
expenses is primarily due to the costs associated with managing increased
store counts. General and administrative expenses in total decreased as a
percentage of total revenues to 2.9% in fiscal 1999 from 3.3% in fiscal 1998.
Income from Operations. Income from operations for fiscal 1999 was $65.2
million compared to $31.8 million for fiscal 1998, an increase of $33.4
million or 104.7%. The increase is primarily due to the items discussed above.
As a percentage of total revenue, income from operations increased to 3.9% in
fiscal 1999 from 3.2% in fiscal 1998.
EBITDA. EBITDA represents income (loss) before interest expense, income tax
benefit, depreciation and amortization, merger integration costs,
restructuring charges, impairment of long-lived assets, and extraordinary
item. EBITDA for fiscal 1999 was $108.0 million compared to $60.5 million for
fiscal 1998, an increase of $47.5 million or 78.5%. The increase is primarily
due to the items discussed above.
EBITDA is not a measure of performance under generally accepted accounting
principles, and should not be considered as a substitute for net income, cash
flows from operating activities and other income or cash flow statement data
prepared in accordance with generally accepted accounting principles, or as a
measure of profitability or liquidity. We have included information concerning
EBITDA as one measure of our cash flow and historical ability to service debt
and because we believe investors find this information useful. EBITDA as
defined may not be comparable to similarly-titled measures reported by other
companies.
Interest Expense (see "Liquidity and Capital Resources; Long-Term Debt").
Interest expense is primarily interest on our senior subordinated notes,
borrowings under our bank credit facility and our previously outstanding
senior notes. Interest expense in fiscal 1999 was $41.3 million compared to
$28.9 million for fiscal 1998, an increase of $12.4 million or 42.6%. Interest
expense is primarily related to interest on our senior subordinated notes of
$21.9 million, interest on the bank credit facility of approximately $16.6
million and interest on our senior notes of $2.0 million which was partially
offset by $1.1 million in interest savings related to the redemption and
refinancing of $49.0 million in principal amount of the senior notes.
Income Tax Expense. Our effective income tax rate for fiscal 1999 was 43.4%.
Our effective tax rate is negatively impacted by non-deductible goodwill
related to acquisitions and other permanent differences.
Extraordinary Loss. We recognized an extraordinary loss, net of taxes, of
approximately $3.6 million in fiscal 1999 in connection with the redemption of
the remaining outstanding balance of our senior notes and the related consent
fees. The extraordinary item includes the payment of the 4% call premium of
$2.0 million and the write-off of related deferred financing costs on our
senior notes and former credit facility. The extraordinary item also reflects
an income tax benefit of approximately $2.3 million.
Net Income. Net income for fiscal 1999 was $10.4 million compared to a net
loss of $3.3 million for fiscal 1998, an increase of $13.7 million or 413.3%.
The increase is primarily due to results from acquired stores, improved
results from operations, and the lower extraordinary charges related to
redemption and refinancing
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activities. Our income before extraordinary loss was $14.0 million for fiscal
1999 compared to $4.7 million during fiscal 1998, an increase of $9.3 million
or a 200% increase. Pursuant to Emerging Issues Task Force Topic No. ("EITF")
D-42, in connection with our redemption of our preferred stock in our third
fiscal quarter, we were required to recognize a one-time deduction to net
income applicable to common stockholders (and a related reclassification to
accumulated deficit) in the amount of $1,500,000 associated with original
issue costs incurred in connection with the issuance of preferred stock in
December 1996. At that time, the original issue costs were netted against the
gross proceeds and thus charged to additional paid-in capital. EITF D-42
requires that the excess of fair value of the consideration transferred to the
preferred stockholders over the carrying amount of the preferred stock be
subtracted from net income applicable to common stockholders in the
calculation of earnings per share.
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 due to Lil' Champ revenue of $451.4
million for the eleven month period ended September 24, 1998, the revenue from
stores acquired or opened in fiscal 1998 of $92.2 million and comparable store
merchandise sales growth of 5.3% (or $9.7 million). Comparable store sales
increases at our locations are primarily due 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.
Merchandise Revenue. Merchandise revenue for fiscal 1998 was $460.8 million
compared to $202.4 million for fiscal 1997, an increase of $258.4 million or
127.7%. The increase in merchandise revenue is primarily due to Lil' Champ
merchandise revenue of $212.2 million for the eleven month period ended
September 24, 1998, the revenue from stores acquired or opened in fiscal 1998
of $30.5 million and comparable store merchandise sales growth of $9.7
million. Fiscal 1998 comparable store merchandise revenue increased 5.3% over
fiscal 1997.
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 due to Lil'
Champ gasoline revenue of $231.7 million for the eleven month period ended
September 24, 1998 and the revenue from stores acquired or opened in fiscal
1998 of $61.1 million. Overall, gasoline revenue growth was partially offset
by lower average gasoline retail prices in fiscal 1998 versus fiscal 1997. In
fiscal 1998, the Company's average retail price of gasoline was $0.14, or
11.4%, lower than in fiscal 1997. The decrease in average retail is primarily
due 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%. The increase in gasoline gallons is primarily due to Lil' Champ
gallon volume of 204.9 million and comparable store gasoline volume increases
of 7.9 million. Fiscal 1998 comparable store gallon sales growth was 4.8% and
is primarily due to more competitive gasoline pricing, rebranding and
promotional activity, enhanced store appearance and local market and economic
conditions.
Commission Revenue. Total commission revenue for fiscal 1998 was $14.1
million compared to $4.8 million for fiscal 1997, an increase of $9.3 million
or 193.8%. The increase in commission revenue is primarily due to Lil' Champ
revenue of $7.5 million for the eleven month period ended September 24, 1998
and revenue from stores acquired or opened in fiscal 1998 of $0.5 million.
Lil' Champ's commission revenue is principally lottery revenue in locations
throughout Florida and Georgia.
Total Gross Profit. Total gross profit for fiscal 1998 was $233.4 million
compared to $97.3 million for fiscal 1997, an increase of $136.1 million or
139.9%. The increase in gross profit is primarily due to Lil' Champ gross
profit of $108.5 million for the eleven month period ended September 24, 1998,
the gross profit from stores acquired or opened in fiscal year 1998 of $15.7
million and comparable store gross profit increases of $5.8 million.
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Merchandise Gross Margin. Merchandise gross margins in fiscal 1998 remained
relatively constant compared to fiscal 1997, decreasing only 4.0 basis points
despite cost inflation in the tobacco category.
Gasoline Gross Profit Per Gallon. The gasoline gross profit per gallon
increased to $0.134 in fiscal 1998 from $0.128 in fiscal 1997 as the result of
more favorable retail price and wholesale cost conditions in Lil' Champ's
markets and improved gasoline market conditions in our other primary markets.
This increase occurred in spite of decreases in retail gasoline prices to
$1.09 in fiscal 1998 from $1.23 in fiscal 1997.
Store Operating and General and Administrative Expenses. Store operating
expenses for fiscal 1998 were $140.1 million compared to $60.2 million for
fiscal 1997, an increase of $79.9 million or 132.7%. The increase in store
expenses is primarily due to Lil' Champ expenses of $63.6 million for the
eleven month period ended September 24, 1998 and the operating and lease
expenses associated with the stores acquired or opened in fiscal 1998 of $9.6
million. As a percentage of total revenue, store operating expenses increased
to 14.2% in fiscal 1998 from 14.1% in fiscal 1997.
General and administrative expenses for fiscal 1998 were $32.8 million
compared to $16.8 million for fiscal 1997, an increase of $16.0 million or
95.2%. The increase in general and administrative expenses is primarily due to
Lil' Champ expenses of $16.0 million for the eleven month period ended
September 24, 1998. Operating,
general and administrative expenses in total decreased as a percentage of
total revenues. As a percentage of total revenue, general and administrative
expenses decreased to 3.3% in fiscal 1998 from 3.9% in fiscal 1997.
Merger Integration Costs. In connection with the Lil' Champ acquisition, we
incurred merger integration costs of approximately $1.0 million related to the
combination of its existing business with the acquired business of Lil' Champ.
These costs include $0.3 million related to the relocation of personnel, $0.6
million related to the provision for duplicated contracted services that
provide no future economic benefit and $0.1 million for other consolidation
and related expenses.
Income From Operations. Income from operations for fiscal 1998 was $31.8
million compared to $10.8 million for fiscal 1997, an increase of $21.0
million or 194.4%. The increase is primarily due to Lil' Champ income from
operations of $16.7 million. As a percentage of total revenue, income from
operations increased to 3.2% in fiscal 1998 from 2.5% in fiscal 1997.
EBITDA. EBITDA for fiscal 1998 was $60.5 million compared to $20.3 million
for fiscal 1997, an increase of $40.2 million or 198.0%. The increase is
primarily due 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 (see "Liquidity and Capital Resources; Long-Term
Debt"). Interest expense in fiscal 1998 was $28.9 million compared to $13.0
million for fiscal 1997, an increase of $15.9 million or 122.3%. This increase
is primarily due to interest on the senior notes of $6.5 million, the senior
subordinated notes of $18.9 million and borrowing under the former bank credit
facility of approximately $2.0 million, which was partially offset by $0.8
million in interest savings related to the redemption and refinancing of $51.0
million in principal amount of the senior notes.
Income Tax Benefit (Expense). We did not record an income tax benefit for
fiscal 1998 or fiscal 1997. Income tax benefit (expense) is recorded net of a
valuation allowance to provide for operating loss carryforwards and available
tax credits based on estimated future earnings and for temporary differences
based on expected timing of reversals. In fiscal 1998, the valuation allowance
increased $551,000, which resulted primarily from the allowance for 1998
federal net operating loss benefits, offset by a $1.2 million allowance
adjustment related to a corresponding reduction of $1.2 million of deferred
tax assets which resulted from a preliminary settlement of a North Carolina
tax assessment.
Extraordinary Loss. We recognized an extraordinary loss of approximately
$8.0 million in fiscal 1998 in connection with the redemption of a portion of
the senior notes and related consent fees. The extraordinary item
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relates to the purchase of $51.0 million in principal amount of the senior
notes and includes tender costs of $5.1 million, consent solicitation costs of
$0.9 million, and the write-off of a respective portion of the deferred
financing cost of $2.0 million.
Net Loss. Net loss for fiscal 1998 was $3.3 million compared to $1.0 million
for fiscal 1997, an increase of $2.3 million or 230.0%. The increase is
primarily due to the extraordinary loss of $8.0 million in connection with the
redemption of the senior notes and related consent fees. Our income before
extraordinary loss was $4.7 million for fiscal 1998 compared to a loss of $1.0
million during fiscal 1997, an increase of $5.7 million. The income before
extraordinary loss for fiscal 1998 represents an increase of $12.8 million
over fiscal year 1996.
Liquidity and Capital Resources
Cash Flows from Operations. Due to the nature of our business, substantially
all sales are for cash. Cash provided by operations is our primary source of
liquidity. Acquisitions, interest expense and capital expenditures represent
the primary uses of funds. We rely primarily upon cash provided by operating
activities, supplemented
as necessary from time to time by borrowings under the 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 for fiscal 1997 totaled
$7.3 million, for fiscal 1998 totaled $48.0 million and for fiscal 1999
totaled $68.6 million. We had $31.2 million of cash and cash equivalents on
hand at September 30, 1999.
Bank Credit Facility. On January 28, 1999, we entered into the 1999 bank
credit facility. The bank credit facility consists of a $45.0 million
revolving credit facility, a $50.0 million acquisition facility and a $240.0
million term loan facility. The revolving credit facility is available to fund
working capital and for the issuance of standby letters of credit. The
acquisition facility is available to fund future acquisitions of related
businesses. As of September 30, 1999, there were no borrowings outstanding
under the working capital line of credit and $12.0 million outstanding under
the acquisition facility. As of September 30, 1999, approximately $16.1
million of letters of credit were issued under the standby letter of credit
facility.
Subsequent to September 30, 1999, we entered into an amendment to our bank
credit facility and borrowed an additional $75.0 million under our term loan
facility. This term loan generally carries the same terms and conditions as
our existing term loan facility. Proceeds from the term loan were used to
prepay amounts outstanding under our acquisition facility and to fund
acquisitions closed after September 30, 1999. We have commitments for an
additional $25.0 million term loan that is expected to fund on January 31,
2000 with proceeds to be used to finance future acquisitions. With these
transactions, we have approximately $79.0 million in additional borrowing
capacity to fund future acquisitions.
The 1999 bank credit facility contains covenants restricting our ability
and the ability of any of our 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 1999 bank credit facility also contain financial ratios and
tests which must be met with respect to minimum coverage and leverage ratios,
pro forma cash flow and maximum capital expenditures.
Restrictive covenants in our debt agreements may restrict our ability to
implement our acquisition strategy.
1999 Acquisitions. In fiscal 1999 we acquired a total of 297 convenience
stores in eight transactions for approximately $194.4 million, net of cash
acquired. These acquisitions were funded with borrowings under the bank credit
facility, proceeds from the IPO, and cash on hand.
Subsequent to fiscal year end 1999, we acquired the operating assets of 64
stores located in North Carolina, South Carolina, Georgia and Florida. We
funded these transactions with proceeds from the acquisition facility and cash
on hand.
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Capital Expenditures. Capital expenditures (excluding all acquisitions) for
fiscal 1999 were $47.6 million. 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.
Our sale-leaseback program includes the packaging of our owned convenience
store real estate, both land and buildings, for sale to investors in return
for their agreement to leaseback the property to us under long-term leases.
Generally, the leases are operating leases at market rates with terms of
twenty years with four five-year renewal options. The lease payment is based
on market rates ranging from 10.5% to 11.5% applied to the cost of each
respective property. We retain ownership of all personal property and gasoline
marketing equipment. The bank credit facility limits or caps the proceeds of
sale-leasebacks that we can use to fund our operations or capital
expenditures. Under this sale-leaseback program, we received $10.7 million in
fiscal 1999 and $4.8 million during fiscal 1998.
In fiscal 1999, we received approximately $17.5 million in sale-leaseback
proceeds, vendor reimbursements for capital improvements and proceeds from
asset dispositions; therefore, net capital expenditures, excluding all
acquisitions, for fiscal 1999 were $30.1 million. We anticipate that net
capital expenditures for fiscal 2000 will be approximately $45.0 million.
Long-Term Debt. At September 30, 1999, our long-term debt consisted
primarily of $200.0 million of the senior subordinated notes, $227.5 million
in term loans, and $12.0 million outstanding under the acquisition facility.
See "Bank Credit Facility."
We 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 our subsidiaries, except for PH Holding
and its subsidiaries. The senior subordinated notes contain covenants that,
among other things, restrict our ability and any restricted subsidiary's
ability to (i) pay dividends or make distributions, except in amounts not in
excess of a percentage of our net income of proceeds of debt or equity
issuances and in amounts not in excess of $5.0 million, (ii) issue stock of
subsidiaries, (iii) make investments of non-affiliated entities, except
employee loans of up to $3.0 million, (iv) repurchase stock, except stock
owned by employees in amounts not in excess of $2.0 million with the proceeds
from debt or equity issuances, (v) incur liens not securing debt permitted
under the senior subordinated notes, (vi) enter into transactions with
affiliates, (vii) enter into sale-leaseback transactions, or (viii) engage in
mergers or consolidations.
We can incur debt under the senior subordinated notes if its ratio of pro
forma EBITDA to fixed charges, after giving effect to such incurrence, is at
least 2 to 1. Even if we do not meet this ratio we can incur: (i) bank credit
facility debt of up to $50.0 million of acquisition debt and other debt in an
amount equal to the greater of $45.0 million or an amount equal to 4.0% times
our annualized revenues, (ii) capital leases or acquisition debt in amounts
not to exceed in the aggregate 10% of its tangible assets at time of
incurrance, (iii) intercompany debt, (iv) pre-existing debt, (v) up to $15.0
million in any type of debt or (vi) debt for refinancing of the above
described debt.
The senior subordinated notes also place conditions on the terms of asset
sales or transfers and require us either to reinvest the proceeds of an asset
sale or transfer, or, if we do not reinvest those proceeds, to pay down our
bank credit facility or other senior debt or to offer to redeem our senior
subordinated notes with any asset sale proceeds not so used. Up to 35% of the
senior subordinated notes may be redeemed prior to October 15, 2000 at a
redemption price of 110.25% plus accrued interest with the net proceeds of one
or more public equity offerings. All of the senior subordinated notes may be
redeemed after October 15, 2002 at a redemption price which begins at 105.125%
and decreases to 100.0% after October 2005.
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Cash Flows From Financing Activities. We used proceeds from our 1999 bank
credit facility, our IPO, our cash on hand and the net proceeds of
approximately $1.2 million from the sale of common stock to employees under
our stock subscription plan to finance:
. fiscal 1999 acquisitions,
. the redemption of $49.0 million of senior notes,
. the redemption of $17.5 million of preferred stock,
. the payment of $6.5 million in preferred dividends and
. the related fees and expenses.
Cash Requirements. We believe that cash on hand, together with cash flow
anticipated to be generated from operations, short-term borrowing for seasonal
working capital, permitted borrowings under our credit facilities and
permitted borrowings by our unrestricted subsidiary 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 September 30, 1999, our shareholders' equity
totaled $104.2 million. The increase in shareholders' equity of $64.9 million
is attributed to the proceeds from our IPO and our current year net income of
$7.7 million.
Additional paid in capital is impacted by the accounting treatment applied
to a 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 in
us by our shareholders.
Environmental Considerations. We make certain expenditures to comply with
various federal, state and local environmental laws and regulations governing
underground storage tanks. See "Part 1--Item 1. Business" for a further
discussion of environmental regulations to which we are subject.
Environmental reserves of $15.4 million as of September 30, 1999, represent
estimates for future expenditures for remediation, tank removal and litigation
associated with 233 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. Although
we can make no assurances, we anticipate that we will be reimbursed for a
portion of these expenditures from state trust funds and private insurance. As
of September 30, 1999, amounts which are probable of reimbursement (based on
our experience) from those sources total $13.1 million and are recorded as
long-term environmental receivables. These receivables are expected to be
collected within a period of twelve to eighteen months after the reimbursement
claim has been submitted. In Florida, remediation of such contamination will
be performed by the state and we expect substantially all of the costs will be
paid by the state trust fund. We will perform remediation in other states
through independent contractor firms engaged by us. For certain sites the
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 for environmental
conditions at adjacent real properties 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 average remediation cost for contaminated sites and
our historical claims experience. 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 the locations identified as contaminated are being cleaned up by
third parties who have indemnified us as to responsibility for clean up
matters. Additionally, we are awaiting closure notices on several
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other locations which will release us from responsibility related to known
contamination at those sites. These sites continue to be included in our
environmental reserve until a final closure notice is received.
