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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K/A
AMENDMENT NO. 1 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 24, 1998
COMMISSION FILE NUMBER 33-72574
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THE PANTRY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 56-1574463
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
P.O. BOX 1410
1801 DOUGLAS DRIVE
SANFORD, NC
27331-1410
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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:
NONE
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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 the 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]
As of December 21, 1998, there were issued and outstanding 232,701 shares
of the registrant's Common Stock. The registrant's Common Stock is not traded
in a public market.
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THE PANTRY, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K/A
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Page
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Part I
Item 1: Business...................................................... 1
Item 2: Properties.................................................... 10
Part II
Item 6: Selected Financial Data....................................... 12
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 14
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.... 26
Item 8: Consolidated Financial Statements and Supplementary Data...... 27
Part III
Item 10: Directors and Executive Officers of the Registrant............ 72
Item 11: Executive Compensation........................................ 74
Item 12: Security Ownership of Certain Beneficial Owners and
Management.................................................... 79
Item 13: Certain Relationships and Related Transactions................ 81
</TABLE>
<PAGE>
PART I
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act"), and Section 21E of the Securities Exchange Act of
1934, as amended. All statements other than statements of historical fact
included in this Annual Report on Form 10-K, including without limitation,
certain statements under "Item 1. Business," "Item 2. Properties," "Item 3.
Legal Proceedings" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation" include forward-looking
information and may reflect certain judgements by management. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurances that such expectations
will prove to be correct. Actual results could differ materially from those
projected in such forward-looking statements and are subject to risks
including, but not limited to, those identified in the Company's Registration
Statement on Form S-4, as amended, effective January 8, 1998.
Item 1. Business
General
The Pantry, Inc. (the "Company" or "The Pantry"), a privately held company
incorporated in the State of Delaware, is a leading operator of convenience
stores in the Southeast. As of September 24, 1998, the Company operated 954
convenience stores under the names "The Pantry(R)," "Lil'Champ," "Quick
Stop(TM)," "QS," "Express Stop(TM)," "Dash N(TM)," "Smokers Express" and
"Sprint(TM)" located throughout North and South Carolina, Florida, western
Kentucky, Tennessee, Virginia and southern Indiana. The Company's stores offer
a broad selection of merchandise and services designed to appeal to the
convenience needs of its 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. In its
Kentucky, Virginia and Indiana stores, the Company also sells lottery
products. In addition, self-service gasoline is sold at 884 Pantry stores, 667
of which sell gasoline under brand names including Amoco, British Petroleum
("BP"), Chevron, Exxon, Shell and Texaco. Since fiscal 1994, merchandise sales
(including commissions from services) and gasoline sales have each averaged
approximately 50% of total revenues.
Prior to November 2, 1993, The Pantry was a wholly-owned subsidiary of
Montrose Pantry Acquisition Corporation ("MPAC"), an entity formed to effect
the 1987 leveraged buy-out of The Pantry. On November 2, 1993, The Pantry was
merged into MPAC and MPAC's name was changed to The Pantry. MPAC had no assets
or operations other than its investment in The Pantry.
On November 30, 1995, Freeman Spogli & Co. Incorporated, through its
affiliates, FS Equity Partners III, L.P., a Delaware limited partnership
("FSEP III") and FS Equity Partners International, L.P., a Delaware limited
partnership ("FSEP International," collectively with FSEP III, "the FS Group")
acquired a 39.9% interest in the Company and Chase Manhattan Capital
Corporation ("Chase") acquired a 12.0% interest in the Company through a
series of transactions which included the purchase of Common Stock from
certain shareholders and the purchase of newly issued Common and Preferred
Stock. The FS Group and Chase subsequently acquired an additional 37.0% and
11.1% interest, respectively, on August 19, 1996 through the purchase of
Common and Preferred Stock from certain other shareholders. 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 24, 1998, the FS Group and Chase and its
affiliates owned approximately 78.8% and 17.2%, respectively, of the
outstanding shares of the Company's equity securities. The remaining 4.0% is
owned by certain of the Company's directors and executive management.
For a further discussion of the ownership change see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources," "Item 8. Consolidated Financial Statements
and Supplementary Data--Notes to Consolidated Financial Statements--Note 13.
Preferred Stock" and "Item 12. Security Ownership of Certain Beneficial Owners
and Management."
1
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The Lil' Champ Acquisition
On October 23, 1997, The Pantry acquired all of the outstanding common
stock of Lil' Champ Food Stores, Inc. ("Lil' Champ") from Docks U.S.A., Inc.
for $125.7 million in cash and repaid $10.7 million in outstanding
indebtedness of Lil' Champ (the "Lil' Champ Acquisition"). The acquisition was
funded by a combination of the proceeds of the sale of Senior Subordinated
Notes (as defined herein), cash on hand and an equity investment of $32.4
million by the FS Group, Chase and a member of management.
On October 23, 1997 in connection with the Lil' Champ Acquisition, the
Company issued and sold 10 1/4% Senior Subordinated Notes due October 15, 2007
in the aggregate principal amount of $200.0 million (the "Senior Subordinated
Notes"). The Senior Subordinated Notes were sold to CIBC Wood Gundy Securities
Corp. and First Union Capital Markets Corp. (the "Initial Purchasers") in a
private placement. The Initial Purchasers subsequently resold the Senior
Subordinated Notes to (i) "qualified institutional buyers" (in reliance on
Rule 144A under the Securities Act) and (ii) non-U.S. persons outside the
United States (in reliance on Regulation S under the Securities Act). The
proceeds of the Senior Subordinated Notes were used primarily to acquire Lil'
Champ and to finance a tender offer for the purchase of $51.0 million of the
Company's outstanding 12% Senior Notes due 2000 (the "Senior Notes"). In
connection with the issuance and sale of the Senior Subordinated Notes, the
Company and the Initial Purchasers entered into a registration rights
agreement pursuant to which the Company agreed to use its best efforts to
cause a registration statement to become effective under the Securities Act
with respect to the exchange by the Company of its 10 1/4% Senior Subordinated
Notes (the "Exchange Notes"), for the outstanding Senior Subordinated Notes.
The Company complied by filing a registration statement on Form S-4 which
became effective, as amended, on January 8, 1998.
In addition, the Company entered into a new bank credit facility which
consists of a $45.0 million revolving credit facility and a $30.0 million
acquisition facility. The bank credit facility was amended in July 1998 to
increase the acquisition facility to $85.0 million (as amended, the "Bank
Credit Facility"). The Bank Credit Facility is available for (i) working
capital financing and general corporate purposes of the Company, (ii) issuing
commercial and standby letters of credit and (iii) acquisitions.
For a further discussion of Lil' Champ and related transactions see "Item
5. Market for Registrants Common Equity and Related Stockholder Matters,"
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Item 8.
Consolidated Financial Statements and Supplementary Data--Notes to
Consolidated Financial Statements."
Fiscal Year 1998 Acquisitions, Store Openings, and Dispositions
In seven separate transactions during fiscal year 1998, the Company
acquired 154 convenience stores located in North Carolina, South Carolina,
Florida and Virginia. These acquisitions were primarily funded from borrowings
under the acquisition facility contained in the Company's New Credit Facility
(the "Acquisition Facility"), an equity investment (see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"),
and cash on hand. In addition, the Company opened six new stores located in
major cities and resort areas of North and South Carolina.
On September 1, 1998, the Company sold 100% of its convenience store
operations and idle property located in eastern Georgia and acquired four
convenience stores located in Florida. These related transactions effected
management's intention to divest itself of certain operations associated with
the Lil' Champ Acquisition. The net proceeds of the disposition and
acquisition were approximately $2.0 million.
2
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SUBSEQUENT EVENTS
In two separate transactions subsequent to fiscal year end 1998, the
Company acquired 32 stores located in North and South Carolina. These
transactions were primarily funded from borrowings under the Company's
Acquisition Facility and cash on hand. In addition, subsequent to fiscal year
end the Company signed a purchase agreement to acquire approximately 125
convenience stores in its existing market. There can be no assurances that
these transactions will be consummated.
OPERATIONS
For a discussion of fiscal year 1998 operating results see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In fiscal year 1998, the Company acquired or opened 653 convenience stores
located in Florida, North Carolina, South Carolina, Georgia and Virginia. In
addition, the Company closed 41 convenience stores and sold 48 convenience
stores representing 100% of its convenience store operations in Georgia. The
net increase in store count and timing of these acquisitions materially impact
the Company's results from operations and comparisons to prior periods.
Specific strategies implemented by the Company's senior management team
include 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 24, 1998, The Pantry's
merchandise sales (including commissions from services) were 48.2% of total
revenues. The following table highlights certain information with respect to
the Company's merchandise sales for the last two fiscal years:
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FISCAL YEAR ENDED
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SEPT. 25, SEPT. 24,
1997 1998
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Merchandise sales (in millions)......................... $202.4 $460.8
Average merchandise sales per store (in thousands)...... $525.8 $533.3
Comparable store merchadise sales....................... 8.5% 5.3%
Merchandise gross margins (after purchase rebates, mark-
downs, inventory spoilage and inventory shrink)........ 34.4% 34.0%
</TABLE>
The Company's stores generally carry approximately 4,750 stock keeping
units and 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 Company has also developed an in-house food service
program featuring breakfast biscuits, fried chicken, deli and other hot food
offerings. The Company also operates approximately 66 locations offering quick
service restaurants inside our stores with nationally branded food franchises
such as Subway, Church's, Taco Bell and Hardee's. The Company's merchandise
mix is influenced by the mix of the stores it acquires.
3
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The Company does not record merchandise sales by detailed categories.
However, based upon its merchandise purchases, the Company estimates sales by
category for the last two fiscal years as follows:
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FISCAL YEAR ENDED
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SEPT. 25, SEPT. 24,
1997 1998
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Tobacco products......................................... 26.6% 27.6%
Beer..................................................... 15.1 17.2
Packaged beverages....................................... 17.0 16.0
Self-service fast foods and beverages ................... 7.1 6.5
General merchandise/health and beauty care............... 6.3 6.4
Candy.................................................... 5.0 4.6
Salty snacks............................................. 4.4 4.5
Newspapers and magazines................................. 5.2 3.8
Dairy products........................................... 2.9 3.5
Bread/cake............................................... 2.2 2.1
Grocery and other........................................ 8.2 7.8
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Total.................................................... 100% 100%
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</TABLE>
The Company purchases over 50% of its general merchandise (including most
tobacco products and grocery items) from a single wholesale grocer, McLane
Company, Inc. ("McLane"). In addition, McLane supplies health and beauty aids,
toys, and seasonal items to all stores. The Company's arrangement with McLane
is governed by a distribution service agreement, pursuant to which the Company
purchases all of its requirements of wholesale food, non-food and general
merchandise products. The products are purchased at McLane's cost plus an
agreed upon percentage, reduced by any promotional allowances offered by
manufacturers and volume rebates offered by McLane. In addition, the Company
receives per store annual service allowances from McLane which are amortized
over the remaining term of the agreement, which is four years. McLane may
terminate the agreement upon a default in payment or if the Company becomes
insolvent. However, there are adequate alternative sources available to
purchase this merchandise should a change from the current wholesaler become
necessary or desirable. The Company purchases the balance of its merchandise
from a variety of other distributors under contract terms of up to four years.
With a number of these vendors the Company does not have contracts.
The Company's commission revenue is derived from ATMs, lottery ticket
sales, video gaming, money orders, public telephones and other ancillary
product and service offerings. This category is an important aspect of the
Company's merchandise operations because it attracts new customers as well as
provides additional services for existing customers.
Cigarette prices increased 15.4% during fiscal 1998. The most recent
increase occurred on November 23, 1998, when major cigarette manufacturers
increased prices by $0.45 per pack. However, during December 1998, major
cigarette manufacturers offered a rebate to retailers of $0.45 per pack to
offset the November 1998 price increase. The Company passed along this rebate
to its customers. There can be no assurance that major cigarette manufacturers
will continue to offer these rebates or that any resulting increase in prices
to the Company's customers will not have a material adverse effect on the
Company's cigarette sales and gross profit dollars. Despite increases in
price, which have been passed on for the most part to the Company's customers,
the Company's cigarette unit sales and gross profit dollars associated with
such sales have increased. The Company believes that convenience stores in
general, and The Pantry in particular, will benefit as customers shift their
cigarette buying patterns from less frequent carton purchases to more frequent
pack purchases and as other retailers stop selling cigarettes. The Company
expects that cigarette cost increases will reduce its gross margin percentage
for the cigarette category, but will not have a material impact on the
cigarette category gross profit dollars. Although it is too early to determine
the potential impact on cigarette unit volume, management believes it can pass
along these and other cost increases to its customers over the long-term and,
therefore, does not expect cigarette inflation to have a significant impact on
the results of operations or financial condition of the Company in the
foreseeable future.