Year 2000 Initiative
The following discussion about the implementation of our Year 2000 program,
the costs expected to be associated with the program and the results we expect
to achieve constitute forward-looking information. As noted below, there are
many uncertainties involved with the Year 2000 issue, including the extent to
which we will be able to adequately provide for contingencies that may arise,
as well as the broader scope of the Year 2000 issue as it may affect third
parties and our trading partners. Accordingly, the costs and results of our
Year 2000 program and the extent of any impact on our results of operations
could vary materially from that stated herein.
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 disruptions of operations.
We completed 90% of our assessment phase of Year 2000 vulnerability early
in fiscal year 1998, after a formal third party assessment was completed in
November 1997. Assessment activities found that 30% of our systems would
require remediation and 20% of our systems were planned for replacement or
would be best served if replaced. Based on this third party assessment,
internal assessment, and project results as of December 16, 1999, we believe
all system modifications, hardware and software replacements or upgrades and
related testing have been completed.
We have tested, modified or replaced, or plan to modify or replace our
existing systems and related hardware which did not properly interpret dates
beyond December 31, 1999 to ensure Year 2000 compliance. We have assessed
software and technology infrastructures, embedded systems such as microchips
in point-of-sale systems, fuel consoles and office equipment, and building
facilities such as telephone-related systems, HVAC and security. Our testing
methodology plan included, but was 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 applications requiring remediation or
replacement have been tested and implemented.
We 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. The replies indicate
that they will be Year 2000 compliant before the end of the calendar year.
Specifically, our grocery wholesaler, McLane, has stated in their "Year 2000
Readiness Disclosure" that they are "committed to identifying and correcting
all business critical Year 2000 problems by June 1, 1999." Based on these
communications and presently available information, we do not anticipate any
material effects related to vendor, supplier, or financial institution
compliance. Additionally, due to the nature of our business, Year 2000
compliance with respect to our customers is not relevant. Noncompliance by
vendors, suppliers, credit card processing companies and financial
institutions utilized by us could result in a material adverse effect on our
financial condition and results of operations. We believe that the worst case
scenario in the event of a Year 2000 related failure would be delays in the
receipt of payment from credit card processing companies and a return to
manual accounting processing at our individual stores.
In addition, we have reviewed the assets acquired since our original
assessment for Year 2000 compliance. This includes the acquisition of other
companies, as well as procurement and service arrangements. We believe that
our recently acquired assets are Year 2000 compliant. The assessments have
been conducted through the due diligence process, vendor compliance
communications and requests for disclosure statements as part of contract
negotiations. In general, the systems and suppliers of acquired companies are
the same as those used in our existing operations.
25
<PAGE>
State of Readiness as of December 16, 1999
<TABLE>
<CAPTION>
Estimated Estimated
Percent Completion
Phase Complete Date(a)
----- --------- ---------------
<S> <C> <C>
Awareness.......................................... 99% January, 2000
Assessment......................................... 99% January, 2000
Remediation........................................ Completed September, 1999
Replacement........................................ Completed September, 1999
Testing............................................ 99% January, 2000
Contingency planning............................... Completed November, 1999
</TABLE>
- --------
(a) Indicates month when work was substantially completed. We will continue to
reevaluate awareness, assess acquired assets and update contingency plans
as needed.
The direct and indirect costs of Year 2000 compliance have not been
material to our operations or operating results. Our expenditures, which have
been funded through operating cash flow, consist primarily of internal costs
and expenses associated with third-party contractors. To date, our spending
with contractors and consultants has been approximately $350,000.
Our Year 2000 Contingency Plan has been developed and distributed. We
believe this plan provides for emergency and alternative contact numbers, and
alternative procedures related to accounting for store level transactions,
credit card processing, corporate accounting and payroll processing. The plan
also calls for expanded help desk and external support coverage for the
January 1st weekend. Our marketing staff has worked with our primary
merchandise supplier, McLane, to have a standing order ready should there be
any particular McLane related system problems.
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. We
cannot provide assurance that any such failure will not have a material impact
on our operations.
Recently Issued Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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. In June 1999, the
effective date of SFAS No. 133 was extended for one year and consequently the
statement is now effective for the first fiscal quarter of fiscal 2001.
Earlier application of all of the provisions of SFAS No. 133 is encouraged. As
of September 30, 1999, we have not determined the effect of SFAS No. 133 on
our consolidated financial statements, however, we do not believe adoption of
this accounting standard will have a material impact on our financial
condition.
Inflation
During fiscal 1999 cigarette prices increased 33.4%. The largest increase
occurred on November 23, 1998, when major cigarette manufacturers increased
prices by $0.45 per pack. In September 1999, manufacturers raised cigarette
prices an additional $0.10 per pack. In general, we have passed price
increases to our customers. However, during fiscal 1999 as in years past,
major cigarette manufacturers offered rebates to retailers, and we passed
along these rebates to our customers. Based on purchase and sales information,
we estimate that cigarette inflation during fiscal year 1999 accounted for 3%
to 4% of the 9.6% increase in comparable store merchandise sales.
During 1999, wholesale gasoline fuel prices increased significantly from a
low of $12 per barrel in February 1999 to a high of $26 per barrel in
September 1999. Generally we pass along wholesale gasoline cost changes to our
customers through retail price changes. Gasoline price inflation has had an
impact on total revenue and gross margin percentage, however, this inflation
has not materially impacted gross margin dollars.
26
<PAGE>
General CPI increased 2.6% during fiscal 1999 and food at home, which is
most indicative of our merchandise inventory, increased 2.0%. While we have
generally been able to pass along these price increases to our customers, we
make no assurances that continued inflation will not have a material adverse
effect on our sales and gross profit dollars.
Item 7A. 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. We are subject to interest rate risk on our existing long-
term debt and any future financing requirements. Our fixed rate debt consists
primarily of outstanding balances on our senior subordinated notes and our
variable rate debt relates to borrowings under our bank credit facility.
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.
On November 30, 1999, we entered into an interest rate swap with respect to
$50 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 9.28% for the Tranche A facility and 9.78% for the Tranche
B facility for approximately two years.
The following table presents the future principal cash flows and weighted-
average interest rates expected on our existing long-term debt instruments.
Fair values have been determined based on quoted market prices as of December
16, 1999.
EXPECTED MATURITY DATE
<TABLE>
<CAPTION>
As of September 30, 1999
--------------------------------------------------------------------------
Fair
FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 Thereafter Total Value
------- ------- ------- ------- ------- ---------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt.......... $10,687 $19,939 $24,942 $28,196 $39,510 $317,633 $440,907 $434,907
Weighted Average
Interest Rate.......... 9.42% 9.46% 9.52% 9.60% 9.69% 10.08% 9.67%
</TABLE>
<TABLE>
<CAPTION>
As of September 24, 1998
-------------------------------------------------------------
FY FY FY FY FY
1999 2000 2001 2002 2003 Thereafter Total
----- ----- -------- ----- -------- ---------- --------
<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>
Qualitative Disclosures:
Our primary exposure relates to:
. interest rate risk on long-term and short-term borrowings,
. our ability to refinance our senior subordinated notes at maturity at
market rates,
. the impact of interest rate movements on our ability to meet interest
expense requirements and exceed financial covenants, and
. 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. While we cannot predict
or manage our ability to refinance existing debt or the impact interest rate
movements will have on our existing debt, management continues to evaluate our
financial position on an ongoing basis.
27
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
------------
<S> <C>
Financial Statements:
Independent Auditors' Report.................................... 29
Consolidated Balance Sheets as of September 24, 1998 and
September 30, 1999............................................. 30
Consolidated Statements of Operations for the years ended
September 25, 1997, September 24, 1998, and September 30,
1999........................................................... 32
Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended September 25, 1997, September 24, 1998, and
September 30, 1999............................................. 33
Consolidated Statements of Cash Flows for the years ended
September 25, 1997, September 24, 1998, and September 30,
1999........................................................... 34
Notes to Consolidated Financial Statements...................... 36
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts and Reserves..... S-1
Financial Statement Exhibit:
Exhibit 12.1--Computation of Ratio of Earnings to Fixed
Charges........................................................ Exhibit 12.1
</TABLE>
28
<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. ("The Pantry") and subsidiaries as of September 24, 1998 and September
30, 1999, and the related consolidated statements of operations, shareholders'
equity (deficit), and cash flows for each of the three years in the period
ended September 30, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14. These financial statements and
financial statement schedule are the responsibility of The Pantry's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule 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 24, 1998 and September 30, 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended September 30, 1999 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
November 17, 1999
29
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 24, September 30,
1998 1999
------------- -------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 34,404 $ 31,157
Receivables (net of allowance for doubtful
accounts of $280 at September 24, 1998, $766 at
September 30, 1999)............................. 9,907 24,234
Inventories (Note 3)............................. 47,809 76,237
Income taxes receivable (Note 6)................. 488 --
Prepaid expenses................................. 2,216 3,497
Property held for sale........................... 3,761 135
Deferred income taxes (Note 6)................... 3,988 4,849
-------- --------
Total current assets........................... 102,573 140,109
-------- --------
Property and equipment, net (Notes 4, 5, and 7).... 300,978 421,685
-------- --------
Other assets:
Goodwill (net of accumulated amortization of
$11,940 at September 24, 1998, $18,324 at
September 30, 1999) (Notes 2)................... 120,025 197,705
Deferred lease costs (net of accumulated
amortization of $9,001 at September 24, 1998,
$9,046 at September 30, 1999)................... 269 224
Deferred financing costs (net of accumulated
amortization of $4,871 at September 24, 1998,
$3,499 at September 30, 1999) (Note 5).......... 14,545 12,680
Environmental receivables (Note 8)............... 13,187 13,136
Other............................................ 3,243 8,179
-------- --------
Total other assets............................. 151,269 231,924
-------- --------
Total assets....................................... $554,820 $793,718
======== ========
</TABLE>
30
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS--(Continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 24, September 30,
1998 1999
------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY:
-------------------------------------
Current liabilities:
Current maturities of long-term debt (Note 5).... $ 45 $ 10,687
Current maturities of capital lease obligations
(Note 7)........................................ 1,240 1,205
Accounts payable:
Trade.......................................... 49,559 85,011
Money orders................................... 5,181 4,113
Accrued interest (Note 5)........................ 11,712 9,928
Accrued compensation and related taxes........... 6,719 8,042
Income taxes payable (Note 6).................... -- 5,004
Other accrued taxes.............................. 7,007 13,834
Accrued insurance................................ 5,745 8,820
Other accrued liabilities........................ 24,348 20,976
-------- --------
Total current liabilities.................... 111,556 167,620
-------- --------
Long-term debt (Note 5)............................ 327,269 430,220
-------- --------
Other noncurrent liabilities:
Environmental costs (Note 8)..................... 17,137 15,402
Deferred income taxes (Note 6)................... 20,366 26,245
Deferred revenue (Note 8)........................ 16,660 28,729
Capital lease obligations (Note 7)............... 12,129 13,472
Employment obligations........................... 934 486
Accrued dividends on preferred stock (Note 11)... 4,391 --
Other............................................ 5,074 7,347
-------- --------
Total other noncurrent liabilities........... 76,691 91,681
-------- --------
Commitments and contingencies (Notes 5, 7, 8 and
13)
Shareholders' Equity:
Preferred stock, $.01 par value, 150,000 shares
authorized; 17,500 issued and outstanding at
September 24, 1998 and none issued and
outstanding at September 24, 1999 (aggregate
liquidation value: September 24, 1998--$17,500)
(Note 11)....................................... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized; 11,704,857 issued and outstanding at
September 24, 1998, 18,111,474 issued and
outstanding at September 30, 1999 (Note 10)..... 117 182
Additional paid-in capital (Note 11)............. 68,939 128,256
Shareholder loans................................ (215) (937)
Accumulated deficit.............................. (29,537) (23,304)
-------- --------
Total shareholders' equity................... 39,304 104,197
-------- --------
Total liabilities and shareholders' equity......... $554,820 $793,718
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, except per share amounts)
<TABLE>
<CAPTION>
September 25, September 24, September 30,
1997 1998 1999
------------- ------------- -------------
(52 weeks) (52 weeks) (53 weeks)
<S> <C> <C> <C>
Revenues:
Merchandise sales................. $202,440 $460,798 $ 731,681
Gasoline sales.................... 220,166 509,958 923,786
Commissions....................... 4,787 14,128 23,403
-------- -------- ---------
Total revenues................ 427,393 984,884 1,678,870
-------- -------- ---------
Cost of sales:
Merchandise....................... 132,846 303,968 489,258
Gasoline.......................... 197,268 447,565 818,784
-------- -------- ---------
Total cost of sales........... 330,114 751,533 1,308,042
-------- -------- ---------
Gross profit........................ 97,279 233,351 370,828
-------- -------- ---------
Operating expenses:
Store expenses.................... 60,208 140,089 214,384
General and administrative
expenses......................... 16,796 32,761 48,468
Merger integration costs (Note
2)............................... -- 1,016 --
Depreciation and amortization..... 9,504 27,642 42,798
-------- -------- ---------
Total operating expenses...... 86,508 201,508 305,650
-------- -------- ---------
Income from operations.............. 10,771 31,843 65,178
-------- -------- ---------
Other income (expense):
Interest expense.................. (13,039) (28,946) (41,280)
Miscellaneous..................... 1,293 1,776 852
-------- -------- ---------
Total other expense........... (11,746) (27,170) (40,428)
-------- -------- ---------
Income (loss) before income taxes
and extraordinary loss............. (975) 4,673 24,750
Income tax expense (Note 6)......... -- -- (10,750)
-------- -------- ---------
Income (loss) before extraordinary
loss............................... (975) 4,673 14,000
Extraordinary loss (Note 5)......... -- (7,998) (3,584)
-------- -------- ---------
Net income (loss)................... $ (975) $ (3,325) $ 10,416
======== ======== =========
Net income (loss) applicable to
common shareholders (Note 14)...... $ (6,279) $ (6,267) $ 6,233
======== ======== =========
Earnings per share (Note 14):
Basic:
Income (loss) before
extraordinary item............. $ (1.08) $ 0.18 $ 0.71
Extraordinary loss.............. -- $ ( 0.82) $ ( 0.26)
-------- -------- ---------
Net income (loss)............... $ (1.08) $ ( 0.64) $ 0.45
======== ======== =========
Diluted:
Income (loss) before
extraordinary item............. $ (1.08) $ 0.16 $ 0.65
Extraordinary loss.............. -- $ ( 0.73) $ ( 0.24)
-------- -------- ---------
Net income (loss)............... $ (1.08) $ ( 0.57) $ 0.41
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (DEFICIT)
(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 26,
1996................... 25,999 $ -- 5,815,479 $ 58 $ 6,495
Net loss................ -- -- -- -- --
Net proceeds from stock
and warrants issued.... 17,500 -- -- -- 15,953
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ---------- -------- --------
Balance, September 25,
1997................... 43,499 -- 5,815,479 58 22,448
Net loss................ -- -- -- -- --
Issuances of common
stock.................. -- -- 5,889,378 59 57,092
Contribution of Series A
preferred stock and
related dividends to
additional paid in
capital................ (25,999) -- -- -- 6,508
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ---------- -------- --------
Balance, September 24,
1998................... 17,500 -- 11,704,857 117 86,048
Net loss................ -- -- -- -- --
Issuances of common
stock.................. -- -- 156,617 2 1,788
Public sale of common
stock at $13.00 per
share, net of
expenses............... -- -- 6,250,000 63 72,916
Redemption of Series B
preferred stock........ (17,500) -- -- -- (15,387)
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ---------- -------- --------
Balance, September 30,
1999................... -- $ -- 18,111,474 $ 182 $145,365
======== ======== ========== ======== ========
<CAPTION>
Total
Additional
Paid-in Shareholder Accumulated
Other(1) Capital Loans Deficit Total
-------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, September 26,
1996................... $(17,109) $(10,614) $ -- $(16,991) $(27,547)
Net loss................ -- -- -- (975) (975)
Net proceeds from stock
issue.................. -- 15,953 -- -- 15,953
Dividends on preferred
stock.................. -- -- -- (5,304) (5,304)
-------- -------- ---------- -------- --------
Balance, September 25,
1997................... (17,109) 5,339 -- (23,270) (17,873)
Net loss................ -- -- -- (3,325) (3,325)
Issuances of common
stock.................. -- 57,092 (215) -- 56,936
Contribution of Series A
preferred stock and
related dividends to
additional paid in
capital................ -- 6,508 -- -- 6,508
Dividends on preferred
stock.................. -- -- -- (2,942) (2,942)
-------- -------- ---------- -------- --------
Balance, September 24,
1998................... (17,109) 68,939 (215) (29,537) 39,304
Net income.............. -- -- -- 10,416 10,416
Issuances of common
stock.................. -- 1,788 (722) -- 1,068
Public sale of common
stock at $13.00 per
share, net of
Expenses............... -- 72,916 -- -- 72,979
Redemption of Series B
preferred stock........ -- (15,387) -- (2,113) (17,500)
Dividends on preferred
stock.................. -- -- -- (2,070) (2,070)
-------- -------- ---------- -------- --------
Balance, September 30,
1999................... $(17,109) $128,256 $ (937) $(23,304) $104,197
======== ======== ========== ======== ========
</TABLE>
- --------
(1) Represents excess of amount paid in 1987 leveraged buy-out over net book
value for "carry over" shareholders. See Note 1.
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------
September 25, September 24, September 30,
1997 1998 1999
------------- ------------- -------------
(52 weeks) (52 weeks) (53 weeks)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................ $ (975) $ (3,325) $ 10,416
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Extraordinary loss............. -- 2,006 3,406
Depreciation and amortization.. 9,504 27,642 42,798
Provision for deferred income
taxes......................... 371 138 530
(Gain) loss on sale of property
and equipment................. (1,054) 531 4,484
Provision for environmental
expenses...................... 1,574 6,181 (1,735)
Provision for closed stores.... (11) 50 --
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Receivables.................... (527) (8,512) 9,454
Inventories.................... (2,273) (4,518) (11,155)
Prepaid expenses............... (429) 390 (7)
Other noncurrent assets........ (4,295) 5,111 (1,540)
Accounts payable............... 603 13,896 19,103
Other current liabilities and
accrued expenses.............. 3,393 2,241 (17,425)
Employment obligations......... (698) (407) (448)
Other noncurrent liabilities... 2,155 6,608 10,686
-------- --------- ---------
Net cash provided by operating
activities...................... 7,338 48,032 68,567
-------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property held for
sale............................ (1,828) (5,203) (178)
Additions to property and
equipment....................... (14,749) (42,067) (47,416)
Proceeds from sale lease-back
transactions.................... 1,345 4,807 10,724
Proceeds from sale of property
and equipment................... 2,315 7,648 2,366
Acquisitions of related
businesses, net of cash
acquired........................ (12,162) (250,592) (194,414)
-------- --------- ---------
Net cash used in investing
activities...................... (25,079) (285,407) (228,918)
-------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal repayments under
capital leases.................. (303) (1,424) (1,495)
Principal repayments of long-term
debt............................ (26) (51,543) (184,888)
Proceeds from issuance of long-
term debt....................... 200 278,508 297,000
Redemption of Series B preferred
stock........................... -- -- (17,500)
Net proceeds from initial public
offering........................ -- -- 72,979
Net proceeds from other stock
issuances....................... 15,953 56,935 1,068
Accrued dividends paid on
preferred stock................. -- -- (6,461)
Other financing costs............ (74) (14,044) (3,599)
-------- --------- ---------
Net cash provided by financing
activities...................... 15,750 268,432 157,104
-------- --------- ---------
Net increase (decrease).......... (1,991) 31,057 (3,247)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR............... 5,338 3,347 34,404
-------- --------- ---------
CASH AND CASH EQUIVALENTS AT END
OF YEAR ........................ $ 3,347 $ 34,404 $ 31,157
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------
September 25, September 24, September 30,
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Cash paid (refunded)
during the year:
Interest................ $12,863 $21,826 $43,064
======= ======= =======
Taxes................... $ (917) $ 784 $ 34
======= ======= =======
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1998 and 1999, The Pantry entered into several business
acquisitions and divestitures. See Note 2--Business Acquisitions and Note 10--
Common Stock. In 1998 and in connection with the Lil' Champ acquisition, the
holders of The Pantry's Series A preferred stock contributed all outstanding
shares of Series A preferred stock and related accrued and unpaid dividends to
the capital of The Pantry, resulting in an increase in paid in capital of
$6,508.
35
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--HISTORY OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Pantry
The consolidated financial statements include the accounts of The Pantry,
Inc. (the "Company" or "The Pantry") and its wholly-owned subsidiaries,
Sandhills, Inc., Lil' Champ Food Stores, Inc., and its wholly-owned
subsidiary, Miller Enterprises Inc., Global Communications, Inc., PH Holding
Corporation and PH Holding's wholly-owned subsidiaries, TC Capital Management,
Inc. and Pantry Properties, Inc. All intercompany transactions and balances
have been eliminated in consolidation. The Pantry owns and operates
approximately 1,215 convenience stores in Florida (533), North Carolina (336),
South Carolina (232), Kentucky (45), Indiana (20), Tennessee (19), Virginia
(18), and Georgia (12).
During fiscal 1996, Freeman Spogli & Co. ("Freeman Spogli") and Chase
Manhattan Capital Corporation ("Chase") acquired a controlling 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. During fiscal years 1997 and 1998, the Company issued
additional shares of common and preferred stock to existing shareholders and
certain directors and executives of the Company. As of September 30, 1999,
Freeman Spogli owns 9,349,524 shares of common stock and warrants to purchase
2,346,000 shares of common stock which represents beneficial ownership of
approximately 57.2% of our outstanding shares, including shares underlying
warrants. Subsequent to September 30, 1999 Freeman Spogli purchased an
additional 420,000 shares giving them beneficial ownership of approximately
59.2% of the outstanding common stock (including shares underlying warrants)
(unaudited). Chase and its affiliates own 2,298,438 shares of common stock, or
12.7% of the outstanding shares.
On June 8, 1999, we offered and sold 6,250,000 shares of our common stock
in our initial public offering (the "IPO"). The initial offering price was
$13.00 per share and the Company received $75.6 million in net proceeds,
before expenses. The net proceeds were used (i) to repay $19.0 million in
indebtedness under the 1999 bank credit facility; (ii) to redeem $17.5 million
in outstanding preferred stock; and (iii) to pay accrued dividends on the
preferred stock of $6.5 million. Of the remaining $32.6 million, $30.2 million
was used to fund acquisitions closed during the fourth quarter and $2.4
million was reserved to pay fees and expenses associated with the IPO.
Accounting Period
The Pantry operates on a 52 or 53 week fiscal year ending on the last
Thursday in September. For 1997 and 1998 The Pantry's fiscal years contained
52 weeks and for 1999 The Pantry's fiscal year contained 53 weeks.
Acquisition Accounting
Generally, our acquisitions are accounted for under the purchase method of
accounting whereby purchase price is allocated to assets acquired and
liabilities assumed based on fair value. Excess of purchase price over fair
value of net assets acquired is recorded as goodwill. Accordingly, the
Consolidated Statement of Operations for the fiscal years presented includes
the results of operations for each of the acquisitions from the date of
acquisition only.
On August 13, 1987, Montrose Pantry Acquisition Corporation acquired all of
our common stock in a leveraged buy-out. Certain individuals and entities
which held an ownership interest retained approximately 45% ownership after
the leveraged buy-out and a new basis of accounting was established which
resulted in a partial step-up in basis. In accordance with EITF 88-16 and 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).
36
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
For purposes of the consolidated financial statements, cash and cash
equivalents includes cash on hand, demand deposits, and short-term investments
with original maturities of three months or less.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out method, except for gasoline inventories for which
cost is determined using the first-in, first-out method.
Property Held for Sale
Property is classified as current assets when management's intent is to
sell these assets in the ensuing fiscal year, and is recorded at the lower of
cost or fair value less cost to sell.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization is provided primarily by the
straight-line method over the estimated useful lives of the assets for
financial statement purposes and by accelerated methods for income tax
purposes.
Estimated useful lives for financial statement purposes are as follows:
<TABLE>
<S> <C>
Buildings................................................. 20 to 33 1/2 years
Gasoline equipment........................................ 7 to 10 years
Other equipment, furniture and fixtures................... 3 to 10 years
Automobiles............................................... 3 to 5 years
</TABLE>
Upon sale or retirement of depreciable assets, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is
recognized. Leased buildings capitalized in accordance with SFAS No. 13,
Accounting for Leases, are recorded at the lesser of fair value or the
discounted present value of future lease payments at the inception of the
leases. Amounts capitalized are amortized over the estimated useful lives of
the assets or terms of the leases (generally 5 to 20 years) using the
straight-line method.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over periods of 20
to 40 years. The Pantry considers legal, contractual, regulatory, obsolescence
and competitive factors in determining the useful life and amortization period
of this intangible asset. Additions to goodwill and increases in goodwill
amortization expense primarily relate to our acquisition of the stock or
assets of convenience store operators. The useful life of the associated
goodwill is either indefinite for real property purchased or tied directly to
leases with terms, including renewal options of 30 to 40 years.
The Pantry assesses the recoverability of this intangible asset by
determining whether amortization of the goodwill balance over its remaining
life can be recovered through estimated undiscounted future operating results.
Estimated future results are based on a trend of historical results for the
trailing three fiscal years and management's estimate of future results which
indicate that the goodwill balances will be recovered over the various periods
remaining to be benefited.
Long-Lived Assets
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 due to each store are compared to the
carrying value of
37
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Deferred Lease Cost
Deferred lease cost represents the value assigned to favorable leases
acquired. Such amounts are being amortized over the remaining term of the
respective leases.
Deferred Financing Cost
Deferred financing cost represents expenses related to issuing The Pantry's
long-term debt, obtaining its lines of credit and obtaining lease financing.
See Note 5--Long Term Debt and Note 7--Leases. Such amounts are being
amortized over the remaining term of the respective financing.
Vendor Allowances, Rebates and Other Vendor Payments
The Pantry receives payments for vendor allowances, volume rebates and
other supply arrangements in connection with various programs. The Pantry
records these payments as a reduction to cost of sales or expenses to which
the particular vendor payment relates. For unearned payments, The Pantry
records deferred income and amortizes the balance, as earned, over the term of
the respective agreement. The amounts recorded against cost of sales were $9.0
million, $21.6 million and $54.7 million for fiscal years 1997, 1998 and 1999,
respectively.
Environmental Costs
The Pantry accounts for the cost incurred to comply with federal and state
environmental regulations as follows:
. The environmental reserve reflected in the financial statements is based
on internal and external estimates of the costs to remediate sites
relating to the operation of underground storage tanks. Factors
considered in the estimates of the reserve are
. the expected cost to remediate each contaminated site
. the estimated length of time to remediate each site
. Future remediation costs for amounts of deductibles under or amounts not
covered by state trust fund programs and third party insurance
arrangements and for which the timing of payments can be reasonably
estimated are discounted using a ten-percent rate. All other
environmental costs are provided for on an undiscounted basis.
. Amounts which are probable of reimbursement under state trust fund
programs or third party insurers, based on The Pantry's experience, are
recognized as receivables and are expected to be collected within a
period of twelve to eighteen months after the reimbursement claim has
been submitted. These receivables exclude all deductibles and an
estimate for uncollectible reimbursements. The Pantry's reimbursement
experience exceeds a 95% collection rate. The adequacy of the liability
and uncollectible receivable reserve is evaluated quarterly and
adjustments are made based on updated experience at existing sites,
newly identified sites and changes in governmental policy.
. Annual fees for tank registration and environmental compliance testing
are expensed as incurred.
. Expenditures for upgrading tank systems including corrosion protection,
installation of leak detectors and overfill/spill devices are
capitalized and depreciated over the remaining useful life of the asset
or the respective lease term, whichever is less.
38
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. The tank removal costs associated with locations which The Pantry plans
to sell or dispose of in the near future are estimated annually and a
liability is established through a charge to expense. The costs to
remove tanks at active locations are expensed as incurred.
Income Taxes
All operations of The Pantry and its subsidiaries are included in a
consolidated Federal income tax return. Pursuant to SFAS No. 109, Accounting
for Income Taxes, The Pantry recognizes deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between
financial statement carrying amounts and the related tax bases.
Excise and Use Taxes
The Pantry collects and remits various federal and state excise taxes on
petroleum products. Sales and cost of sales included approximately
$61,192,000, $154,954,000, and $303,466,000 for 1997, 1998, and 1999,
respectively.
Advertising costs
Advertising costs are expensed as incurred. Advertising expense was
approximately $581,000, $1,019,000 and $1,694,000 for fiscal 1997, 1998 and
1999, respectively.
Stock Based Compensation
The Pantry's stock option plan is accounted for in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. The Pantry follows the disclosure requirements of SFAS No. 123,
Accounting for Stock Based Compensation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Segment Reporting
In 1999, The Pantry adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major
customers. The Pantry operates in one reportable segment.
Reclassifications
Certain amounts in the fiscal 1997 and 1998 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 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
39
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
components (revenues, expenses, gains, and losses) 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
. classify items of other comprehensive income by their nature in a
financial statement
. 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
SFAS No. 130 is effective for fiscal 1999. The adoption of SFAS No. 130 did
not have a material impact on The Pantry's net income or stockholder's equity
as The Pantry had no differences between net income 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 (i) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(ii) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (iii) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction.
Under SFAS No. 133, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk. In June 1999,
the effective date of SFAS No. 133 was extended one year; consequently, the
statement will now be effective for the first quarter of fiscal 2001. Earlier
application of all of the provisions of SFAS No. 133 is encouraged. As of
September 30, 1999, The Pantry has not determined the effect of SFAS No. 133
on its consolidated financial statements.
NOTE 2--BUSINESS ACQUISITIONS:
During fiscal 1999, The Pantry acquired 297 convenience stores located in
North Carolina, South Carolina, Florida, Georgia and Virginia in eight
separate transactions. The transactions were accounted for by the purchase
method of accounting. The 1999 acquisition were funded from borrowings under
the bank credit facility, the IPO, and cash on hand.
During fiscal 1998, The Pantry acquired 643 convenience stores located in
North Carolina, South Carolina, Florida and Virginia in eight separate
transactions. The transactions were accounted for by the purchase method of
accounting. The 1998 acquisitions were funded from borrowings under the 1998
bank credit facility, an equity investment, and cash on hand.
40
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
1998 1999
-------- --------
<S> <C> <C>
ASSETS ACQUIRED:
Receivables, net............................................ $ 3,717 $ 23,220
Inventories................................................. 28,871 17,347
Deferred income taxes....................................... 2,992 733
Prepaid expenses and other current assets................... 1,402 1,192
Property and equipment...................................... 204,064 120,856
Other noncurrent assets..................................... 3,696 4,308
-------- --------
Total assets acquired....................................... 244,742 167,656
-------- --------
LIABILITIES ASSUMED:
Short-term capital lease obligation......................... 1,027 --
Accounts payable--trade..................................... 11,098 15,308
Other liabilities and accrued expenses...................... 36,093 20,615
Income taxes payable........................................ -- 6,863
Long-term capital lease obligations......................... 11,716 --
Environmental remediation liabilities....................... 3,150 --
Noncurrent deferred income taxes............................ 20,530 5,221
Other noncurrent liabilities................................ 9,066 4,402
-------- --------
Total liabilities assumed................................... 92,680 52,409
-------- --------
Net tangible assets acquired................................ 152,062 115,247
Excess of purchase price over fair value of net assets
acquired................................................... 98,530 79,167
-------- --------
Total consideration paid, including direct costs, net of
cash acquired.............................................. $250,592 $194,414
======== ========
</TABLE>
The purchase price allocations for certain of the 1999 acquisitions are
preliminary estimates, based on available information, internal estimates and
certain assumptions management believes are reasonable. Accordingly, the
purchase price allocations are subject to finalization pending the completion
of internal and external appraisals of assets acquired. The excess of the
purchase prices over fair values of the net assets acquired for all
acquisitions 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 Pantry and acquired businesses as if
the 1999 transactions occurred at the beginning of the fiscal year for each of
the periods presented (amounts in thousands):
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Total revenues..................................... $1,818,546 $1,950,161
Income before extraordinary loss................... $ 3,634 $ 12,845
Net Income (loss).................................. $ (4,365) $ 9,261
Net income (loss) applicable to common
shareholders...................................... $ (7,307) $ 5,078
Earnings per share applicable to common
shareholders:
Basic:
Income before extraordinary loss............... $ 0.07 $ 0.63
Extraordinary loss............................. (0.82) (0.26)
---------- ----------
Net income (loss).............................. $ (0.75) $ 0.37
========== ==========
Diluted:
Income before extraordinary loss............... $ 0.06 $ 0.58
Extraordinary loss............................. (0.73) (0.24)
---------- ----------
Net income (loss).............................. $ (0.67) $ 0.34
========== ==========
</TABLE>
41
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the Lil' Champ acquisition, The Pantry recorded an
integration charge of approximately $1.0 million in fiscal 1998 for costs of
combining its existing businesses with the acquired businesses of Lil' Champ.
The charge included
. $300,000 for relocation costs
. $600,000 for elimination of duplicated contractual services for which
there is no future economic benefit
. $100,000 for other consolidation and related expenses
The Pantry's integration plan included
. the relocation of approximately 11 employees
. the elimination of duplicate contractual services
. conforming Lil' Champ's corporate and field operations to The Pantry's
policies and procedures
. the disposal of unprofitable and unstrategic locations and operations
In accordance with generally accepted accounting principles, these
integration costs were not included as part of the purchase price allocation
for the Lil' Champ acquisition.
In connection with the October 23, 1997 acquisition of Lil' Champ and as
contemplated at the consummation date, The Pantry sold all 48 Lil' Champ store
operations and idle property in the state of Georgia. The sale was completed on
September 1, 1998. As required by SFAS No. 121, these assets were measured at
fair value less costs to sell during the allocation period following the
consummation date of the acquisition. The Pantry received cash proceeds of $2.5
million from the disposition, which approximated the carrying value of the
assets. Accordingly, no gain or loss was recorded on the disposition. Revenues
and net loss before taxes related to the 48 stores disposed of and included in
our historical financial statements totaled approximately $30,313,000 and
$(954,000), respectively, for the year ended September 24, 1998.
NOTE 3--INVENTORIES:
At September 24, 1998 and September 30, 1999, inventories consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Inventories at FIFO cost:
Merchandise............................................. $41,967 $ 63,941
Gasoline................................................ 11,510 22,431
------- --------
53,477 86,372
Less adjustment to LIFO cost:
Merchandise............................................. (5,668) (10,135)
------- --------
Inventories at LIFO cost.................................. $47,809 $ 76,237
======= ========
</TABLE>
The positive effect on cost of sales of LIFO inventory liquidations was
$4,000, $482,000 and $53,000 for fiscal years 1997, 1998 and 1999,
respectively.
42
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--PROPERTY AND EQUIPMENT:
At September 24, 1998 and September 30, 1999, property and equipment
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- ---------
<S> <C> <C>
Land.................................................... $ 62,183 $ 86,708
Buildings............................................... 85,278 125,875
Gasoline equipment...................................... 95,729 115,530
Other equipment, furniture and fixtures................. 96,874 140,600
Leasehold improvements.................................. 28,286 51,218
Automobiles............................................. 516 787
Construction in progress................................ 9,443 10,072
-------- ---------
378,309 530,790
Less--accumulated depreciation and amortization......... (77,331) (109,105)
-------- ---------
$300,978 $ 421,685
======== =========
</TABLE>
NOTE 5--LONG-TERM DEBT:
At September 24, 1998 and September 30, 1999, long-term debt consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Senior subordinated notes payable; due October 15, 2007;
interest payable semi-
annually at 10.25%....................................... $200,000 $200,000
Term loan facility-Tranche A; interest payable monthly at
LIBOR (5.39% at
September 30, 1999) plus 3.0%; principal due in quarterly
installments through January 31, 2004 ................... -- 70,656
Term loan facility-Tranche B; interest payable monthly at
LIBOR (5.39% at
September 30, 1999) plus 3.5%; principal due in quarterly
installments through January 31, 2006 ................... -- 156,794
Acquisition facility; interest payable monthly at LIBOR
(5.39% at September 30, 1999) plus 3.0%; principal due in
quarterly installments beginning April 30, 2001 through
January 31, 2004 ........................................ -- 12,000
Senior notes payable; due November 15, 2000; interest pay-
able semi-annually at 12%................................ 48,995 --
1998 bank credit facility; interest payable monthly at LI-
BOR (5.85% at September 24, 1998) plus 2.5%; principal
due in quarterly installments through October 31, 2002... 78,000 --
Note payable; zero (0.0%) interest, with principal due in
annual installments through February 26, 2003............ -- 1,185
Other notes payable; various interest rates and maturity
dates.................................................... 319 272
-------- --------
327,314 440,907
Less--current maturities.................................. (45) (10,687)
-------- --------
$327,269 $430,220
======== ========
</TABLE>
On January 28, 1999, The Pantry redeemed $49.0 million in principal amount
of senior notes and paid accrued and unpaid interest up to, but not including,
the date of purchase and a 4% call premium. The repurchase of 100% of the
senior notes outstanding, the payment of accrued interest and the call premium
were financed with proceeds from The Pantry's term loan facilities, and a draw
under the revolving credit facility.