4
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Gasoline Operations. For the year ended September 24, 1998, the Company's
revenues from sales of gasoline were 51.8% of total revenues. The following
table highlights certain information regarding the Company's gasoline
operations for the last two fiscal years:
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Fiscal Year Ended
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Sept. 25, Sept. 24,
1997 1998
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Gasoline sales ($ in millions)......................... $220.2 $510.0
Gasoline gallons sold (in millions).................... 179.4 466.8
Average gallons sold per store (in thousands).......... 501.2 603.9
Average retail price per gallon........................ $ 1.23 $ 1.09
Average gross profit per gallon (in cents)............. $0.128 $0.134
Locations selling gasoline............................. 364 884
Number of Company-owned branded locations.............. 300 667
Number of Company-owned unbranded locations............ 35 192
Number of third-party locations (branded & unbranded).. 29 25
Number of locations with pay-at-the-pump credit card
readers ("CRINDs").................................... 125 379
Number of locations with multi-product dispensers
("MPDs").............................................. 142 697
</TABLE>
The increase in gross profit per gallon in fiscal 1998 was primarily due to
the addition of Lil' Champ and the relatively higher gasoline margins in
Florida. Although gasoline gross margins in any particular location or market
may vary from time to time, since fiscal 1997 the Company's gross margins on a
consolidated basis have been relatively stable due to the Company's size and
geographic diversity. Historically, the Company has not entered into gasoline
futures contracts that may lock in gasoline prices for a period of time or
reduce the volatility of the Company's gasoline costs.
Of the 884 Company stores that sold gasoline as of September 24, 1998, 667
(including third-party locations selling under these brands) or 76% were
branded under the Amoco, Ashland, British Petroleum (BP), Chevron, Citgo,
Exxon, Shell or Texaco brand names. The Company operates a mix of branded and
unbranded locations and evaluates its gasoline offering on a local market
level.
As of September 24, 1998, the Company owned the gasoline operations at 859
locations and at 25 locations had gasoline operations that were operated under
third-party arrangements. At company-operated locations, the Company owns the
gasoline storage tanks, pumping equipment and canopies, and retains 100% of
the gross profit received from gasoline sales. In fiscal 1998, 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 the Company approximately 50% of the gross profit. In fiscal 1998,
third-party locations accounted for approximately 2% of the total gallons sold
by the Company. The Company has been phasing out third-party arrangements
because its owned operations are more profitable.
The Company purchases its gasoline from major oil companies and independent
refiners. As of September 24, 1999, 76% of the Company's locations selling
fuel sold under a major oil company brand name. The Company's arrangements
with major oil companies are governed by supply agreements pursuant to which
the Company purchases gasoline and diesel fuel for its branded locations. The
fuel is purchased at the stated rack price, or market price, quoted at each
terminal. The terms of these supply agreements range from seven to thirteen
years and generally contain minimum annual purchase requirements as well as
provisions for various payments to the Company based on volume of purchases
and vendor allowances. The Company purchases the balance of its gasoline from
a variety of independent fuel distributors. There are 20 gasoline terminals in
the Company's operating areas, enabling the Company to choose from more than
one distribution point for most of its stores. The Company's inventories of
gasoline (both branded and unbranded) turn approximately every nine days.
5
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Store Locations. As of September 24, 1998, the Company operated 953
convenience stores located primarily in suburban areas of rapidly growing
markets, coastal/resort areas and smaller towns. Substantially all of the
Company's 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 the Company's stores at September 24,
1998:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
STATE STORES TOTAL STORES
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<S> <C> <C>
Florida............................................... 439 46.1%
North Carolina........................................ 264 27.7
South Carolina........................................ 155 16.3
Kentucky.............................................. 46 4.8
Indiana............................................... 20 2.1
Tennessee............................................. 19 2.0
Virginia.............................................. 10 1.0
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Total............................................... 953 100%
=== ====
</TABLE>
Since fiscal 1996, the Company has developed a limited number of new stores
and closed or sold a substantial number of underperforming stores. Beginning
in 1997, the Company turned its attention from developing new stores to
commencing its acquisition program. The following table summarizes these
activities:
<TABLE>
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FISCAL YEAR ENDED
---------------------------------------
SEPT. 28, SEPT. 26, SEPT. 25, SEPT. 24,
1995 1996 1997 1998
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<S> <C> <C> <C> <C>
Number of stores at beginning of
period........................... 406 403 379 390
Opened or acquired................ 10 4 36 653
Closed or sold.................... (13) (28) (25) (89)
--- --- --- ---
Number of stores at end of
period........................... 403 379 390 954
=== === === ===
</TABLE>
The Company continually evaluates the performance of each of its stores to
determine whether any particular store should be closed or sold based on its
sales trends and profitability. In deciding to close or sell an
underperforming store, the Company considers such factors as store location,
gasoline volumes and margins, merchandise sales and gross profits, lease term,
rental rate and other obligations and the store's contribution to corporate
overhead. Although closing or selling underperforming stores reduces revenues,
the Company's operating results typically improve since these stores were
generally unprofitable.
Acquisitions. In eight separate transactions during fiscal year 1998, the
Company acquired 643 convenience stores located in Florida, North Carolina,
South Carolina, Georgia and Virginia. With these acquisitions, the Company
expanded its market area to the southeastern states of Florida, Georgia and
Virginia and, together, has created the third largest independent convenience
store chain in the United States (based on number of stores as of September
24, 1998) with 954 stores located primarily in the Southeast. The Company
focuses on acquiring chains within its existing and contiguous market areas.
In evaluating potential acquisition candidates, the Company considers 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 the Company's operating strategy and financial impact.
Site Selection. In opening new stores in recent years, the Company has
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, the Company
uses an evaluation process designed to enhance its return on investment by
focusing on market area demographics, population density, traffic volume,
visibility, ingress and egress and economic development in the market area.
The Company also reviews the location of competitive stores and customer
activity at those stores.
6
<PAGE>
Upgrading of Store Facilities and Equipment. During fiscal 1997 and fiscal
1998, the Company upgraded the facilities and equipment at many of its
existing and acquired store locations, including gasoline equipment upgrades,
at a cost of approximately $8.7 million and $34.0 million, respectively.
During this period, $11.2 million was reimbursed through long-term contracts
with the Company's gasoline suppliers. The Company's store renovation program
is an integral part of the Company's operating strategy. The Company
continually evaluates the performance of individual stores and periodically
upgrades store facilities and equipment based on sales volumes, the lease term
for leased locations and management's assessment of the potential return on
investment. Typical upgrades for many stores include improvements to interior
fixtures and equipment for self-service food and beverages, interior lighting,
in-store restrooms for customers and exterior lighting and signage. The
upgrading program for the Company's gasoline operations includes the addition
of automated gasoline dispensing and payment systems, such as MPDs and CRINDs,
to enhance customer convenience and service and the installation of UST (as
defined herein) leak detection and other equipment in accordance with
applicable Environmental Protection Agency ("EPA") environmental regulations.
For further discussion of EPA and other environmental regulations see "Item 1.
Business--Government Regulation and Environmental Matters" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Store Operations. Each convenience store is staffed with a manager, an
assistant manager and sales associates who work various shifts to enable most
stores to remain open 24 hours, seven days a week. The Company's field
operations organization is comprised of a network of regional, divisional and
district managers who, with the Company's corporate management, evaluate store
operations. District managers typically oversee from eight to ten stores. The
Company also monitors 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 the Company's stores in particular.
The Company competes with numerous other convenience stores and
supermarkets. In addition, the Company's stores offering self-service gasoline
compete with gasoline service stations and, more recently, super-markets. The
Company's stores also compete to some extent with supermarket chains, drug
stores, fast food operations and other similar retail outlets. In some of the
Company's markets, its competitors have been in existence longer and have
greater financial, marketing and other resources than the Company.
TECHNOLOGY AND STORE AUTOMATION
The Company utilizes information systems and application programs for its
core business systems, such as accounting, financial reporting and payroll.
Within the past two years, the Company installed newer and more reliable mid-
range system hardware to support these applications and its continued growth.
These systems continue to be enhanced through modification and redesign in
order to meet management reporting requirements and operational needs.
Over the last year, the Company has expanded its computer system
infrastructure with the addition of new local area network systems, improved
end user computer hardware and software and replacement of older point of sale
systems. This has helped to streamline operations and improve productivity at
the Company's corporate office, among its field management staff and at its
stores.
7
<PAGE>
In addition, these new and expanding systems have laid the foundation for a
strategic information systems initiative that will bring a new store and
corporate accounting and management reporting system. The Company selected and
began implementation of a leading convenience store systems package, Resource
Management Series from Professional Datasolutions, Inc., a wholly-owned
subsidiary of McLane.
During fiscal 1999, the Resource Management Series will be implemented in
phases. The Company will continue to accelerate the store level implementation
that began with all of the stores it acquired in 1998. The Company expects to
have the entire store base fully integrated by the end of fiscal 2000. To
complete this program, the Company plans to spend $5.8 million in fiscal 1999
and $3.0 million in fiscal 2000. In addition to facilitating integration of
future acquisitions, these upgrades will enable the Company 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
The Company has registered or applied for registration of a variety of
trade names, service marks and trademarks for use in its business, including
The Pantry(R), Worth(R), Bean Street Coffee Company(TM), Bean Street
Market(TM), Big Chill(R), Lil' Champ(R), Quick Stop(TM), Zip Mart(TM), Express
Stop, Sprint(TM) and Smokers Express(TM). The Company regards its intellectual
property as having significant value and as being an important factor in the
marketing of the Company and its convenience stores. The Company is not aware
of any facts which would negatively impact its continuing use of any of its
trade names, service marks or trademarks.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
Many aspects of the Company's operations are subject to regulation under
federal, state and local laws. The most significant of the regulations that
impact all aspects of the Company's operations are described below.
Storage and Sale of Gasoline. The Company is subject to various federal,
state and local environmental laws. Federal, state, and local regulatory
agencies have adopted regulations governing underground storage tanks ("USTs")
that require the Company to make certain expenditures for compliance. In
particular, at the federal level, the Resource Conservation and Recovery Act
of 1976, as amended, requires the EPA to establish a comprehensive regulatory
program for the detection, prevention and cleanup of leaking USTs.
In addition to the technical standards, the Company is required by federal
and state regulations to maintain evidence of financial responsibility for
taking corrective action and compensating third parties in the event of a
release from its UST systems. In order to comply with the applicable
requirements, The Pantry maintains letters of credit in the aggregate amount
of $2.3 million issued by a commercial bank in favor of state environmental
agencies in the states of North Carolina, South Carolina, Virginia, Tennessee,
Kentucky and Indiana and relies upon the reimbursement provisions of
applicable state trust funds. In Florida, the Company meets such financial
responsibility requirements by state trust fund coverage through December 31,
1998 and will meet such requirements thereafter through private commercial
liability insurance and by qualified self-insurance. The Company has sold all
of its Georgia stores but has retained responsibility for pre-closing
environmental remediation at certain locations. The cost of such remediation
and third party claims should be covered by the state trust fund, subject to
applicable deductibles and caps on reimbursement.
Regulations enacted by the EPA in 1988 established requirements for (i)
installing UST systems; (ii) upgrading UST systems; (iii) taking corrective
action in response to releases; (iv) closing UST systems; (v) keeping
appropriate records; and (vi) maintaining evidence of financial responsibility
for taking corrective action and compensating third parties for bodily injury
and property damage resulting from releases. These regulations permit states
to develop, administer and enforce their own regulatory programs,
incorporating requirements which are at least as stringent as the federal
standards. The Florida rules for 1998 upgrades are
8
<PAGE>
more stringent than the 1988 EPA regulations. The Pantry facilities in Florida
all meet or exceed such rules. The following is an overview of the
requirements imposed by these regulations:
Leak Detection. The Pantry utilizes several approved leak detection methods
for all Pantry-owned UST systems. Daily and monthly inventory reconciliations
are completed at the store level and at the corporate support center. The
daily and monthly reconciliation data is also analyzed using statistical
inventory reconciliation which compares the reported volume of gasoline
purchased and sold with the capacity of each UST system and highlights
discrepancies. The Company believes it is in material compliance with the leak
detection requirements applicable to its USTs.
Corrosion Protection. The 1988 EPA regulations require that all UST systems
have corrosion protection by December 22, 1998. The Company began installing
non-corrosive fiberglass tanks and piping in 1982. All of the UST systems at
Pantry stores' are in material compliance with these 1988 EPA regulations.
Overfill/Spill Prevention. The 1988 EPA regulations require that all sites
have overfill/spill prevention devices by December 22, 1998. All Company-owned
UST systems are in material compliance with these 1988 EPA regulations.