43
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry recognized an extraordinary loss of approximately $5.9 million
($3.6 million net of tax benefit) in connection with the repurchase of the
senior notes including the payment of the 4% call premium of $2.0 million,
fees paid in connection with the amendments and commitments under the bank
credit facility, and the write-off of deferred financing costs related to our
repayment of our former credit facility.
On October 23, 1997 in connection with the Lil' Champ acquisition, The
Pantry completed the offering of the senior subordinated notes and, in a
related transaction, completed the tender offer and consent solicitation with
respect to the senior notes. The tender offer resulted in The Pantry's
purchase of $51 million in principal amount of the senior notes at a purchase
price of 110% of the aggregate principal amount plus accrued and unpaid
interest and other related fees. In connection with this repurchase, The
Pantry incurred an extraordinary loss of approximately $8.0 million related to
costs of the tender offer and consent solicitation and write-off of deferred
financing costs.
The senior subordinated notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, as to the payment of principal, premium,
if any, and interest, jointly and severally, by all guarantors. See Note 15--
Supplemental Guarantors Information. The senior subordinated notes contain
covenants that, among other things, restrict the ability of The Pantry and any
restricted subsidiary to (i) incur additional debt, (ii) pay dividends or make
distributions, (iii) issue stock of subsidiaries, (iv) make certain
investments or repurchase stock, (v) create liens, (vi) enter into
transactions with affiliates or sale-leaseback transactions, and (vii) merge
or consolidate The Pantry or any of its subsidiaries or sell or transfer
assets. The senior subordinated notes also contain financial ratios and tests
which must be met with respect to minimum coverage and leverage ratios, pro
forma cash flow and capital expenditures.
During fiscal 1998, the 1998 bank credit facility was amended to increase
the amount available to The Pantry for acquisitions from $30.0 million to
$85.0 million. In addition, amendments were made to certain of The Pantry's
financial ratios and tests including the minimum coverage and leverage ratios,
pro forma cash flow and maximum capital expenditures.
On January 28, 1999, The Pantry entered into the 1999 bank credit facility,
replacing the 1998 bank 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, (ii)
a 50.0 million acquisition facility available to finance acquisitions of
related businesses, and (iii) term loan facilities with outstanding borrowings
of $240.0 million.
On October 27, 1999 The Pantry entered into an amendment to its bank credit
facility which increased the borrowing capacity to include an additional $75.0
million term loan. The term loan bears interest, at The Pantry's option, based
on margins over a base rate or an adjusted Eurodollar rate. Proceeds from the
term loan were used to prepay amounts outstanding under the acquisition
facility and to fund acquisitions after September 30, 1999.
The 1999 bank credit facility contains covenants restricting the ability of
The Pantry 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 1999 bank credit facility also contain financial ratios and
tests which must be met with respect to minimum coverage and leverage ratios,
pro forma cash flow and maximum capital expenditures.
The Pantry used the proceeds of the term loan facilities and a $5.0 million
initial draw under its revolving credit facility, along with cash on hand, to:
. finance the Miller acquisition
44
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. repay $94.0 million outstanding under the prior bank credit facility,
and replace outstanding letters of credit
. redeem its outstanding senior notes in the aggregate principal amount of
$49.0 million
. pay related transaction costs
As of September 30, 1999, there was $12,000,000 outstanding under the
acquisition facility. The Pantry had outstanding letters of credit of
$15,979,000 at September 30, 1999, issued under the revolving credit facility.
As of September 30, 1999, The Pantry was in compliance with all covenants
and restrictions relating to all its outstanding borrowings.
As of September 30, 1999, substantially all of The Pantry's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
The Pantry's long-term debt maturities for the five years following
September 30, 1999, are: $10.7 million in 2000; $19.9 million in 2001; $25.0
million in 2002; $28.2 million in 2003; $39.5 million in 2004; and
$317.6 million thereafter.
Subsequent to September 30, 1999, we entered into an amendment to our bank
credit facility and borrowed an additional $75.0 million under our term loan
facility. This term loan generally carries the same terms and conditions as
our existing term loan facility. Proceeds from the term loan were used to
prepay amounts outstanding under our acquisition facility and to fund
acquisitions closed after September 30, 1999. We have commitments for an
additional $25.0 million term loan that is expected to fund on January 31,
2000 with proceeds to be used to finance future acquisitions. With these
transactions, we have approximately $79.0 million in additional borrowing
capacity to fund future acquisitions.
NOTE 6--INCOME TAXES:
The components of income tax expense (benefit) are summarized below (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -------
<S> <C> <C> <C>
Current:
Federal............................................. $ 163 $ -- $ 7,093
State............................................... (534) 138 800
----- ----- -------
(371) 138 7,893
----- ----- -------
Deferred:
Federal............................................. 371 -- 2,488
State............................................... -- (138) 369
----- ----- -------
371 (138) 2,857
----- ----- -------
$ -- $ -- $10,750
===== ===== =======
</TABLE>
45
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of September 24, 1998 and September 30, 1999, deferred tax liabilities
(assets) are comprised of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Depreciation............................................. $ 33,969 $ 39,695
Deferred lease cost...................................... 17 17
Inventory................................................ 3,417 2,761
Amortization............................................. -- 1,315
Other.................................................... 1,673 581
-------- --------
Gross deferred tax liabilities........................... 39,076 44,369
-------- --------
Capital lease obligations................................ (1,207) (1,499)
Allowance for doubtful accounts.......................... (108) (301)
Environmental expenses................................... (2,114) (345)
Accrued insurance reserves............................... (4,482) (4,692)
Exit and employee termination costs...................... (1,293) (1,328)
Other.................................................... (3,254) (3,653)
-------- --------
Gross deferred tax assets................................ (12,458) (11,818)
Net operating loss carryforwards......................... (7,097) (3,223)
General business credits................................. (1,832) (1,833)
AMT credits.............................................. (2,494) (7,282)
Deferred tax assets valuation allowance.................. 1,183 1,183
-------- --------
$ 16,378 $ 21,396
======== ========
</TABLE>
As of September 24, 1998 and September 30, 1999, net current deferred
income tax assets totaled $3,988,000 and $4,849,000, respectively, and net
noncurrent deferred income tax assets (liabilities) totaled $(20,366,000) and
$(26,245,000), respectively.
Reconciliations of income taxes at the Federal statutory rate (34%) to
actual taxes provided are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
----- ------- -------
<S> <C> <C> <C>
Tax expense (benefit) at Federal statutory rate.... $(332) $(1,131) $ 8,415
Tax expense (benefit) at state rate, net of Federal
income tax expense (benefit)...................... (325) (149) 1,188
Permanent differences:
Amortization of goodwill......................... 235 677 1,081
Other............................................ 248 52 66
Tax benefit from creation of general business
credits........................................... (151) -- --
Valuation allowance................................ 325 551 --
----- ------- -------
Net income tax expense............................. $ -- $ -- $10,750
===== ======= =======
</TABLE>
46
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of September 30, 1999 The Pantry had net operating loss carryforwards,
general business credits and AMT credits which can be used to offset future
Federal income taxes. The benefit of these carryforwards is recognized, net of
a valuation allowance for a portion of the net operating losses and credits
which The Pantry believes may expire unused, as deferred tax assets. Loss
carryforwards as of September 30, 1999 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....................................................... -- 13,755
2014....................................................... -- 6,854
2017....................................................... 9,374 --
------- -------
Total loss carryforwards................................... $11,706 $42,761
======= =======
</TABLE>
The valuation allowance increased $325,000 in 1997, primarily to provide
for operating loss carryforwards and available tax credits that more likely
than not will not be realized, based on estimates of future earnings and
expected timing of reversals of temporary differences. The valuation allowance
increased $551,000 in 1998, which was primarily due to federal net operating
losses, net of a decrease for state tax net economic loss carryovers (as
discussed below).
The State of North Carolina and the State of Tennessee have assessed
Sandhills, Inc., a subsidiary of The Pantry, with additional taxes plus
penalties and accrued interest totaling approximately $5 million, for the
periods February 1, 1992 to September 26, 1996. For the tax years ending
January 26, 1993 through September 30, 1999, The Pantry has reached a
preliminary settlement with the State of North Carolina, which is pending
final approval by the state. Under the proposed settlement, The Pantry will
reduce State net economic loss carryforwards and pay a de minimis amount of
additional tax. The expected settlement is reflected in the financial
statements as a reduction to State net economic losses and a reduction of
deferred tax assets (and related valuation allowance). The Pantry is
contesting the Tennessee assessment and believes that, in the event of a
mutual settlement, the assessment amount and related penalties (approximately
$250,000) would be substantially reduced. Based on this, The Pantry believes
the outcome of the audits will not have a material adverse effect on The
Pantry's financial condition or financial statements.
47
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 24, 1998, and September 30, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Buildings.................................................. $12,344 $13,542
Less--accumulated amortization............................. (2,142) (1,564)
------- -------
$10,202 $11,978
======= =======
</TABLE>
Amortization expense related to capitalized leased assets was $185,000,
$1,249,000, and $1,299,000 for fiscal 1997, 1998, and 1999 respectively.
Future minimum lease payments as of September 30, 1999, 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>
2000....................................................... $ 2,738 $ 35,441
2001....................................................... 2,591 34,112
2002....................................................... 2,546 31,519
2003....................................................... 2,462 29,996
2004....................................................... 2,309 27,473
Thereafter................................................. 13,506 57,272
------- --------
Net minimum lease payments................................. 26,152 $215,813
========
Amount representing interest (8% to 20%)................... 11,475
-------
Present value of net minimum lease payments................ 14,677
Less--current maturities................................... 1,205
-------
$13,472
=======
</TABLE>
Rental expense for operating leases was approximately $9,618,000,
$23,758,000 and $40,551,000 for fiscal years 1997, 1998 and 1999,
respectively. Some of The Pantry's leases require contingent rental payments;
such amounts are not material for the fiscal years presented.
During 1997, 1998, and 1999, The Pantry entered into sale-leaseback
transactions with unrelated parties with net proceeds of $1,345,000,
$4,807,000 and $10,724,000, respectively. The assets sold in these
transactions consisted of newly constructed or acquired convenience stores.
The Pantry retained ownership of all personal property and gasoline marketing
equipment at these locations. The net proceeds from these transactions
approximated the carrying value of the assets at the time of sale;
accordingly, any gains or losses recognized on these transactions were
insignificant for all periods presented. Generally, the leases are operating
leases at market rates with terms of twenty years with four five-year renewal
options.
NOTE 8--COMMITMENTS AND CONTINGENCIES:
As of September 30, 1999, The Pantry was contingently liable for
outstanding letters of credit in the amount of $16,113,000 million related
primarily to several areas in which The Pantry is self-insured. The letters of
credit are not to be drawn against unless The Pantry defaults on the timely
payment of related liabilities.
48
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry is involved in certain legal actions arising in the normal
course of business. In the opinion of management, based on a review of such
legal proceedings, the ultimate outcome of these actions will not have a
material effect on the consolidated financial statements.
Unamortized Liabilities Associated with Vendor Payments
In accordance with the terms of each service or supply agreement and in
accordance with generally accepted accounting principles, service and supply
allowances are amortized over the life of each agreement in accordance with
the specific terms. The unamortized liabilities associated with these payments
as of September 24, 1998 and September 30, 1999, were $22,702,000 and
$35,195,000, respectively.
McLane Company, Inc. ("McLane")--The Pantry purchases over 50% of its
general merchandise from a single wholesaler, McLane. The Pantry's arrangement
with McLane is governed by a five-year distribution service agreement under
which McLane supplies general merchandise, including tobacco products, grocery
items, health and beauty aids and other products. The Pantry receives annual
service allowances based on the number of stores operating on each contract
anniversary date. If The Pantry were to default under the contract or
terminate the distribution service agreement prior to March 28, 2003, The
Pantry must reimburse McLane the unearned, unamortized portion of the service
allowance payments received to date. In accordance with the terms of the
distribution service agreement and in accordance with generally accepted
accounting principles, the original service allowances received and all future
service allowances are amortized to cost of goods sold on a straight-line
method over the life of the agreement.
Major Oil Companies--The Pantry has entered into product purchase
agreements with numerous oil companies to buy specified quantities of gasoline
at market prices. The length of these contracts range from five to thirteen
years and in some cases include minimum annual purchase requirements. In
connection with these agreements, The Pantry may receive upfront vendor
allowances, volume incentive payments and other vendor assistance payments. If
The Pantry were to default under the terms of any contract or terminate the
supply agreement prior to the end of the initial term, The Pantry must
reimburse the respective oil company for the unearned, unamortized portion of
the payments received to date. In accordance with generally accepted
accounting principles, these payments are amortized using the specific
amortization periods in accordance with the terms of each agreement, either
using the straight-line method or based on gasoline volume purchased. The
Pantry has exceeded the minimum required annual purchases each year and
expects to exceed the minimum required annual purchase levels in future years.
Environmental Liabilities and Contingencies
The Pantry is subject to various federal, state and local environmental
laws and regulations governing underground petroleum storage tanks that
require The Pantry to make certain expenditures for compliance. In particular,
at the federal level, the Resource Conservation and Recovery Act, as amended,
requires the EPA to establish a comprehensive regulatory program for the
detection, prevention, and cleanup of leaking underground storage tanks.
Regulations enacted by the EPA in 1988 established requirements for:
. installing underground storage tank systems
. upgrading underground storage tank systems
. taking corrective action in response to releases
. closing underground storage tank systems
. keeping appropriate records
49
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. maintaining evidence of financial responsibility for taking corrective
action and compensating third parties for bodily injury and property
damage resulting from releases
In addition to the technical standards, The Pantry is required by federal
and state regulations to maintain evidence of financial responsibility for
taking corrective action and compensating third parties in the event of a
release from its underground storage tank systems. In order to comply with
this requirement, The Pantry maintains surety bonds in the aggregate amount of
approximately $900,000 in favor of state environmental agencies in the states
of North Carolina, Virginia, South Carolina and Georgia and a letter of credit
in the aggregate amount of approximately $1.1 million issued by a commercial
bank in favor of state environmental agencies in the states of Florida,
Tennessee, Indiana and Kentucky and relies on reimbursements from applicable
state trust funds. In Florida, The Pantry meets such financial responsibility
requirements by state trust fund coverage through December 31, 1998 and met
such requirements thereafter through a combination of private commercial
liability insurance and a letter of credit.
All states in which The Pantry operates or has operated underground storage
tank systems have established trust funds for the sharing, recovering, and
reimbursing of certain cleanup costs and liabilities incurred as a result of
releases from underground storage tank systems. These trust funds, which
essentially provide insurance coverage for the cleanup of environmental
damages caused by the operation of underground storage tank systems, are
funded by an underground storage tank registration fee and a tax on the
wholesale purchase of motor fuels within each state. The Pantry has paid
underground storage tank registration fees and gasoline taxes to each state
where it operates to participate in these programs and has filed claims and
received reimbursement in North Carolina, South Carolina, Kentucky, Indiana,
Florida, Georgia, and Tennessee. The coverage afforded by each state fund
varies but generally provides from $150,000 to $1.0 million per site or
occurrence for the cleanup of environmental contamination, and most provide
coverage for third party liabilities.
In addition to immaterial amounts to be spent by The Pantry, a substantial
amount will be expended for remediation on behalf of The Pantry by state trust
funds established in The Pantry's operating areas or other responsible third
parties (including insurers). To the extent such third parties do not pay for
remediation as anticipated by The Pantry, The Pantry will be obligated to make
such payments, which could materially adversely affect The Pantry's financial
condition and results of operations. Reimbursement from state trust funds will
be dependent upon the maintenance and continued solvency of the various funds.
50
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Environmental reserves of $17,137,000 million and $15,402,000 million as of
September 24, 1998, September 30, 1999, respectively, represent estimates for
future expenditures for remediation, tank removal and litigation associated
with 205 and 233 known contaminated sites, respectively, as a result of
releases (e.g., overfills, spills and underground storage tank releases) and
are based on current regulations, historical results and certain other
factors. As of September 30, 1999 the current average remediation cost per
site is approximately $70,000. Remediation costs for known sites are expected
to be incurred over the next one to ten years. Environmental reserves have
been established on an undiscounted basis with remediation costs based on
internal and external estimates for each site. Future remediation costs for
amounts of deductibles under, or amounts not covered by, state trust fund
programs and third party insurance arrangements and for which the timing of
payments can be reasonably estimated are discounted using a ten-percent rate.
The undiscounted amount of future estimated payments for which The Pantry does
not expect to be reimbursed for each of the five years and thereafter at
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Expected
Fiscal Year Payments
----------- --------
<S> <C>
2000............................................................... $ 186
2001............................................................... 179
2002............................................................... 141
2003............................................................... 46
2004............................................................... 20
Thereafter......................................................... 2,408
-------
Total undiscounted amounts not covered by a third party............ 2,980
Other current cost amounts......................................... 16,531
Amount representing interest (10%)................................. (4,109)
-------
Environmental reserve.............................................. $15,402
=======
</TABLE>
The Pantry anticipates that it will be reimbursed for a portion of these
expenditures from state trust funds and private insurance. As of September 30,
1999, anticipated reimbursements of $13,136,000 million are recorded as long-
term environmental receivables. In Florida, remediation of such contamination
reported before January 1, 1999 will be performed by the state and
substantially all of the costs will be paid by the state trust fund. The
Pantry will perform remediation in other states through independent contractor
firms engaged by The Pantry. For certain sites the trust fund does not cover a
deductible or has a co-pay which may be less than the cost of such
remediation. Although The Pantry is not aware of releases or contamination at
other locations where it currently operates or has operated stores, any such
releases or contamination could require substantial remediation expenditures,
some or all of which may not be eligible for reimbursement from state trust
funds.
The Pantry has reserved $500,000 to cover third party claims for
environmental conditions at adjacent real properties 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 average remediation cost for
contaminated sites and our historical claims experience.
Several of the locations identified as contaminated are being cleaned up by
third parties who have indemnified The Pantry as to responsibility for clean
up matters. Additionally, The Pantry is awaiting closure notices on several
other locations which will release The Pantry from responsibility related to
known contamination at those sites. These sites continue to be included in our
environmental reserve until a final closure notice is received.
51
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $305,000, $396,000 and $573,000
for fiscal years 1997, 1998 and 1999, respectively.
NOTE 10--COMMON STOCK:
On June 4, 1999, the Company effected a 51 for 1 stock split of its common
stock. In connection with the stock split, the number of authorized shares of
common stock was increased to 50,000,000 (300,000 shares previously). The
accompanying financial statements give effect to the stock split,
retroactively applied to all periods presented. There was no change in par
values of the common stock as a result of the stock split.
On June 8, 1999, the Company completed an initial public offering of
6,250,000 shares of its common stock at a public offering price of $13.00 per
share (the "IPO"). The net proceeds from the IPO of $75.6 million, before
expenses, were used (i) to repay $19.0 million in indebtedness under the 1999
bank credit facility; (ii) to redeem $17.5 million in outstanding preferred
stock; and (iii) to pay accrued dividends on the preferred stock of $6.5
million. Of the remaining $32.6 million, $30.2 million was used to fund
acquisitions closed during the fourth quarter and $2.4 million was reserved to
pay fees and expenses associated with the IPO.
Upon completion of the IPO, Freeman Spogli owned approximately 9,349,524
shares and owned warrants for the purchase of an additional 2,346,000 shares
giving Freeman Spogli beneficial ownership of approximately 57.2% of the
outstanding common stock (including shares underlying warrants). Subsequent to
September 30, 1999 Freeman Spogli purchased an additional 420,000 shares
giving them beneficial ownership of approximately 59.2% of the outstanding
common stock (including shares underlying warrants) (unaudited).
In 1998 and in connection with the Lil' Champ acquisition and related
transactions, The Pantry issued 3,672,000 shares of common stock, par value
$0.01, to certain existing shareholders and a member of management for
$32.4 million. Prior to the purchase of common stock, Freeman Spogli and Chase
contributed all outstanding shares of Series A preferred stock and related
accrued and unpaid dividends to the capital of The Pantry. As a result, the
par value of preferred stock and accrued dividends were reduced by $260 and
$6,508,000 respectively, and additional paid in capital was increased by
$6,508,260.
On July 2, 1998 in connection with two acquisitions completed in July 1998,
The Pantry issued 2,217,378 shares of common stock, par value $0.01 per share,
to certain existing shareholders for an aggregate purchase price of $25.0
million.
NOTE 11--PREFERRED STOCK:
As of September 24, 1998, preferred stock consisted of 150,000 authorized
shares. As discussed in Note 10--Common Stock, holders of The Pantry's 25,999
shares of Series A preferred stock contributed all outstanding shares of
Series A preferred stock and related accrued and unpaid dividends to the
capital of The Pantry in connection with the Lil' Champ acquisition. Issued
and outstanding shares of preferred stock at September 24, 1998 included
17,500 shares designated as Series B, all of which were held by the Freeman
Spogli entities. On June 8, 1999 in conjunction with the IPO, The Pantry
redeemed the outstanding preferred stock for $17.5 million and paid accrued
dividends on the preferred stock of $6.5 million. As of September 30, 1999,
the Company has no preferred stock issued or outstanding.
In 1999 and upon the redemption of its Series B preferred stock, The Pantry
recorded a one-time dividend of $613,000 which represents the difference
between the gross proceeds ($16,887,000) from the initial sale of Series B
52
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
preferred stock and the consideration paid upon redemption ($17,500,000). In
accordance with Emerging Issues Task Force Topic No. ("EITF") D-42, The Pantry
was also required to recognize a one-time deduction to net income applicable
to common stockholders (and a related reclassification to accumulated deficit)
in the amount of $1,500,000 associated with original issue costs incurred in
connection with the issuance of the Series B preferred stock in December 1996.
At that time, the original issue costs were netted against the gross proceeds
and, thus, charged to additional paid in capital. EITF D-42 requires that the
excess of fair value of the consideration transferred to the preferred
shareholders over the carrying amount of the preferred stock be subtracted
from net income applicable to common shareholders in the calculation of
earnings per share.
NOTE 12--STOCK OPTIONS AND OTHER EQUITY INSTRUMENTS:
On January 1, 1998, The Pantry adopted an incentive and non-qualified stock
option plan. Pursuant to the provisions of the plan, options may be granted to
officers, key employees and consultants of The Pantry or any of its
subsidiaries and certain members of the board of directors to purchase up to
1,275,000 shares of The Pantry's common stock. The plan is administered by the
board of directors or a committee of the board of directors. Options are
granted at prices determined by the board of directors and may be exercisable
in one or more installments. Additionally, the terms and conditions of awards
under the plan may differ from one grant to another. Under the plan, incentive
stock options may only be granted to employees with an exercise price at least
equal to the fair market value of the related common stock on the date the
option is granted. Fair values are based on the most recent common stock
sales. During 1998, options to acquire 576,861 shares of common stock were
granted under the plan with exercise prices ranging from $8.82-$11.27 per
share (weighted-average exercise price of $9.39 per share).
On June 3, 1999, the Pantry adopted a new 1999 stock option plan providing
for the grant of incentive stock options and non-qualified stock options to
officers, directors, employees and consultants, with provisions similar to the
1998 stock option plan. During 1999, options to acquire 240,000 shares of
common stock were granted under the 1999 plan with exercise prices of $13.00
per share. These options vest over three years and have contractual lives of
seven years.
The following table summarizes information about stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
Number
Outstanding at Weighted-Average
Date September 30, Remaining Weighted-Average
Exercise Prices Issued 1999 Contractual Life Exercise Price
- --------------- --------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
$8.82................. 1/1/98 443,751 8 years $ 8.82
$11.27................ 8/25/98 133,110 8 years $11.27
$13.00................ 6/8/99, 9/30/99 240,000 7 years $13.00
-------
Total............... 816,861
</TABLE>
All options granted in 1998 and 1999 vest over a three-year period, with
one-third of each grant vesting on the anniversary of the initial grant. There
were no exercises, forfeitures, or terminations of options in 1998 or 1999.
All stock options are granted at estimated fair market value of the common
stock at the grant date.
Had compensation cost for the plan been determined consistent with SFAS No.
123, The Pantry's pro-forma net income (loss) for 1998 and 1999 would have
been approximately $(3,446,000) and $10,136,000, respectively. Pro forma basic
earnings (loss) per share for 1998 and 1999 would have been $(0.66) and $0.43,
respectively.
53
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma diluted earnings (loss) per share for 1998 and 1999 would have been
$(0.59) and $0.39, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions:
<TABLE>
<CAPTION>
1998 1999
----- ----------
<S> <C> <C>
Weighted-average grant date fair value.................. $1.12 $2.07
Weighted-average expected lives (years)................. 2.33 2.00
Weighted-average grant date fair value-exercise price
equals market price.................................... $1.12 $2.24
Weighted-average grant date fair value-exercise price
greater than market price.............................. -- $1.18
Risk-free interest rate................................. 5.5% 5.5%
Expected volatility..................................... 0.00% 0.00%-21.0%
Dividend yield.......................................... 0.00% 0.00%
</TABLE>
On August 31, 1998, The Pantry adopted a stock subscription plan. The
subscription plan allows The Pantry to offer to certain employees the right to
purchase shares of common stock at a purchase price equal to the fair market
value on the date of purchase. A purchaser may not sell, transfer or pledge
their shares
. prior to the first anniversary of the date on which the purchaser
acquires the shares
. after the first anniversary, except in compliance with the provisions of
the subscription agreement and a pledge agreement if part of the
consideration for such shares includes a secured promissory note
In the event that the purchaser's employment with The Pantry and all of its
subsidiaries terminates for any reason, The Pantry shall have the option to
repurchase from the purchaser all or any portion of the shares acquired by the
purchaser under the subscription agreement for a period of six months after
the effective date of such termination. The repurchase option shall terminate
upon the later to occur of
. the first anniversary of the date the shares were originally acquired
. an initial public offering of common stock by The Pantry registered
under the Securities Act (other than an offering registered on Form S-4
or Form S-8) resulting in gross proceeds to The Pantry in excess of $25
million
After the first anniversary of the date the shares were originally acquired
by the purchaser, the purchaser may transfer the shares for cash (only) to a
third party, subject to The Pantry's right of first refusal with respect to
such sale. Finally, under certain circumstances, a purchaser of shares under
the subscription plan may be forced to sell all or part of the shares
purchased under such plan if Freeman Spogli finds a third-party buyer for all
or part of the shares of common stock held by Freeman Spogli. No issuances of
shares under the subscription plan had been made at September 24, 1998. On
September 25, 1998 and November 30, 1999, 134,436 shares, net of subsequent
repurchases of 6,273 shares, were sold under the subscription plan. These
shares were sold at fair value ($11.27), as determined by the most recent
equity investment (July 1998). In connection with these sales, The Pantry
received $722,000 of secured promissory notes receivable, bearing an interest
rate of 8.5%, due August 31, 2003.
In December 1996, in connection with its purchase of 17,500 shares of
Series B preferred stock, Freeman Spogli acquired warrants to purchase
2,346,000 shares of common stock. The warrants are exercisable at $7.45 per
share until December 30, 2006, and contain adjustment provisions in the event
The Pantry declares dividends or distributions, makes stock splits, or engages
in mergers, reorganizations or reclassifications. The fair value of the
warrants at date of issuance approximated $600,000 and is included in
additional paid-in capital. None of these warrants had been exercised at
September 30, 1999.
54
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13--RELATED PARTIES:
Transactions With Affiliates
Stock Issuances
In December 1996, Freeman Spogli purchased 17,500 shares of Series B
preferred stock and warrants to purchase 2,346,000 shares of common stock for
approximately $17.5 million. The purchase price for the Series B preferred
stock was $1,000.00 per share and the purchase price for each of the two
warrants was $1.00. The warrants are exercisable at $7.45 per share until
December 30, 2006 and contain adjustment provisions in the event The Pantry
declares dividends or distributions, makes stock splits or engages in mergers,
reorganizations or reclassifications. In connection with the IPO, The Pantry
repurchased the Series B preferred stock from Freeman Spogli for $17.5
million, plus approximately $6.5 million in accrued dividends. See also Note
11--Preferred Stock.
In October 1997, in connection with the Lil' Champ acquisition, Freeman
Spogli purchased 3,030,471 shares of common stock and Chase purchased 596,190
shares of common stock for an aggregate purchase price of approximately $32.0
million. Peter J. Sodini, The Pantry's Chief Executive Officer, purchased
45,339 shares of common stock for an aggregate purchase price of $400,050,
payable $185,000 in cash and $215,050 in the form of a secured promissory note
in our favor. The purchase price for the common stock was $8.82 per share. All
of the outstanding Series A preferred stock was contributed back to The Pantry
and cancelled at this time.
In July 1998, in connection with the acquisition of Quick Stop and the
acquisition of Stallings, Freeman Spogli purchased 1,845,690 shares of common
stock and Chase purchased 371,688 shares of common stock for an aggregate
purchase price of $25.0 million. The purchase price for the common stock was
$11.27 per share.
In November 1998, Peter Starrett, a director of The Pantry, purchased
22,185 shares of common stock for a purchase price of $250,125. Freeman Spogli
has the right to require the sale of Mr. Starrett's shares in the event it
sells all of its holdings of common stock.
Payments to Freeman Spogli
Transaction fees of $1.5 million and $3.0 million, for the fiscal years
ended September 25, 1997 and September 24, 1998, respectively, were paid to
Freeman Spogli in connection with previous investments and assistance with
analyzing acquisition candidates and obtaining financing.
Stockholders' Agreement
The Pantry has a stockholders' agreement, as amended July 1998, with
Freeman Spogli, Chase and Peter J. Sodini in which:
. Freeman Spogli has a right of first offer enabling it to purchase shares
held by Chase or Mr. Sodini prior to transfers of shares of common stock
to non-affiliates, other than transfers pursuant to a registration
statement or under Rule 144
. Freeman Spogli has the right to require Chase and Mr. Sodini to sell
their shares of common stock to a third party buyer on the same terms as
Freeman Spogli if Freeman Spogli is selling all of its shares
. Freeman Spogli, Chase and Mr. Sodini have rights to be included in sales
of common stock by the other stockholders
55
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. Freeman Spogli has agreed, as long as Chase holds 10% of The Pantry's
common stock, to vote for a director nominated by Chase
. Transactions with affiliates will be on terms no less favorable to The
Pantry than would be obtained in an arms length transaction and to limit
the fees payable to Freeman Spogli
NOTE 14--EARNINGS PER SHARE:
The Pantry computes earnings per share data in accordance with the
requirements of SFAS No. 128, Earnings Per Share. Basic earnings per share is
computed on the basis of the weighted average number of common shares
outstanding. Diluted earnings per share is computed on the basis of the
weighted average number of common shares outstanding plus the effect of
outstanding warrants and stock options using the "treasury stock" method. The
following table reflects the calculation of basic and diluted earnings per
share (see also Note 11--Preferred Stock):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net income (loss) applicable to common
shareholders:
Income (loss) before extraordinary loss....... $ (975) $ 4,673 $14,000
Preferred stock dividend requirement.......... (5,304) (2,942) (2,070)
Redemption of preferred stock in excess of
carrying amount.............................. -- -- (2,113)
------- ------- -------
Income (loss) applicable to common
shareholders before extraordinary loss....... (6,279) 1,731 9,817
Extraordinary loss............................ -- (7,998) (3,584)
------- ------- -------
Net income (loss) applicable to common
shareholders................................. $(6,279) $(6,267) $ 6,233
======= ======= =======
Earnings per share--basic:
Weighted-average shares outstanding........... 5,815 9,732 13,768
======= ======= =======
Income (loss) before extraordinary loss per
share--basic................................. $ (1.08) $ 0.18 $ 0.71
Extraordinary loss per share--basic........... -- (0.82) (0.26)
------- ------- -------
Net income (loss) per share--basic............ $ (1.08) $ (0.64) $ 0.45
======= ======= =======
Earnings per share--diluted:
Weighted-average shares outstanding........... 5,815 9,732 13,768
Dilutive impact of options and warrants
outstanding.................................. -- 1,280 1,308
------- ------- -------
Weighted-average shares and potential dilutive
shares outstanding........................... 5,815 11,012 15,076
======= ======= =======
Income (loss) before extraordinary loss per
share--diluted............................... $ (1.08) $ 0.16 $ 0.65
Extraordinary loss per share--diluted......... -- (0.73) (0.24)
------- ------- -------
Net income (loss) per share--diluted.......... $ (1.08) $ (0.57) $ 0.41
======= ======= =======
</TABLE>
56
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15--SUPPLEMENTAL GUARANTORS INFORMATION:
In connection with the Lil' Champ acquisition and commitments under the
acquisition facility, Lil' Champ, Sandhills, Inc. and Global Communications,
Inc. (the "Guarantors") jointly and severally, unconditionally guaranteed, on
an unsecured senior subordinated basis, the full and prompt performance of The
Pantry's obligations under its senior subordinated notes and its acquisition
facility.
The senior subordinated notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, as to the payment of principal, premium,
if any, and interest, jointly and severally, by the Guarantors and future
direct and indirect restricted subsidiaries.
The senior subordinated notes contain covenants that, among other things,
restrict the ability of The Pantry and any restricted subsidiary to (i) incur
additional debt, (ii) pay dividends or make distributions, (iii) issue stock
of subsidiaries, (iv) make certain investments or repurchase stock, (v) create
liens, (vi) enter into transactions with affiliates or sale-leaseback
transactions, and (vii) merge or consolidate The Pantry or any of its
subsidiaries or sell or transfer assets.
As of September 30, 1999, substantially all of The Pantry's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
Management has determined that separate, full financial statements of the
guarantors (Lil' Champ, Sandhills and Global Communications as of September
30, 1999) would not be material to investors and therefore such financial
statements are not provided. The following supplemental combining financial
statements present information regarding the guarantors and The Pantry.
The Pantry accounts for its wholly-owned subsidiaries on the equity basis.
Certain reclassifications have been made to conform all of the financial
information to the financial presentation on a consolidated basis. The
principal eliminating entries eliminate investments in subsidiaries and
intercompany balances.
57
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc.
Supplemental Combining Statements of Operations
Year Ended September 25, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Non-
The Guarantor Guarantor
Pantry Subsidiary Subsidiary Eliminations Total
-------- ---------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $202,440 $ -- $ -- $ -- $202,440
Gasoline sales........ 220,166 -- -- -- 220,166
Commissions........... 4,787 -- -- -- 4,787
-------- ------- ---------- -------- --------
Total revenues...... 427,393 -- -- -- 427,393
======== ======= ========== ======== ========
Cost of sales:
Merchandise........... 132,846 -- -- -- 132,846
Gasoline.............. 197,268 -- -- -- 197,268
-------- ------- ---------- -------- --------
Total cost of
sales.............. 330,114 -- -- -- 330,114
-------- ------- ---------- -------- --------
Gross profit............ 97,279 -- -- -- 97,279
-------- ------- ---------- -------- --------
Operating expenses:
Store expenses........ 73,225 -- (291) (12,726) 60,208
General and
administrative
expenses............. 16,731 42 23 -- 16,796
Depreciation and
amortization......... 9,485 13 6 -- 9,504
-------- ------- ---------- -------- --------
Total operating
expenses........... 99,441 55 (262) (12,726) 86,508
-------- ------- ---------- -------- --------
Income from operations.. (2,162) (55) 262 12,726 10,771
-------- ------- ---------- -------- --------
Equity in earnings of
subsidiaries........... 16,605 -- -- (16,605) --
Other income (expense):
Interest expense...... (16,095) -- (13) 3,069 (13,039)
Miscellaneous......... 677 16,207 204 (15,795) 1,293
-------- ------- ---------- -------- --------
Total other
expense............ (15,418) 16,207 191 (12,726) (11,746)
-------- ------- ---------- -------- --------
Income (loss) before
income taxes........... (975) 16,152 453 (16,605) (975)
Income tax benefit
(expense).............. -- (5,492) (155) 5,647 --
-------- ------- ---------- -------- --------
Net income (loss)....... $ (975) $10,660 $298 $(10,958) $ (975)
======== ======= ========== ======== ========
Net loss applicable to
common shareholders.... $ (6,279) -- -- -- $ (6,279)
======== ======= ========== ======== ========
</TABLE>
58
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (used in)
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 noncurrent
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
lease-back
transactions.......... 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, net of
cash acquired......... (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)............. (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>
59
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc.
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 costs,
net.................. 269 -- -- -- 269
Deferred financing
costs, net........... 14,545 -- -- -- 14,545
Environmental
receivables.......... 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>
60
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc.