State Trust Funds. All states in which the Company operates UST systems
have established trust funds for the sharing, recovering and reimbursing of
certain cleanup costs and liabilities incurred as a result of releases from
UST systems. These trust funds, which essentially provide insurance coverage
for the cleanup of environmental damages caused by the operation of UST
systems, are funded by a UST registration fee and a tax on the wholesale
purchase of motor fuels within each state. The Company has paid UST
registration fees and gasoline taxes to each state where it operates to
participate in these trust programs and the Company has filed claims and
received reimbursement in North Carolina, South Carolina, Kentucky, Indiana,
Georgia, Florida and Tennessee. The coverage afforded by each state fund
varies but generally provides from $150,000 to $1.0 million per site for the
cleanup of environmental contamination, and most provide coverage for third-
party liabilities. Costs for which the Company does not receive reimbursement
include but are not limited to: (i) the per-site deductible; (ii) costs
incurred in connection with releases occurring or reported to trust funds
prior to their inception; (iii) removal and disposal of UST systems; and (iv)
costs incurred in connection with sites otherwise ineligible for reimbursement
from the trust funds. The trust funds require the Company to pay deductibles
ranging from $10,000 to $100,000 per occurrence depending on the upgrade
status of its UST system, the date the release is discovered/reported and the
type of cost for which reimbursement is sought. The Florida trust fund will
not cover releases first reported after December 31, 1998. The Company will
obtain private coverage for remediation and third party claims arising out of
releases reported after December 31, 1998. In addition to up to $4.5 million
to be spent by the Company for remediation, the Company estimates that up to
$12.7 million may be expended for remediation on behalf of the Company by
state trust funds established in the Company's operating areas or other
responsible third parties (including insurers). To the extent such third
parties do not pay for remediation as anticipated by the Company, the Company
will be obligated to make such payments, which could materially adversely
affect the Company's financial condition and results of operations.
Reimbursements from state trust funds will be dependent upon the continued
maintenance 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 and to impose various restrictions
and sanctions. In many states, retailers of alcoholic beverages have been held
responsible for damages caused by intoxicated individuals who purchased
alcoholic beverages from them. While the potential exposure to the Company for
damage claims as a seller of alcoholic beverages is substantial, the Company
has adopted procedures intended to minimize such exposure. In addition, the
Company maintains general liability insurance which may mitigate the cost of
any liability.
Video Poker Licenses. Stores in South Carolina operating video poker
machines are subject to local and state regulations regarding the operation
and ownership of video poker machines. Furthermore, state and local
9
<PAGE>
laws limit the manner in which video poker machines may be operated. In
addition, state and local regulatory agencies have the authority to approve,
revoke, suspend or deny applications for, and renewal of, the applicable
licenses for video poker machines. There are numerous legislative proposals
pending in the South Carolina legislature relating to video gaming, including
initiatives to impose additional significant taxes or regulatory measures as
well as initiatives to ban video gaming. Enactment of some of these
initiatives could adversely impact the Company's results of operations.
Store Operations. The Company's 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.
The Company's 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 the
Company's results of operations.
Employees
As of September 24, 1998, the Company employed approximately 4,548 full-
time and 1,606 part-time employees. Fewer part-time employees are employed
during the winter months than during the peak spring and summer seasons. Of
the Company's employees, approximately 5,837 are employed in the Company's
stores and 317 are corporate and field management personnel. The Company has
not been adversely impacted by recent increases in the minimum wage because
the majority of its employees are paid more than the minimum wage. None of the
Company's employees are represented by unions. The Company considers its
employee relations to be good.
Item 2. Properties
The Company owns the real property at 323 Company stores and leases the
real property at 630 Company stores. Management believes that none of these
leases is individually material to the Company. Most of the Company's leases
are net leases requiring the Company to pay taxes, insurance and maintenance
costs. The aggregate rental paid for fiscal 1998 was $23.6 million. The
following table lists the expiration dates of the Company's leases, including
renewal options:
<TABLE>
<CAPTION>
Number
Lease Expiration of Stores
---------------- ---------
<S> <C>
1999-2001....................................................... 46
2002-2008....................................................... 145
2009-2013....................................................... 119
2014-2018....................................................... 72
2019-2023....................................................... 30
2024-2028....................................................... 61
2029 and thereafter............................................. 298
</TABLE>
Of the Company's leases that expire prior to the end of 2003, management
anticipates that it will be able to negotiate acceptable extensions of the
leases for those locations that it intends to continue operating. Beyond
payment of the Company's contractual lease obligations through the end of the
term, early termination of these leases would result in no significant penalty
to the Company.
When appropriate, the Company has 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
10
<PAGE>
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.
The Company owns its corporate headquarters, a three-story, 51,000 square
foot office building in Sanford, North Carolina and leases its Lil'Champ
corporate headquarters in Jacksonville, Florida. Management believes that the
Company's headquarters are adequate for its present and foreseeable needs.
11
<PAGE>
PART II
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, the Company's 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. (Dollars are in millions except per store and per gallon data.)
<TABLE>
<CAPTION>
September 29, September 28, September 26, September 25, September 24,
1994 1995 1996 1997 1998(h)
------------- ------------- ------------- ------------- -------------
(52 weeks) (52 weeks) (52 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Merchandise sales...... $189.2 $187.4 $188.1 $202.4 $ 460.8
Gasoline sales......... 175.1 187.2 192.7 220.2 510.0
Commissions............ 4.5 4.5 4.0 4.8 14.1
------ ------ ------ ------ -------
Total revenues....... 368.8 379.1 384.8 427.4 984.9
Cost of Sales:
Merchandise............ 123.1 122.0 126.0 132.8 304.0
Gasoline............... 153.5 161.2 167.6 197.3 447.6
------ ------ ------ ------ -------
Gross profit......... 92.2 95.9 91.2 97.3 233.4
Store operating
expense................ 53.2 56.2 57.8 60.2 140.1
General and
administrative
expenses............... 17.9 18.2 17.8 16.8 32.8
Unusual charges......... -- -- 4.6 -- 1.0
Depreciation and
amortization........... 10.2 11.5 9.2 9.5 27.6
------ ------ ------ ------ -------
Income from operations.. 10.9 10.1 1.9 10.8 31.8
Interest expense........ (12.0) (13.2) (12.0) (13.0) (28.9)
Due diligence costs..... -- (1.2)(b) -- -- --
Income (loss) before
other items............ 0.2 (3.3) (8.1) (1.0) 4.7
Extraordinary loss...... (0.7)(a) -- -- -- (8.0)(i)
Net income (loss)....... $ (0.5) $ (4.2) $ (8.1) $ (1.0) $ (3.3)
Net loss applicable to
common shareholders.... (0.5) (4.2) (10.8) (6.3) (6.3)
Other Financial Data:
EBITDA(c)............... $ 21.1 $ 21.5 $ 15.6 $ 20.3 $ 60.5
Net cash provided by
(used in):
Operating activities... $ (4.1) $ 11.9 $ 5.4 $ 7.3 $ 48.0
Investing activities... (10.6) (15.3) (7.2) (25.1) (286.5)
Financing activities... 26.0 (1.0) (3.9) 15.8 269.5
Capital
expenditures(d)........ 9.9 32.3 11.1 16.8 48.4
Ratio of earnings to
fixed charges(e)....... -- -- -- -- 1.2
Operating Data:
Merchandise gross
margin................. 34.9 % 34.9 % 33.0 % 34.4 % 34.0 %
Gasoline gallons sold
(in millions).......... 158.5 160.3 160.7 179.4 466.8
Average retail gasoline
price per gallon....... $ 1.10 $ 1.17 $ 1.20 $ 1.23 $ 1.09
Average gasoline gross
profit per gallon...... $0.136 $0.162 $0.156 $0.128 $ 0.134
Store expense as a
percentage of costs.... 14.4% 14.8% 15.0% 14.1% 14.2%
General and
administrative expense
as a percentage of
sales.................. 4.9% 4.8% 4.6% 3.9% 3.3%
Operating income as a
percentage of sales.... 3.0% 2.7% 0.5% 2.5% 3.2%
Store Operating Data:
Number of stores (end of
period)................ 406 403 379 390 954
Average sales per store:
Merchandise sales (in
thousands)............ $460.4 $462.7 $481.1 $525.8 $ 533.3
Gasoline gallons (in
thousands)............ 423.7 440.3 450.0 501.2 603.9
Comparable store sales
growth(f):
Merchandise............ 1.3 % (0.8)% 2.8 % 8.5 % 5.3 %
Gasoline gallons....... 2.8 % 0.5 % (4.3)% 7.2 % 4.8 %
Balance Sheet Data (end
of period):
Working capital
(deficiency)........... $ 6.7 $ (0.8) $ (6.5) $ (8.2) $ (9.0)
Total assets............ 124.0 127.7 120.9 142.8 554.8
Total debt and capital
lease obligations(g)... 102.4 101.8 101.4 101.3 340.7
Shareholders' equity
(deficit).............. (12.1) (16.3) (27.5) (17.9) 39.3
</TABLE>
12
<PAGE>
NOTES TO SELECTED FINANCIAL DATA
(a) In fiscal 1994, The Pantry recorded an extraordinary loss of $671,000,
net of taxes, related to the early extinguishment of debt.
(b) During fiscal 1995, The Pantry expended $1,181,000 in due diligence
costs related to the evaluation of the potential purchase of a regional
convenience store company. The proposed transaction was abandoned and, as a
result, the costs incurred in connection with the prospective acquisition were
charged to earnings in fiscal 1995.
(c) "EBITDA" represents income from operations before depreciation and
amortization, merger integration costs, restructuring charges, and impairment
of long-lived assets. EBITDA is not a measure of performance under generally
accepted accounting principles, and should not be considered as a substitute
for net income, cash flows from operating activities and other income or cash
flow statement data prepared in accordance with generally accepted accounting
principles, or as a measure of profitability or liquidity. The Pantry has
included information concerning EBITDA as one measure of 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 The Pantry's operating performance.
(d) Purchases of assets to be held for sale are excluded from these
amounts.
(e) 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). The Pantry's earnings were inadequate to
cover fixed charges by $0.2 million, $3.6 million, $10.8 million, and $1.0
million for fiscal years 1994, 1995, 1996, and 1997, respectively.
(f) The stores included in calculating same store sales growth are stores
that were under Company management and in operation for both fiscal years of
the comparable period; therefore, acquired stores, new stores and closed
stores are not included.
(g) Total debt includes capital lease obligations.
(h) 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."
(i) On October 23, 1997 in connection with the Lil' Champ Acquisition, the
Company completed the offering of the Senior Subordinated Notes and, in a
related transaction completed a Tender Offer and Consent Solicitation with
respect to the Senior Notes. The Tender Offer resulted in the Company's
purchase of $51 million in principal amount of the Senior Notes at a purchase
price of 110% of the aggregate principal amount plus accrued and unpaid
interest and other related fees. In connection with this repurchase, the
Company incurred an extraordinary loss of approximately $8.0 million related
to cost of the Tender Offer and Consent Solicitation and write-off of deferred
financing costs.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements and
notes thereto. Further information is contained in the Company's Quarterly
Reports on Form 10-Q for the quarters ended December 25, 1997, March 26, 1998
and June 25, 1998, and the Company's Registration Statement on Form S-4, as
amended, effective January 8, 1998.
INTRODUCTION
The Pantry is a leading convenience store operator in the southeastern
United States. The Company's stores offer a broad selection of merchandise and
gasoline as well as ancillary services designed to appeal to the convenience
needs of the Company's customers.
Since the arrival of the Company's current management team in fiscal 1996,
it has grown through a combination of management initiatives and strategic
acquisitions including:
. enhancing merchandising to increase same store merchandise sales growth
and margins
. improving gasoline offering in order to increase customer traffic and
same store gasoline volume growth
. reducing expenses through strengthened vendor relationships and
tightened expense controls
. increasing expenditures for facilities improvement and store automation
. growing through acquisitions and new store development
As a result, The Pantry has experienced increases in total revenue, same
store merchandise sales and gasoline volume growth and income from operations.
Additionally, the Company has expanded the geographic scope of its operations
which it believes will result in less seasonality from period to period. The
Company intends to continue its acquisition strategy and, accordingly, future
results may not be necessarily comparable to historic results.
The Company believes that there is significant opportunity to continue to
increase profitability at its existing and new stores. The Company continues
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. The Company is upgrading its
management information systems and continues to remodel its stores. Finally,
the Company continues to seek acquisitions and believes that there is a large
number of attractive acquisition opportunities in our markets.
The Company believes that its arrangements with vendors, including McLane,
has enabled it to decrease the operating expenses of acquired companies after
it completes an acquisition. The Pantry purchases over 50% of its general
merchandise, including most tobacco products and grocery items, from a single
wholesale grocer, McLane. In addition, McLane supplies health and beauty aids,
toys and seasonal items to all Pantry stores. The Pantry has a contract with
McLane until 2003. Although the Company believes there are adequate
alternative supply sources, a change of suppliers, especially McLane, could
have a material adverse affect on its cost of goods and results of operations.