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>
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 noncurrent liabilities:
Environmental costs......... 13,487 3,650 -- -- 17,137
Deferred income taxes....... (36) 22,001 -- (1,599) 20,366
Deferred revenue............ 13,680 2,980 -- -- 16,660
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....................... 1,645 2,757 38 634 5,074
-------- -------- ------ --------- --------
Total other noncurrent
liabilities.................. 86,340 62,805 38 (72,492) 76,691
-------- -------- ------ --------- --------
Shareholders' Equity
(Deficit):
Preferred stock............. -- -- -- -- --
Common stock................ 117 1 -- (1) 117
Additional paid-in capital.. 68,939 6,758 5,001 (11,759) 68,939
Shareholder loan............ (215) -- -- -- (215)
Accumulated earnings
(deficit).................. (29,537) 56,802 (325) (56,477) (29,537)
-------- -------- ------ --------- --------
Total shareholders'
equity (deficit)....... 39,304 63,561 4,676 (68,237) 39,304
-------- -------- ------ --------- --------
Total liabilities and
shareholders' equity
(deficit).............. $380,044 $317,436 $4,974 $(147,634) $554,820
======== ======== ====== ========= ========
</TABLE>
61
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc.
Supplemental Combining Statement of Operations
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>
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 loss..... 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)
======== ======== ===== ======== ========
Net loss applicable to
common shareholders.... $ (6,267) $ -- $ -- $ -- $ (6,267)
======== ======== ===== ======== ========
</TABLE>
62
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Year Ended September 24, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Guarantor Non-Guarantor
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
Provision for deferred
income taxes......... -- 1,737 -- (1,599) 138
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........ (26,483) (15,584) -- -- (42,067)
Proceeds from sale
lease-back
transactions......... 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... (135,993) (147,395) -- (2,019) (285,407)
--------- --------- ------- -------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital
leases............... (303) (1,121) -- -- (1,424)
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
stock issuances...... 56,935 -- -- -- 56,935
Other financing
costs................ (14,044) -- -- -- (14,044)
--------- --------- ------- -------- ---------
Net cash provided by
(used in) financing
activities............. 130,571 137,879 (17) (1) 268,432
--------- --------- ------- -------- ---------
Net increase............ 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>
63
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc. and Subsidiaries
Supplemental Combining Balance Sheets
Year Ended September 30, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
The
Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
-------- ------------ ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 16,446 $ 9,870 $ 4,841 $ -- $ 31,157
Receivables, net...... 34,761 46,179 3,119 (59,825) 24,234
Inventories........... 40,714 35,523 -- -- 76,237
Prepaid expenses...... 2,186 958 353 -- 3,497
Property held for
sale................. 135 -- -- -- 135
Deferred income
taxes................ 2,220 2,621 8 -- 4,849
-------- -------- ------- --------- --------
Total current
assets............. 96,462 95,151 8,321 (59,825) 140,109
-------- -------- ------- --------- --------
Investment in
subsidiaries........... 119,590 -- -- (119,590) --
-------- -------- ------- --------- --------
Property and equipment,
net.................... 160,809 244,622 16,254 -- 421,685
-------- -------- ------- --------- --------
Other assets:
Goodwill, net......... 127,056 70,649 -- -- 197,705
Deferred lease costs,
net.................. 224 -- -- -- 224
Deferred financing
costs, net........... 12,680 -- -- -- 12,680
Environmental
receivables.......... 11,959 1,177 -- -- 13,136
Intercompany notes
receivable........... 248,650 49,705 17,124 (315,479) --
Other................. 3,558 4,053 568 -- 8,179
-------- -------- ------- --------- --------
Total other assets.. 404,127 125,584 17,692 (315,479) 231,924
-------- -------- ------- --------- --------
Total assets........ $780,988 $465,357 $42,267 $(494,894) $793,718
======== ======== ======= ========= ========
</TABLE>
64
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc. and Subsidiaries
Supplemental Combining Balance Sheets--(Continued)
Year Ended September 30, 1999
(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.................. $ 10,370 $ 296 $ 21 $ -- $ 10,687
Current maturities of
capital lease obligations.. 178 1,027 1,205
Accounts payable:
Trade..................... 50,866 31,360 2,919 (134) 85,011
Money orders.............. 775 3,338 -- -- 4,113
Accrued interest............ 16,060 -- 1 (6,133) 9,928
Accrued compensation and
related taxes.............. 4,730 3,310 2 -- 8,042
Income taxes payable........ 6,784 12,499 447 (14,726) 5,004
Other accrued taxes......... 5,041 8,793 -- -- 13,834
Accrued insurance........... 3,401 5,419 -- -- 8,820
Other accrued liabilities... 36,480 13,846 4,366 (33,716) 20,976
-------- -------- ------- --------- --------
Total current
liabilities............ 134,685 79,888 7,756 (54,709) 167,620
-------- -------- ------- --------- --------
Long-term debt................ 429,235 889 96 -- 430,220
-------- -------- ------- --------- --------
Other noncurrent liabilities:
Environmental costs......... 13,010 2,392 -- -- 15,402
Deferred income taxes....... 2,810 21,766 1,669 -- 26,245
Deferred revenue............ 20,705 8,024 -- -- 28,729
Capital lease obligations... 4,063 9,409 -- -- 13,472
Employment obligations...... 486 -- -- -- 486
Intercompany note payable... 68,829 249,715 3,997 (322,541) --
Other....................... 2,968 4,143 36 200 7,347
-------- -------- ------- --------- --------
Total other noncurrent
liabilities.................. 112,871 295,449 5,702 (322,341) 91,681
-------- -------- ------- --------- --------
Shareholders' Equity
(Deficit):
Preferred stock............. -- -- -- -- --
Common stock................ 182 1 5,001 (5,002) 182
Additional paid-in capital.. 128,256 6,882 24,212 (31,094) 128,256
Shareholder loans........... (937) -- -- -- (937)
Accumulated earnings
(deficit).................. (23,304) 82,248 (500) (81,748) (23,304)
-------- -------- ------- --------- --------
Total shareholders'
equity (deficit)....... 104,197 89,131 28,713 (117,844) 104,197
-------- -------- ------- --------- --------
Total liabilities and
shareholders' equity
(deficit).............. $780,988 $465,357 $42,267 $(494,894) $793,718
======== ======== ======= ========= ========
</TABLE>
65
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Year Ended September 30, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $402,013 $329,668 $ -- $ -- $ 731,681
Gasoline sales........ 550,940 372,846 -- -- 923,786
Commissions........... 13,831 9,560 12 -- 23,403
-------- -------- ----- -------- ----------
Total revenues...... 966,784 712,074 12 -- 1,678,870
-------- -------- ----- -------- ----------
Cost of sales:
Merchandise........... 268,750 220,508 -- -- 489,258
Gasoline.............. 491,793 326,991 -- -- 818,784
-------- -------- ----- -------- ----------
Total cost of
sales.............. 760,543 547,499 -- -- 1,308,042
-------- -------- ----- -------- ----------
Gross profit............ 206,241 164,575 12 -- 370,828
-------- -------- ----- -------- ----------
Operating expenses:
Store expenses........ 148,470 94,733 (243) (28,576) 214,384
General and
administrative
expenses............. 25,807 22,385 276 -- 48,468
Depreciation and
amortization......... 22,855 19,525 418 -- 42,798
-------- -------- ----- -------- ----------
Total operating
expenses........... 197,132 136,643 451 (28,576) 305,650
-------- -------- ----- -------- ----------
Income from operations.. 9,109 27,932 (439) 28,576 65,178
-------- -------- ----- -------- ----------
Equity in earnings of
subsidiaries........... 39,871 6 -- (39,877) --
-------- -------- ----- -------- ----------
Other income (expense):
Interest expense...... (24,063) (22,186) (13) 4,982 (41,280)
Miscellaneous......... (167) 34,292 276 (33,549) 852
-------- -------- ----- -------- ----------
Total other income
(expense).......... (24,230) 12,106 263 (28,567) (40,428)
-------- -------- ----- -------- ----------
Income (loss) before
income taxes and
extraordinary loss..... 24,750 40,044 (176) (39,868) 24,750
Income tax benefit
(expense).............. (10,750) (14,571) -- 14,571 (10,750)
-------- -------- ----- -------- ----------
Net income (loss) before
extraordinary loss..... 14,000 25,473 (176) (25,297) 14,000
Extraordinary loss...... (3,584) -- -- -- (3,584)
-------- -------- ----- -------- ----------
Net income (loss)....... $ 10,416 $ 25,473 $(176) $(25,297) $ 10,416
======== ======== ===== ======== ==========
Net income (loss)
applicable to common
Shareholders........... $ 6,233 $ 25,473 $(176) $(25,297) $ 6,233
======== ======== ===== ======== ==========
</TABLE>
66
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Year Ended September 30, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Guarantor Non-Guarantor
Pantry Subsidiaries Subsidiary Eliminations Total
--------- ------------ ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)....... $ 10,416 $25,473 $ (176) $ (25,297) $ 10,416
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Extraordinary loss.... 3,406 -- -- -- 3,406
Depreciation and
amortization......... 22,855 19,525 418 -- 42,798
Provision for deferred
income taxes......... 1,851 (2,982) 1,661 -- 530
Loss on sale of
property and
equipment............ 402 4,082 -- -- 4,484
Provision for
environmental
expenses............. (477) (1,258) -- -- (1,735)
Equity earnings of
affiliates........... (51,352) -- 24,212 27,140 --
Changes in operating
assets and liabilities,
net:
Receivables........... (7,238) (31,063) (2,071) 49,826 9,454
Inventories........... (6,071) (5,084) -- -- (11,155)
Prepaid expenses...... (59) 402 (350) -- (7)
Other noncurrent
assets............... 12 (974) (568) (10) (1,540)
Accounts payable...... 15,238 1,053 2,919 (107) 19,103
Other current
liabilities and
accrued expenses..... 27,365 (3,987) 4,203 (45,006) (17,425)
Employment
obligations.......... (448) -- -- -- (448)
Other noncurrent
liabilities.......... 8,347 2,774 (2) (433) 10,686
--------- ------- -------- --------- ---------
Net cash provided by
operating activities... 24,247 7,961 30,246 6,113 68,567
--------- ------- -------- --------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale........ (178) -- -- -- (178)
Additions to property
and equipment........ (10,502) (20,582) (16,332) -- (47,416)
Proceeds from sale
lease-back
transactions......... 524 10,200 -- -- 10,724
Proceeds from sale of
property and
equipment............ 1,959 407 -- -- 2,366
Intercompany notes
receivable
(payable)............ 23,858 89,893 (13,127) (100,624) --
Acquisition of related
businesses, net of
cash acquired........ (206,108) (82,817) -- 94,511 (194,414)
--------- ------- -------- --------- ---------
Net cash used in
investing activities... (190,447) (2,899) (29,459) (6,113) (228,918)
--------- ------- -------- --------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital
leases............... (309) (1,186) -- -- (1,495)
Principal repayments
of long-term debt.... (184,563) (306) (19) -- (184,888)
Proceeds from issuance
of long-term debt.... 297,000 -- -- -- 297,000
Redemption of Series B
preferred stock...... (17,500) -- -- -- (17,500)
Net proceeds from
initial public
offering............. 72,979 -- -- -- 72,979
Net proceeds from
other stock
issuances............ 1,068 -- -- -- 1,068
Accrued dividends paid
on preferred stock... (6,461) -- -- -- (6,461)
Other financing
costs................ (3,599) -- -- -- (3,599)
--------- ------- -------- --------- ---------
Net cash provided by
(used in) financing
activities............. 158,615 (1,492) (19) -- 157,104
--------- ------- -------- --------- ---------
Net increase (decrease)
....................... (7,585) $ 3,570 768 -- (3,247)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR...... 24,031 6,300 4,073 -- 34,404
--------- ------- -------- --------- ---------
CASH AND CASH
EQUIVALENTS AT END OF
YEAR................... $ 16,446 $ 9,870 $ 4,841 $ -- $ 31,157
========= ======= ======== ========= =========
</TABLE>
67
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16--SUBSEQUENT EVENTS:
In four separate transactions subsequent to fiscal year end 1999, the
Company acquired 64 stores located in Georgia (49), North Carolina (7), South
Carolina (7) and Florida (1). These transactions were primarily funded from
borrowings under the Company's bank credit facility, as amended, and cash on
hand.
On October 27, 1999, the Company entered into an amendment to its bank
credit facility which increased the borrowing capacity to include an
additional $75.0 million term loan. The term loan bears interest, at the
Company's option, based on margins over a base rate or an adjusted Eurodollar
rate. Proceeds from the term loan were used to prepay amounts outstanding
under the acquisition facility and to fund acquisitions closed subsequent to
September 30, 1999.
NOTE 17--QUARTERLY FINANCIAL DATA (unaudited):
Summary quarterly financial data for 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Year Ended September 24, 1998 Year Ended September 30, 1999
---------------------------------------------- -----------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Year Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue.......... $195,171 $220,670 $254,577 $314,466 $984,884 $315,607 $359,792 $456,704 $546,767 $1,678,870
Gross profit........... $ 45,365 $ 53,287 $ 60,365 $ 74,334 $233,351 $ 72,380 $ 83,561 $100,431 $114,456 $ 370,828
Income (loss) before
income taxes and
extraordinary loss: $ (501) $ (2,084) $ 3,136 $ 4,122 $ 4,673 $ 1,397 $ 398 $ 9,119 $ 13,836 $ 24,750
Net income (loss)...... $ (6,889) $ (1,580) $ 2,509 $ 2,635 $ (3,325) $ 1,065 $ (3,545) $ 5,210 $ 7,686 $ 10,416
Earnings per share
before extraordinary
loss:
Basic................. $ (0.12) $ (0.23) $ 0.19 $ 0.30 $ 0.18 $ 0.03 $ (0.06) $ 0.19 $ 0.42 $ 0.71
Diluted............... $ (0.12) $ (0.23) $ 0.18 $ 0.27 $ 0.16 $ 0.03 $ (0.06) $ 0.18 $ 0.40 $ 0.65
Earnings per share:
Basic................. $ (0.93) $ (0.23) $ 0.19 $ 0.17 $ (0.64) $ 0.03 $ (0.36) $ 0.19 $ 0.42 $ 0.45
Diluted............... $ (0.93) $ (0.23) $ 0.18 $ 0.15 $ (0.57) $ 0.03 $ (0.36) $ 0.18 $ 0.40 $ 0.41
</TABLE>
68
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Our Directors and Executive Officers
Information on our directors is incorporated by reference from the section
entitled "Proposal 1: Election of Directors" in our definitive proxy statement
to be filed with respect to the Annual Meeting of Stockholders to be held
March 23, 2000. Information on our executive officers is included in the
section entitled "Executive Officers" on page 11 of this report.
Item 11. Executive Compensation
This information is incorporated by reference from the section entitled
"Executive Compensation" in our definitive proxy statement to be filed with
respect to the Annual Meeting of Stockholders be held March 23, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This information is incorporated by reference from the section entitled
"Principal Stockholders" in our definitive proxy statement to be filed with
respect to the Annual Meeting of Stockholders be held March 23, 2000.
Item 13. Certain Relationships and Related Transactions
This information is incorporated by reference from the sections entitled
"Principal Stockholders" and "Transactions with Affiliates" in our definitive
proxy statement to be filed with respect to the Annual Meeting of Stockholders
be held March 23, 2000.
69
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits--The
following documents are filed as part of this Annual Report on Form 10-K.
(i) Consolidated Financial Statements--See index on page 29.
(ii) Financial Statement Schedule--See index on page 29.
(iii) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
--------- -----------------------
<C> <S>
2.1(1) Stock Purchase Agreement dated August 26, 1997 by and between PH
Holding Corporation ("PH Holding") and Docks U.S.A., Inc.
2.2(1) Assignment and Assumption Agreement dated October 23, 1997 between
PH Holding and The Pantry.
2.3(2) Asset Purchase Agreement dated June 5, 1998 between Quick Stop Food
Mart, Inc. and The Pantry.
2.4(3) Asset Purchase Agreement dated July 6, 1998 between Stallings Oil
Company and The Pantry.
2.5(4) Asset Purchase Agreement dated September 28, 1998, as amended on
November 5, 1998, by and among Express Stop, Inc., Bryan Oil
Company, Inc., Market Express of Shallotte, Inc., Lennon Oil
Company and The Pantry.
2.6(9) Purchase Agreement dated November 30, 1998 among Lil Champ Food
Stores, Inc. and the Selling Shareholders of Miller: Thomas A.
Miller, Joseph E. Miller, The Miller Investments Trust U/A dated
October 11, 1995 and The George C. Miller, Jr. Estate Trust U/A
dated June 30, 1989, and Miller Brothers and Circle Investments,
Ltd. and Miller.
2.7(12) Asset Purchase Agreement dated January 14, 1999 between Taylor Oil
Company and The Pantry.
2.8(13) Stock Purchase Agreement dated June 16, 1999 between Greg Ryberg,
Tim Dangerfield, Jim Victor and The Pantry.
2.9(14) Stock Purchase Agreement dated as of September 24, 1999 between
Michael F. Mansfield and The Pantry.
2.10(15) Letter Agreement dated October 7, 1999 between Michael F. Mansfield
and The Pantry amending the Stock Purchase Agreement referenced in
exhibit 2.9 above.
3.1(16) Amended and Restated Certificate of Incorporation of The Pantry.
3.2(16) Amended and Restated Bylaws of The Pantry.
4.1(5) Indenture dated as of October 23, 1997 among The Pantry, Sandhills,
Lil' Champ 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(17) 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(17) 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.
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
---------- -----------------------
<C> <S>
10.2(17) 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.
10.11(1) Company Trademark Security 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(17) Form of Subsidiary Guaranty.
10.22(17) Form of Subsidiary Security Agreement.
10.23(17) Form of Subsidiary Pledge Agreement.
10.24(17) Form of Subsidiary Trademark Security Agreement.
10.25(8) The Pantry Inc. 1998 Stock Subscription Plan.
10.26(17) Form of Stock Subscription Agreement.
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
-------- -----------------------
<C> <S>
10.27(17) Stock Purchase Agreement dated July 2, 1998 among The Pantry, FSEP
IV and CB Capital Investors, L.P.
10.28(17) Distribution Service Agreement dated as of March 29, 1998 among The
Pantry, Lil' Champ and McLane Company, Inc., as amended (asterisks
located within the exhibit denote information which has been deleted
pursuant to a request for confidential treatment filed with the
Securities and Exchange Commission).
10.29(17) Form of Indemnification Agreement.
10.30(17) Common Stock Purchase Warrant dated December 30, 1996.
10.31(17) Common Stock Purchase Warrant dated December 30, 1996.
10.32(17) Form of 1999 Stock Option Plan.
10.33(18) First Amendment to Amended Credit Agreement dated as of April 30,
1999 among the Pantry, the Lenders listed therein, First Union, CIBC
and NationsBank, N.A.