ACQUISITION HISTORY
The Pantry's acquisition strategy focuses on acquiring convenience stores
within or contiguous to its existing market areas. The Company believes
acquiring locations with demonstrated revenue volumes involves lower risk and
is an economically attractive alternative to traditional site selection and
new store development.
14
<PAGE>
The table below provides information concerning the largest acquisitions
the Company has completed from fiscal 1996 through fiscal 1998:
<TABLE>
<CAPTION>
NUMBER OF
DATE ACQUIRED COMPANY TRADE NAME LOCATIONS STORES
---------------- ------------------------------ ------------ -------------------------------- ---------
<C> <C> <S> <C> <C>
July 15, 1998 Stallings Oil Company, Inc. Zip Mart Central North Carolina, Virginia 42
July 2, 1998 Quick Stop Food Mart, Inc. Quick Stop Southeast North Carolina, 75
Coastal South Carolina
May 2, 1998 United Fuels Corporation, Inc. Sprint Gainesville, Florida 10
March 19, 1998 Wooten Oil Company, Inc. Kwik Mart Eastern North Carolina 23
October 23, 1997 Lil' Champ Food Stores, Inc. Lil' Champ Northeast Florida 440(a)
June 12, 1997 Carolina Ice Company, Inc. Freshway Eastern North Carolina 15
April 17, 1997 Gregorie Oil Co., Inc. Gregorie Oil Charleston, South Carolina 15
</TABLE>
- --------
(a) Net of the disposition of 48 convenience stores located throughout eastern
Georgia.
The Pantry seeks to improve the productivity and profitability of acquired
stores by implementing its merchandising and gasoline initiatives, eliminating
duplicative costs, reducing overhead and centralizing functions such as
purchasing and information technology. For example, at Lil' Champ, The Pantry
has, among other things, expanded the merchandise offered at each store,
upgraded store and gasoline facilities and centralized merchandise purchasing.
These improvements have contributed to an increase in same store EBITDA of
30.3% and a decrease in same store operating expenses of 6.6% at Lil' Champ
stores during the twelve month period following the Lil' Champ acquisition.
The Pantry believes it takes six to twelve months to fully integrate and
achieve operational and financial improvements at acquired locations. There
can be no assurance, however, that revenue increases or cost savings can be
achieved with respect to any acquisition.
RESULTS OF OPERATIONS
The Company's operations for fiscal years 1996, 1997 and 1998 each
contained 52 weeks. The following table sets forth certain of the Company's
results as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Revenues:
Merchandise sales..................................... 48.9% 47.4% 46.8%
Gasoline sales........................................ 50.1 51.5 51.8
Commissions........................................... 1.0 1.1 1.4
----- ----- -----
Total revenues...................................... 100.0% 100.0% 100.0%
===== ===== =====
Gross profit.......................................... 23.7 22.7 23.7
Operating, general and administrative expenses.......... 20.8 18.0 17.7
Depreciation and amortization........................... 2.4 2.2 2.8
----- ----- -----
Income from operations.................................. 0.5% 2.5% 3.2%
===== ===== =====
</TABLE>
Impact of Acquisitions. The Lil' Champ acquisition and other acquisitions
and related transactions have had a significant impact on the Company's
financial condition and results of operations since their respective
transaction dates. Due to the method of accounting for fiscal year 1998
acquisitions, the Consolidated Statements of Operations for the fiscal year
ended September 24, 1998 herein includes results from operations for each of
the acquisitions from the date of each acquisition only. Moreover, the
Consolidated Balance Sheets as of September 25, 1997 and the Consolidated
Statements of Operations for fiscal years September 25, 1997 and September 26,
1996 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 obfuscate the
underlying performance of same store results.
15
<PAGE>
Fiscal 1998 Compared To Fiscal 1997
Total Revenue. Total revenue for fiscal 1998 was $984.9 million compared to
$427.4 million for fiscal 1997, an increase of $557.5 million or 130.4%. The
increase in total revenue is primarily attributable to Lil' Champ revenue of
$451.4 million for the eleven month period ended September 24, 1998, the
revenue from stores acquired or opened in fiscal 1998 of $92.2 million and
same store merchandise sales growth of 5.3% (or $9.7 million).
Merchandise Revenue. Total merchandise revenue for fiscal 1998 was $460.8
million compared to $202.4 million for fiscal 1997, an increase of $258.4
million or 127.7%. The increase in merchandise revenue is primarily
attributable to Lil' Champ merchandise revenue of $212.2 million for the
eleven month period ended September 24, 1998, the revenue from stores acquired
or opened in fiscal 1998 of $30.5 million and same store merchandise sales
growth of $9.7 million. Fiscal 1998 same store merchandise revenue growth
increased 5.3% over fiscal 1997. Same store sales increases at The Pantry
locations are primarily attributable to increased customer counts and average
transaction size resulting from more competitive gasoline pricing, enhanced
store appearance and store merchandising, and increased in-store promotional
activity.
Gasoline Revenue and Gallons. Total gasoline revenue for fiscal 1998 was
$510.0 million compared to $220.2 million for fiscal 1997, an increase of
$289.8 million or 131.6%. The increase in gasoline revenue is primarily
attributable to Lil' Champ gasoline revenue of $231.7 million for the eleven
month period ended September 24, 1998 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 attributable to lower wholesale gasoline pricing.
In fiscal 1998, total gasoline gallons were 466.8 million gallons compared
to 179.4 million gallons in fiscal 1997, an increase of 287.4 million gallons
or 160.2%. The increase in gasoline gallons is primarily attributable to Lil'
Champ gallon volume of 204.9 million and same store gasoline volume increases
of 7.9 million. Fiscal 1998 same store gallon sales growth was 4.8% and is
primarily attributable to more competitive gasoline pricing, rebranding and
promotional activity, enhanced store appearance and local market and economic
conditions.
Commission Revenue. Total commission revenue for fiscal 1998 was $14.1
million compared to $4.8 million for fiscal 1997, an increase of $9.3 million
or 193.8%. The increase in commission revenue is primarily attributable to
Lil' Champ revenue of $7.5 million for the eleven month period ended September
24, 1998 and revenue from stores acquired or opened in fiscal 1998 of $0.5
million. Lil' Champ's commission revenue is principally lottery revenue in
locations throughout Florida and Georgia.