10.34(18) Amendment No. 1 to Employment Agreement between The Pantry and Peter
J. Sodini.
10.35(18) Amendment No. 1 to the Amended and Restated Stockholder's Agreement
dated as of June 1, 1999 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.
10.36(18) Amendment No. 1 to the Amended and Restated Registration Rights
Agreement dated as of June 1, 1999 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.
12.1 Statement re Computation of Earnings to Fixed Charges Ratio.
21.1 Subsidiaries of The Pantry.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
99.1 Risk Factors.
</TABLE>
- --------
(1) Incorporated by reference to the exhibit designated by the same number in
The Pantry's Registration Statement on Form S-4 (Registration No. 333-
42811) (the "Form S-4").
(2) Incorporated by reference to the exhibit designated by exhibit number 2.1
in The Pantry's Current Report on Form 8-K dated July 17, 1998.
(3) Incorporated by reference to the exhibit designated by exhibit number 2.3
in The Pantry's Current Report on Form 8-K dated July 17, 1998.
(4) Incorporated by reference to the exhibit designated by exhibit number 2.1
in The Pantry's Current Report on Form 8-K dated November 6, 1998.
(5) Incorporated by reference to the exhibit designated by exhibit number 4.5
in the Form S-4.
(6) Incorporated by reference to the exhibit designated by the same number in
The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended
December 25, 1997.
(7) Represents a management contract or compensation plan arrangement.
(8) Incorporated by reference to the exhibit designated by the same number in
The Pantry's Annual Report on Form 10-K dated December 23, 1998.
(9) Incorporated by reference to the exhibit designated by exhibit 2.1 in The
Pantry's Current Report on Form 8-K dated February 5, 1999.
(10) Incorporated by reference to the exhibit designated by exhibit 10.1 in
The Pantry's Current Report on Form 8-K dated February 5, 1999.
(11) Incorporated by reference to the exhibit designated by the same number
in The Pantry's Annual Report on Form 10-K for the year ended September
28, 1995.
(12) Incorporated by reference to the exhibit designated by exhibit number
2.1 in The Pantry's Current Report on Form 8-K dated March 12, 1999.
72
<PAGE>
(13) Incorporated by reference to the exhibit designated by exhibit number
2.1 in The Pantry's Current Report on Form 8-K dated August 6, 1999.
(14) Incorporated by reference to the exhibit designated by exhibit number
2.1 in The Pantry's Current Report on Form 8-K dated November 24, 1999.
(15) Incorporated by reference to the exhibit designated by exhibit number
2.3 in The Pantry's Current Report on Form 8-K dated November 24, 1999.
(16) Incorporated by reference to the exhibit designated by exhibit number
3.3 in The Pantry's Registration Statement on Form S-1, as amended
(Registration No. 333-74221) (the "Form S-1").
(17) Incorporated by reference to the exhibit designated by the same number
in the Form S-1.
(18) Incorporated by reference to the exhibit designated by the same number
in The Pantry's Quarterly Report on Form 10-Q for the quarterly period
ended June 24, 1999.
(b) Reports on Form 8-K.
(i) On August 6, 1999, the Company filed a Current Report on Form 8-K
announcing its acquisition of 100% of the outstanding capital stock of R&H
Maxxon, Inc. ("Maxxon") on July 22, 1999. On October 5, 1999, the Company
filed a Current Report on Form 8-K/A which provided the following financial
statements for the acquisition:
Audited financial statements of Maxxon as of June 30, 1999, 1998 and
1997, and for each of the three years in the period ended June 30,
1999:
(1) Report of Independent Certified Public Accountants
(2) Balance Sheets
(3) Statements of Income
(4) Statements of Changes in Stockholders' Equity
(5) Statements of Cash Flows
(6) Notes to Financial Statements
Unaudited pro forma consolidated financial data:
(1) Introduction to Unaudited Pro Forma Financial Data
(2) Unaudited Pro Forma Balance Sheet Data as of June 24, 1999
(3) Notes to Unaudited Pro Forma Balance Sheet Data
(4) Unaudited Pro Forma Statement of Operations Data for the Nine-
Month Period Ended June 24, 1999
(5) Unaudited Pro Forma Statement of Operations Data for the Year
Ended September 24, 1998
(6) Notes to Unaudited Pro Forma Statements of Operations Data
(ii) Subsequent to fiscal year-end 1999, on November 24, 1999, the
Company filed a Current Report on Form 8-K announcing its acquisition of
100% of the outstanding capital stock of Kangaroo, Inc. on November 11,
1999.
(c) See (a)(iii) above.
(d) See (a)(ii) above.
73
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
--------- -----------------------
<C> <S>
2.1(1) Stock Purchase Agreement dated August 26, 1997 by and between PH
Holding Corporation ("PH Holding") and Docks U.S.A., Inc.
2.2(1) Assignment and Assumption Agreement dated October 23, 1997 between
PH Holding and The Pantry.
2.3(2) Asset Purchase Agreement dated June 5, 1998 between Quick Stop Food
Mart, Inc. and The Pantry.
2.4(3) Asset Purchase Agreement dated July 6, 1998 between Stallings Oil
Company and The Pantry.
2.5(4) Asset Purchase Agreement dated September 28, 1998, as amended on
November 5, 1998, by and among Express Stop, Inc., Bryan Oil
Company, Inc., Market Express of Shallotte, Inc., Lennon Oil
Company and The Pantry.
2.6(9) Purchase Agreement dated November 30, 1998 among Lil Champ Food
Stores, Inc. and the Selling Shareholders of Miller: Thomas A.
Miller, Joseph E. Miller, The Miller Investments Trust U/A dated
October 11, 1995 and The George C. Miller, Jr. Estate Trust U/A
dated June 30, 1989, and Miller Brothers and Circle Investments,
Ltd. and Miller.
2.7(12) Asset Purchase Agreement dated January 14, 1999 between Taylor Oil
Company and The Pantry.
2.8(13) Stock Purchase Agreement dated June 16, 1999 between Greg Ryberg,
Tim Dangerfield, Jim Victor and The Pantry.
2.9(14) Stock Purchase Agreement dated as of September 24, 1999 between
Michael F. Mansfield and The Pantry.
2.10(15) Letter Agreement dated October 7, 1999 between Michael F. Mansfield
and The Pantry amending the Stock Purchase Agreement referenced in
exhibit 2.9 above.
3.1(16) Amended and Restated Certificate of Incorporation of The Pantry.
3.2(16) Amended and Restated Bylaws of The Pantry.
4.1(5) Indenture dated as of October 23, 1997 among The Pantry, Sandhills,
Lil' Champ 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(17) 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(17) 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.
10.2(17) 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.
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
---------- -----------------------
<C> <S>
10.5(1) Stock Pledge Agreement dated October 23, 1997 between Peter J.
Sodini and The Pantry.
10.6(1) Secured Promissory Note dated October 23, 1997 between Peter J.
Sodini and The Pantry.
10.7(1)(7) Employment Agreement dated June 3, 1996 between Dennis R. Crook
and The Pantry (same form of agreement with Daniel McCormack and
Douglas Sweeney).
10.8(10) Amended and Restated Credit Agreement dated as of January 27, 1999
among The Pantry, the financial institutions listed therein
(collectively, "Lenders"), First Union National Bank ("First
Union"), as administrative agent, and Canadian Imperial Bank of
Commerce ("CIBC"), as syndication agent for Lenders.
10.9(1) Company Security Agreement dated as of October 23, 1997 between
The Pantry and First Union, as administrative agent.
10.10(1) Company Pledge Agreement dated as of October 23, 1997 between The
Pantry and First Union, as administrative agent.
10.11(1) Company Trademark Security Agreement dated as of October 23, 1997
between The Pantry and First Union, as administrative agent.
10.12(1) Collateral Account Agreement dated as of October 23, 1997 between
The Pantry and First Union, as administrative agent.
10.13(1)(7) Employment Agreement dated October 1, 1997 between Peter J. Sodini
and The Pantry.
10.14(1) Form of Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (North Carolina)
dated October 23, 1997 among The Pantry, David R. Cannon, as
Trustee, and First Union as Agent.
10.15(1) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (South Carolina)
dated October 23, 1997 between The Pantry and First Union, as
Agent.
10.16(1) Form of Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (Tennessee)
dated October 23, 1997 among The Pantry, David R. Cannon, as
Trustee, and First Union, as Agent.
10.17(1) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases (Kentucky) dated October 23, 1997
between The Pantry and First Union, as Agent.
10.18(1) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (Indiana) dated
as of October 23, 1997 between The Pantry and First Union, as
Agent.
10.19(1) Form of Mortgage, Security Agreement, Assignment of Rents and
Leases and Fixture Filing (Florida) dated October 23, 1997 between
Lil' Champ and First Union, as Agent.
10.20(1) Form of Deed to Secure Debt, Security Agreement, and Assignment of
Rents (Georgia) dated October 23, 1997 between Lil' Champ and
First Union, as Agent.
10.21(17) Form of Subsidiary Guaranty.
10.22(17) Form of Subsidiary Security Agreement.
10.23(17) Form of Subsidiary Pledge Agreement.
10.24(17) Form of Subsidiary Trademark Security Agreement.
10.25(8) The Pantry Inc. 1998 Stock Subscription Plan.
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
-------- -----------------------
<C> <S>
10.26(17) Form of Stock Subscription Agreement.
10.27(17) Stock Purchase Agreement dated July 2, 1998 among The Pantry, FSEP
IV and CB Capital Investors, L.P.
10.28(17) Distribution Service Agreement dated as of March 29, 1998 among The
Pantry, Lil' Champ and McLane Company, Inc., as amended (asterisks
located within the exhibit denote information which has been deleted
pursuant to a request for confidential treatment filed with the
Securities and Exchange Commission).
10.29(17) Form of Indemnification Agreement.
10.30(17) Common Stock Purchase Warrant dated December 30, 1996.
10.31(17) Common Stock Purchase Warrant dated December 30, 1996.
10.32(17) Form of 1999 Stock Option Plan.
10.33(18) First Amendment to Amended Credit Agreement dated as of April 30,
1999 among the Pantry, the Lenders listed therein, First Union, CIBC
and NationsBank, N.A.
10.34(18) Amendment No. 1 to Employment Agreement between The Pantry and Peter
J. Sodini.
10.35(18) Amendment No. 1 to the Amended and Restated Stockholder's Agreement
dated as of June 1, 1999 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.
10.36(18) Amendment No. 1 to the Amended and Restated Registration Rights
Agreement dated as of June 1, 1999 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.
12.1 Statement re Computation of Earnings to Fixed Charges Ratio.
21.1 Subsidiaries of The Pantry.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
99.1 Risk Factors.
</TABLE>
- --------
(1) Incorporated by reference to the exhibit designated by the same number in
The Pantry's Registration Statement on Form S-4 (Registration No. 333-
42811) (the "Form S-4").
(2) Incorporated by reference to the exhibit designated by exhibit number 2.1
in The Pantry's Current Report on Form 8-K dated July 17, 1998.
(3) Incorporated by reference to the exhibit designated by exhibit number 2.3
in The Pantry's Current Report on Form 8-K dated July 17, 1998.
(4) Incorporated by reference to the exhibit designated by exhibit number 2.1
in The Pantry's Current Report on Form 8-K dated November 6, 1998.
(5) Incorporated by. reference to the exhibit designated by exhibit number
4.5 in the Form S-4.
(6) Incorporated by reference to the exhibit designated by the same number in
The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended
December 25, 1997.
(7) Represents a management contract or compensation plan arrangement.
(8) Incorporated by reference to the exhibit designated by the same number in
The Pantry's Annual Report on Form 10-K dated December 23, 1998.
(9) Incorporated by reference to the exhibit designated by exhibit 2.1 in The
Pantry's Current Report on Form 8-K dated February 5, 1999.
(10) Incorporated by reference to the exhibit designated by exhibit 10.1 in
The Pantry's Current Report on Form 8-K dated February 5, 1999.
(11) Incorporated by reference to the exhibit designated by the same number in
The Pantry's Annual Report on Form 10-K for the year ended September 28,
1995.
76
<PAGE>
(12) Incorporated by reference to the exhibit designated by exhibit number 2.1
in The Pantry's Current Report on Form 8-K dated March 12, 1999.
(13) Incorporated by reference to the exhibit designated by exhibit number 2.1
in The Pantry's Current Report on Form 8-K dated August 6, 1999.
(14) Incorporated by reference to the exhibit designated by exhibit number 2.1
in The Pantry's Current Report on Form 8-K dated November 24, 1999.
(15) Incorporated by reference to the exhibit designated by exhibit number 2.3
in The Pantry's Current Report on Form 8-K dated November 24, 1999.
(16) Incorporated by reference to the exhibit designated by exhibit number 3.3
in The Pantry's Registration Statement on Form S-1, as amended
(Registration No. 333-74221) (the "Form S-1").
(17) Incorporated by reference to the exhibit designated by the same number in
the Form S-1.
(18) Incorporated by reference to the exhibit designated by the same number
in The Pantry's Quarterly Report on Form 10-Q for the quarterly period
ended June 24, 1999.
77
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
The Pantry, Inc.
/s/ Peter J. Sodini
By: _________________________________
Peter J. Sodini
President and Chief Executive
Officer
Date: December 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934 this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Peter J. Sodini President, Chief Executive December 29, 1999
____________________________________ Officer and Director
Peter J. Sodini (Principal Executive
Officer)
/s/ William T. Flyg Senior Vice President and December 29, 1999
____________________________________ Chief Financial Officer
William T. Flyg (Principal Financial
Officer)
/s/ Joseph J. Duncan Vice President and Corporate December 29, 1999
____________________________________ Controller (Principal
Joseph J. Duncan Accounting Officer)
/s/ Todd W. Halloran Director December 29, 1999
____________________________________
Todd W. Halloran
/s/ Jon D. Ralph Director December 29, 1999
____________________________________
Jon D. Ralph
/s/ Charles P. Rullman Director December 29, 1999
____________________________________
Charles P. Rullman
/s/ Edfred Shannon Director December 29, 1999
____________________________________
Edfred Shannon
/s/ Peter M. Starrett Director December 29, 1999
____________________________________
Peter M. Starrett
/s/ Hubert Yarborough Director December 29, 1999
____________________________________
Hubert Yarborough
</TABLE>
78
<PAGE>
THE PANTRY, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in thousands)
<TABLE>
<CAPTION>
Additions Deductions Balance
Balance at charged to Additions for at end
beginning costs and charged to payments or of
of period expenses Goodwill write-offs period
---------- ---------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
Year ended September 25,
1997:
Allowance for doubtful
accounts............... $ 150 $ -- $ -- $ -- $ 150
Reserve for
environmental issues... 6,232 1,620 -- (46) 7,806
Reserve for closed
stores................. 960 60 -- (70) 950
Deferred tax asset
valuation allowance.... 1,782 -- -- (1,150) 632
-------- ------ ------ ------- -------
$ 9,124 $1,680 $ -- $(1,266) $ 9,538
======== ====== ====== ======= =======
Year ended September 24,
1998
Allowance for doubtful
accounts............... $ 150 $ 130 $ -- $ -- $ 280
Reserve for
environmental issues... 7,806 6,456 3,150 (275) 17,137
Reserve for closed
stores................. 950 380 383 (110) 1,603
Deferred tax asset
valuation allowance.... 632 551 -- -- 1,183
-------- ------ ------ ------- -------
$ 9,538 $7,517 $3,533 $ (385) $20,203
======== ====== ====== ======= =======
Year ended September 30,
1999
Allowance for doubtful
accounts............... $ 280 $ 486 $ -- $ -- $ 766
Reserve for
environmental issues... 17,137 5,546 -- (7,281) 15,402
Reserve for closed
stores................. 1,603 505 1,302 (606) 2,804
Deferred tax asset
valuation allowance.... 1,183 -- -- -- 1,183
-------- ------ ------ ------- -------
$ 20,203 $6,537 $1,302 $(7,887) $20,155
======== ====== ====== ======= =======
</TABLE>
S-1
<PAGE>
EXHIBIT 12.1
THE PANTRY, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
Sep. Sep. Sep. Sep.
28, Sep. 26, 25, 24, 30,
1995 1996 1997 1998 1999
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Pretax (loss) income............ $(3,639) $(10,778) $ (975) $ 4,673 $24,750
Fixed charges:
Interest expense................ 13,241 11,992 13,039 28,946 41,280
Amortization of deferred
financing costs................ 1,038 1,359 1,461 2,071 1,894
Preferred stock dividends....... -- 3,525 5,304 2,003 3,657
Rental expense (1).............. 2,253 2,709 2,901 7,919 13,517
------- -------- ------- ------- -------
Total fixed charges............. $16,532 $ 19,585 $22,705 $40,939 $60,348
------- -------- ------- ------- -------
Preferred stock dividends....... -- (3,525) (5,304) (2,003) (3,657)
------- -------- ------- ------- -------
Earnings........................ $12,893 $ 5,282 $16,426 $43,609 $81,441
------- -------- ------- ------- -------
Ratio (shortfall) of earnings to
fixed charges.................. $(3,639) $(14,303) $(6,279) $ 1.07 $ 1.35
======= ======== ======= ======= =======
</TABLE>
- --------
(1) One-third of rental expense related to operating leases representing an
appropriate interest factor.
<PAGE>
EXHIBIT 21.1
THE PANTRY, INC.
Subsidiaries
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
------------------ ----------------------
<S> <C>
Lil' Champ Food Stores, Inc. Florida
Sandhills, Inc. Delaware
PH Holding Corporation North Carolina
Global Communications, Inc. South Carolina
R & H Maxxon, Inc. South Carolina
</TABLE>
LIL' CHAMP FOOD STORES, INC.
Subsidiaries
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
------------------ ----------------------
<S> <C>
Miller Enterprises, Inc. Florida
</TABLE>
PH HOLDING CORPORATION
Subsidiaries
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
------------------ ----------------------
<S> <C>
TC Capital Management, Inc. Delaware
Pantry Properties, Inc. South Carolina
</TABLE>
MILLER ENTERPRISES, INC.
Subsidiaries
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
------------------ ----------------------
<S> <C>
Peninsular Petroleum Company Florida
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-62585 of The Pantry, Inc. on Form S-8 of our report dated November 17,
1999, appearing in this Annual Report on Form 10-K of The Pantry, Inc. for the
year ended September 30, 1999.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
December 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> SEP-24-1998
<PERIOD-END> SEP-30-1999
<CASH> 31,157
<SECURITIES> 0
<RECEIVABLES> 25,000
<ALLOWANCES> 766
<INVENTORY> 76,237
<CURRENT-ASSETS> 140,109
<PP&E> 530,790
<DEPRECIATION> 109,105
<TOTAL-ASSETS> 793,718
<CURRENT-LIABILITIES> 167,620
<BONDS> 430,220
0
0
<COMMON> 182
<OTHER-SE> 104,015
<TOTAL-LIABILITY-AND-EQUITY> 793,718
<SALES> 1,678,870
<TOTAL-REVENUES> 1,678,870
<CGS> 1,308,042
<TOTAL-COSTS> 1,308,042
<OTHER-EXPENSES> 305,650
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (41,280)
<INCOME-PRETAX> 24,750
<INCOME-TAX> (10,750)
<INCOME-CONTINUING> 14,000
<DISCONTINUED> 0
<EXTRAORDINARY> (3,584)
<CHANGES> 0
<NET-INCOME> 10,416
<EPS-BASIC> $0.45
<EPS-DILUTED> $0.41
</TABLE>
<PAGE>
EXHIBIT 99.1
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties not presently known to
us, or that we currently deem immaterial, may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
Because gasoline sales comprise a substantial portion of our revenues,
interruptions in the supply of gasoline and increases in the cost of gasoline
could adversely affect our business, financial condition or results of
operations
Gasoline profit margins have a significant impact on our earnings because
gasoline revenue has increased as a percentage of our total revenue over the
past three fiscal years. Gasoline revenue has averaged 52.8% of our revenues
during that period. Several factors beyond our control affect the volume of
gasoline we sell and the gasoline profit margins we achieve:
. the supply and demand for gasoline
. any volatility in the wholesale gasoline market
. the pricing policies of competitors in local markets
In particular, a material increase in the price of gasoline could adversely
affect demand for our gasoline.
In addition, sudden increases in the cost of gasoline could adversely
affect our business, financial condition or results of operations if gasoline
sales volume is reduced. We face this particular risk because:
. we typically have no more than a seven-day supply of gasoline
. our gasoline contracts do not guarantee an uninterrupted, unlimited
supply of gasoline in the event of a shortage
Reductions in volume of gasoline sold or our gasoline profit margins could
have a material adverse effect on our results of operations. In addition,
because gasoline sales generate customer traffic to our stores, decreases in
gasoline sales could impact merchandise sales.
If we are unable to pass along price increases of tobacco products to our
customers, our business, financial condition or results of operations could be
adversely affected because tobacco sales comprise an important part of our
revenues
Sales of tobacco products have averaged approximately 13.5% 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 1999 on tobacco
products increased approximately 33%. In November 1998, major cigarette
manufacturers that supply The Pantry increased prices by $0.45 per pack.
In September 1999, manufacturers raised cigarette prices an additional $0.10 per
pack.
<PAGE>
However, during fiscal 1999 as in years past, major cigarette manufacturers
offered monthly rebates to retailers and we passed along these rebates to our
customers. We cannot assure you that major cigarette manufacturers will continue
to offer these rebates or that any resulting increase in prices to our customers
will not have a material adverse effect on our cigarette sales and gross profit
dollars. A reduction in the amount of cigarettes sold by The Pantry could
adversely affect our business, financial condition and results of operations.
Our growth and operating results could suffer if we are unable to identify and
acquire suitable companies, obtain financing or integrate acquired stores or if
we discover previously undisclosed liabilities
An important part of The Pantry's growth strategy is to acquire other
convenience stores that complement our existing stores or broaden our geographic
presence. From April 1997 through December 1999, we acquired 1,036 convenience
stores in 16 major and numerous smaller transactions. We expect to continue to
acquire convenience stores as an element of our growth strategy. Acquisitions
involve risks that could cause our actual growth or operating results to differ
adversely compared to our expectations or the expectations of security analysts.
For example:
. We may not be able to identify suitable acquisition candidates or
acquire additional convenience stores on favorable terms. We compete
with others to acquire convenience stores. Competition may increase
and could result in decreased availability or increased price for
suitable acquisition candidates. It may be difficult to anticipate the
timing and availability of acquisition candidates.
. During the acquisition process we may fail or be unable to discover
some of the liabilities of companies or businesses which we acquire.
These liabilities may result from a prior owner's noncompliance with
applicable federal, state or local laws.
. We may not be able to obtain the necessary financing, on favorable
terms or at all, to finance any of our potential acquisitions.
. We may fail to successfully integrate or manage acquired convenience
stores.
. Acquired convenience stores may not perform as we expect or we may not
be able to obtain the cost savings and financial improvements we
anticipate.
Restrictive covenants in our debt agreements may restrict our ability to
implement our growth strategy, respond to changes in industry conditions, secure
additional financing and engage in acquisitions
Restrictive covenants contained in our existing bank credit facility and
indenture could limit our ability to finance future acquisitions, new locations
and other expansion of our operations. Credit facilities entered into in the
future likely will contain similar restrictive covenants. These covenants may
require us to achieve specific financial ratios and to obtain lender consent
prior to completing acquisitions. Any of these covenants could become more
restrictive in the future. Our ability to respond to changing business
conditions and to secure additional financing may be restricted by these
covenants. We also may be prevented from engaging in transactions including
acquisitions which are important to our growth strategy. Any breach of these
covenants could cause a default under our debt obligations and result in our
debt becoming immediately due and payable which would adversely affect our
business, financial condition and results of operations.
<PAGE>
We are growing rapidly and our failure to effectively manage our growth may
adversely affect our business, financial condition and results of operations
The Pantry is growing rapidly. We have grown from total revenue of $384.8
million in fiscal 1996 to $1.7 billion in fiscal 1999. Our ability to manage the
growth of our operations will require us to continue to improve our operational,
financial and human resource management information systems and our other
internal systems and controls. Failure to make these improvements may affect our
business, financial condition and results of operations.
The Pantry is in the process of upgrading its management information
systems. The new systems will fully automate our inventory and management
reporting processes. We expect that this upgrade will cost approximately $5.0
million to complete during fiscal year 2000. We expect that the upgrade will be
completed prior to the end of fiscal 2000. Any failure to complete our
transition to these new systems may inhibit our growth plans.
In addition, our growth will increase our need to attract, develop,
motivate and retain both our management and professional employees. The
inability of our management to manage our growth effectively, or the inability
of our employees to achieve anticipated performance or utilization levels, could
have a material adverse effect on our business, financial condition and results
of operations.
We depend on one principal wholesaler for the majority of our merchandise and
loss of this supplier could have an adverse impact on our cost of goods and
business, financial condition and results of operations
The Pantry purchases over 50% of its general merchandise, including most
tobacco products and grocery items, from a single wholesale grocer, McLane
Company, Inc., a wholly-owned subsidiary of Wal-Mart. In addition, McLane
supplies health and beauty aids, toys and seasonal items to all of our stores.
We have a contract with McLane until 2003, and we may not be able to renew the
contract upon expiration. We believe that our arrangements with vendors,
including McLane, have enabled us to decrease the operating expenses of acquired
companies after we complete an acquisition. Therefore, a change of suppliers
could have a material adverse affect on our cost of goods and business,
financial condition and results of operations.
Changes in traffic patterns and the type, number and location of competing
stores could result in the loss of customers and a corresponding decrease in
revenues for affected stores
The convenience store and retail gasoline industries are highly competitive
and we may not be able to compete successfully. Changes in traffic patterns and
the type, number and location of competing stores could result in the loss of
customers and a corresponding decrease in revenues for affected stores. Major
competitive factors include, among others, location, ease of access, gasoline
brands, pricing, product and service selections, customer service, store
appearance, cleanliness and safety. In addition, inflation, increased labor and
benefit costs and the lack of availability of experienced management and hourly
employees may adversely affect the profitability of the convenience store
industry. Any or all of these factors could create heavy competitive pressures
and have an adverse effect on our business, financial condition and results of
operations.
The Pantry competes with numerous other convenience stores and
supermarkets. In addition, our stores offering self-service gasoline compete
with gasoline service stations and, more recently, supermarkets. Our stores also
compete to some extent with supermarket chains, drug stores, fast food
<PAGE>
operations and other similar retail outlets. In some of our markets our
competitors have been in existence longer and have greater financial, marketing
and other resources than us. As a result, our competitors may be able to respond
better to changes in the economy and new opportunities in our industry.
Because substantially all of our stores are located in the southeastern United
States, our revenues could suffer if the economy of that region deteriorates
Substantially all of our stores are located in the Southeast region of the
United States. As a result, our results of operations are subject to general
economic conditions in that region. In the event of an economic downturn in the
Southeast, our business, financial condition and results of operations could be
adversely impacted.
Unfavorable weather conditions in the spring and summer months could adversely
affect our business, financial condition and results of operations
Weather conditions in our operating area impact our business, financial
condition and results of operations. During the spring and summer vacation
season, customers are more likely to purchase higher profit margin items at our
stores, such as fast foods, fountain drinks and other beverages, and more
gasoline at our gasoline locations. As a result, we typically generate higher
revenues and gross margins during warmer weather months in the Southeast, which
fall within our third and fourth quarters. If weather conditions are not
favorable during these periods, our operating results and cash flow from
operations could be adversely affected.
In addition, approximately 37% of our stores are concentrated in coastal
areas in the southeastern United States, and are therefore exposed to damages
associated with hurricanes, tropical storms and other weather conditions in
these areas.
If our history of losses continues, we may be unable to complete our growth
strategy and financing plans
We have experienced losses during two out of our most recent three fiscal
years. Our net losses were $1.0 million in fiscal 1997 and $3.3 million in
fiscal 1998. In fiscal 1999, we had net income of $10.4 million. We incurred
interest expense of $13.0 million in fiscal 1997, $28.9 million in fiscal 1998
and $41.3 million in fiscal 1999. We also incurred an extraordinary loss of $8.0
million in fiscal 1998 and $3.6 million (net of taxes) in fiscal 1999, in each
case related to the early extinguishment of debt.
If we incur net losses in future periods, we may not be able to implement
our growth strategy in accordance with our present plans. Continuation of our
net losses may also require us to secure additional financing sooner than
anticipated. Such financing may not be available in sufficient amounts, or on
terms acceptable to us, and may dilute existing shareholders. If we do achieve
profitability, we may not sustain or increase profitability in the future. This
may, in turn, cause our stock price to decline.
We are subject to extensive environmental regulation, and increased regulation
or our failure to comply with existing regulations could require substantial
capital expenditures or affect our business, financial condition and results of
operations
Our business is subject to extensive environmental requirements,
particularly environmental laws regulating underground storage tanks. Compliance
with these regulations may require significant capital expenditures.
<PAGE>
Federal, state and local regulations governing underground storage tanks
were phased in over a period ending in December 1998. These regulations required
us to make expenditures for compliance with corrosion protection and leak
detection requirements and required spill/overfill equipment by December 1998.
We are in material compliance with the December 1998 upgrade requirements.
Failure to comply with any environmental regulations or an increase in
regulations could affect our business, financial condition and results of
operations.
We may incur substantial liabilities for remediation of environmental
contamination at our locations
Under various federal, state and local laws, ordinances and regulations, we
may, as the owner or operator of our locations, be liable for the costs of
removal or remediation of contamination at these or our former locations,
whether or not we knew of, or were responsible for, the presence of such
contamination. The failure to properly remediate such contamination may subject
us to liability to third parties and may adversely affect our ability to sell or
rent such property or to borrow money using such property as collateral.
Additionally, persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs of removal or remediation of
such substances at sites where they are located, whether or not such site is
owned or operated by such person. Although we do not typically arrange for the
treatment or disposal of hazardous substances, we may be deemed to have arranged
for the disposal or treatment of hazardous or toxic substances and, therefore,
may be liable for removal or remediation costs, as well as other related costs,
including governmental fines, and injuries to persons, property and natural
resources.
We estimate that our future expenditures for remediation of current
locations net of reimbursements will be approximately $2.3 million for which
reserves have been established on our financial statements. In addition, The
Pantry estimates that up to $13.1 million may be expended for remediation on our
behalf by state trust funds established in our operating areas or other
responsible third parties including insurers. To the extent third parties do not
pay for remediation as we anticipate, we will be obligated to make these
payments, which could materially adversely affect our financial condition and
results of operations.
Reimbursements from state trust funds will be dependent on the continued
viability of these funds. The State of Florida trust fund ceased accepting new
claims for reimbursement for releases discovered after December 31, 1998.
However, the State of Florida trust fund will continue to reimburse claims for
remedial work performed on sites that were accepted into its program before
December 31, 1998. We have obtained private coverage for remediation and third
party claims arising out of releases reported after December 31, 1998. We meet
federal and Florida financial responsibility requirements with respect to
underground storage tanks in Florida through a combination of private insurance
and a letter of credit.
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.
<PAGE>
The large amount of our total outstanding debt and our obligation to service
that debt could divert necessary funds from operations, limit our ability to
obtain financing for future needs and expose us to interest rate risks
We are highly leveraged, which means that the amount of our outstanding
debt is large compared to the net book value of our assets, and have substantial
repayment obligations under our outstanding debt. As of September 30, 1999 we
had:
. Total consolidated debt including capital lease obligations of
approximately $455.6 million
. Shareholders' equity of approximately $104.2 million
As of September 30, 1999, our borrowing availability under our bank credit
facility was approximately $79 million.
Our bank credit facility contains numerous financial and operating
covenants that limit our ability, and the ability of most of our subsidiaries,
to engage in activities such as acquiring or disposing of assets, engaging in
mergers or reorganizations, making investments or capital expenditures and
paying dividends. These covenants require that we meet interest coverage, net
worth and leverage tests. The indenture governing our senior subordinated notes
and our bank credit facility permit us and our subsidiaries to incur or
guarantee additional debt, subject to limitations.
Our level of debt and the limitations imposed on us by our debt agreements
could have other important consequences to our shareholders, including the
following:
. We will have to use a portion of our cash flow from operations for
debt service, rather than for our operations or to implement our
growth strategy
. We may not be able to obtain additional debt financing for future
working capital, capital expenditures, acquisitions or other corporate
purposes
. We are vulnerable to increases in interest rates because the debt
under our bank credit facility is at a variable interest rate
Violations of or changes to government regulations could adversely impact wage
rates and other aspects of our business
Convenience stores, including stores that sell tobacco and alcohol
products, are subject to federal and state laws governing such matters as wage
rates, overtime, working conditions, citizenship requirements and alcohol and
tobacco sales. At the federal level, there are proposals under consideration
from time to time to increase minimum wage rates and to introduce a system of
mandated health insurance. A violation or change of these laws, or adoption of
any these proposals, could have a material adverse effect on our business,
financial condition and results of operations.
In 1999, the South Carolina legislature passed a law which makes it illegal
to own or operate video poker machines effective July 1, 2000 unless approved by
a statewide referendum. On October 14, 1999, the South Carolina Supreme Court
ruled that the referendum called for was unconstitutional. After invalidating
the referendum, the South Carolina Supreme Court upheld the remainder of the
law. Accordingly, effective July 1, 2000, video poker will be banned in South
Carolina, which could adversely impact our results of operations.
<PAGE>
The interests of Freeman Spogli & Co., our controlling stockholder, may conflict
with our interests and the interests of our other stockholders
As a result of its stock ownership and board representation, Freeman Spogli
will be in a position to affect our corporate actions such as mergers or
takeover attempts in a manner that could conflict with the interests of our
other stockholders. Freeman Spogli owns 9,769,524 shares of common stock and
warrants to purchase 2,346,000 shares of common stock as of December 16, 1999.
Based on its ownership of common stock and warrants, Freeman Spogli beneficially
owns 59.2% of our common stock. In addition, four of the seven members of our
board of directors are representatives of Freeman Spogli.
Because we depend on our senior management's experience and knowledge of our
industry, we would be materially affected if senior management left The Pantry
We are dependent on the continued efforts of our senior management team,
including our President and Chief Executive Officer, Peter Sodini. Mr. Sodini's
employment contract terminates in September 2001. If, for any reason, our senior
executives do not continue to be active in management, our operations could be
materially adversely affected. We cannot assure you that we will be able to
attract and retain additional qualified senior personnel as needed in the
future. We do not maintain key personnel life insurance on our senior executives
and other key employees.
Future sales of additional shares into the market may depress the market price
of the common stock
If our existing stockholders sell shares of common stock in the public
market, including shares issued upon the exercise of outstanding options and
warrants, or if the market perceives such sales could occur, the market price of
our common stock could fall. These sales also might make it more difficult for
us to sell equity or equity-related securities in the future at a time and price
that we deem appropriate or to use equity as consideration for future
acquisitions.
We have 18,111,474 outstanding shares of common stock. Of these shares,
6,250,000 shares are freely tradable. Of the remaining shares, 11,647,962 shares
are held by affiliated investment funds of Freeman Spogli and affiliates of
Chase Manhattan Capital Corporation, who may be deemed to be affiliates of The
Pantry. Pursuant to Rule 144 under the Securities Act of 1993, as amended,
affiliates of The Pantry can resell up to 1% of the aggregate outstanding common
stock during any three month period. In addition, Freeman Spogli and Chase
Capital have registration rights allowing them to require The Pantry to register
the resale of their shares. If Freeman Spogli and Chase Capital exercise their
registration rights and sell shares of common stock in the public market, the
market price of our common stock could fall.
Our charter includes provisions which may have the effect of preventing or
hindering a change in control and adversely affecting the market price of our
common stock
Our certificate of incorporation gives our board of directors the authority
to issue up to five million shares of preferred stock and to determine the
rights and preferences of the preferred stock without obtaining shareholder
approval. The existence of this preferred stock could make more difficult or
discourage an attempt to obtain control of The Pantry by means of a tender
offer, merger, proxy contest or otherwise. Furthermore, this preferred stock
could be issued with other rights, including economic rights, senior to our
common stock, and, therefore, issuance of the preferred stock could have an
adverse effect on the market price of our common stock. We have no present plans
to issue any shares of our preferred stock.
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Other provisions of our certificate of incorporation and bylaws and of
Delaware law could make it more difficult for a third party to acquire us or
hinder a change in management even if doing so would be beneficial to our
shareholders. These governance provisions could hurt the market price of our
common stock.
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. These measures may be adopted without any further vote or action
by our shareholders.
The failure of The Pantry, third party vendors or acquired entities to be Year
2000 compliant could adversely impact our operations
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
We use a combination of hardware devices run by computers at our support
centers and retail locations to process transactions and other data which are
essential to our business operations. Because of the overall complexity of the
Year 2000 issue and the uncertainty surrounding third party responses to Year
2000 issues, we may experience material unanticipated negative consequences
and/or material costs caused by undetected errors or defects in our systems,
systems of acquired companies or third party systems or by our failure to
adequately prepare for the results of such errors or defects, including costs of
related litigation.
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.