Total Gross Profit. Total gross profit for fiscal 1998 was $233.4 million
compared to $97.3 million for fiscal 1997, an increase of $136.1 million or
139.9%. The increase in gross profit is primarily attributable to Lil' Champ
gross profit of $108.5 million for the eleven month period ended September 24,
1998, the gross profit from stores acquired or opened in fiscal year 1998 of
$15.7 million and same store gross profit increases of $5.8 million.
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 the Pantry's 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
16
<PAGE>
in store expenses is primarily attributable 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
attributable 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,
the Company 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 attributable 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.
Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA"). EBITDA represents income (loss) before interest expense, income
tax benefit, depreciation and amortization, merger integration costs,
restructuring charges, impairment of long-lived assets, extraordinary item,
cumulative effect of change in accounting principle and the write-off of due
diligence costs incurred in connection with a potential purchase of a regional
convenience store company that was abandoned in 1995 and extraordinary loss.
EBITDA for fiscal 1998 was $60.5 million compared to $20.3 million for fiscal
1997, an increase of $40.2 million or 198.0%. The increase is primarily
attributable to Lil' Champ EBITDA of $31.4 million for the eleven month period
ended September 24, 1998 and the items discussed above. Excluding Lil' Champ,
EBITDA increased 43.3% in fiscal 1998 compared to fiscal 1997.
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 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 attributable to interest on the senior notes of $6.5
million, the senior subordinated notes of $18.9 million and borrowing under
the 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). The Company 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
17
<PAGE>
carryforwards and available tax credits based on estimated future earnings and
for temporary differences based on expected timing of reversals. In fiscal
1998, the valuation allowance increased $620,000, which resulted primarily
from the allowance for 1998 federal net operating loss benefits, offset by a
$1.2 million allowance adjustment related to a corresponding reduction of
$1.2 million of deferred tax assets which resulted from a preliminary
settlement of a North Carolina tax assessment.
Extraordinary Item. The Company recognized an extraordinary loss, net of
taxes, 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 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. The extraordinary item also
reflects an income tax benefit of approximately $1.2 million.
Net Loss. Net loss for fiscal 1998 was $3.3 million compared to $1.0
million for fiscal 1997, an increase of $2.3 million or 230.0%. The increase
is primarily attributable to the extraordinary loss, net of taxes, of
$8.0 million in connection with the redemption of the senior notes and related
consent fees. The Pantry's income before extraordinary loss was $4.7 million
for fiscal 1998 compared to a loss of $1.0 million during fiscal 1997, an
increase of $5.7 million. The income before extraordinary loss for fiscal 1998
represents an increase of $12.8 million over fiscal year 1996.
Fiscal 1997 Compared to Fiscal 1996
Total Revenue. Total revenue for fiscal 1997 was $427.4 million compared to
$384.8 million for fiscal 1996, an increase of $42.6 million or 11.1%. This
increase is attributable to significant revenue increases in merchandise of
$14.3 million, gasoline of $27.4 million and commissions of $0.8 million
despite a reduction in average store count compared to the prior year.
Merchandise Revenue. Merchandise revenue for fiscal 1997 was $202.4 million
compared to $188.1 million for fiscal 1996, an increase of $14.3 million or
7.6%. The increase is primarily attributable to same store merchandise sales
increase of $14.8 million which is partially offset by a decrease in
merchandise revenues due to a decrease in average store count compared to the
prior year. The increase in same store merchandise sales of 8.5% is primarily
attributable to increased volume in major merchandise categories, a general
increase in the price of cigarettes and growth in new merchandise programs.
Gasoline Revenue and Gallons. Total gasoline revenue for fiscal 1997 was
$220.2 million compared to $192.7 million for fiscal 1996, an increase of
$27.5 million or 14.3%, primarily due to same store gasoline revenue of $17.7
million. Additionally, the average retail price per gallon in fiscal 1997 was
$1.23 versus an average retail price per gallon in fiscal 1996 of $1.20. In
fiscal 1997 total gasoline gallons were 179.4 million gallons compared to
160.7 million gallons for fiscal 1996, an increase of 18.7 million gallons or
11.6%. The Company's same store gasoline volume increase of 7.2% or 11.0
million gallons in fiscal 1997 can be attributed to more competitive pricing
and a relatively mild 1996-1997 winter season compared to the prior year.
Commission Revenue. Total commission revenue for fiscal 1997 was $4.8
million compared to $4.0 million for fiscal 1996, an increase of $0.8 million
or 20.0% due to the expansion and enhancement of existing commission related
programs and the introduction of new programs in selected markets.
Total Gross Profit. Total gross profit for fiscal 1997 was $97.3 million
compared to $91.2 million for fiscal 1996, an increase of $6.1 million or
6.7%. The increase in gross profit is primarily attributable to the same store
gross profit increase of $4.2 million. In addition, merchandise gross profit
margin increased to 34.4% in fiscal 1997 from 33.0% in fiscal 1996. Overall
gross profit margin declined to 22.8% in fiscal 1997 from 23.7% in fiscal 1996
due to the decrease in gasoline margin per gallon to $0.128 in fiscal 1997
from $0.156 in fiscal 1996. The decrease in gasoline gross profit margin is
attributable to a shift in the Company's pricing practices and less favorable
conditions in the wholesale and retail gasoline markets.
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Store Operating and General and Administrative Expenses. Store operating
expenses in fiscal 1997 were $60.2 million compared to $57.8 million in fiscal
1996, an increase of $2.4 million, or 4.2%, but decreased as a percentage of
merchandise sales. Store expenses increased due to increases in store
personnel related expenses of $1.0 million, real estate lease expense of $0.8
million and equipment rental expense of $0.5 million. The increase in store
personnel related expenses is attributable to increased customer traffic and
transaction volume. The increase in real estate leases is attributable to the
consummation of several sale/leaseback transactions. The increase in equipment
rental expense is primarily attributable to the Company's roll-out of a frozen
drink program to a majority of stores. As a percentage of total revenue, store
operating expenses decreased to 14.1% in fiscal 1997 from 15.0% in fiscal
1996.
General and administrative expenses for fiscal 1997 were $16.8 million
compared to $17.8 million in fiscal 1996, a decrease of $1.0 million, or 6.0%.
The decrease in both total dollar terms and as a percentage of merchandise
sales is attributable to improved fiscal management of major expense
categories. As a percentage of total revenue, general and administrative
expenses decreased to 3.9% in fiscal 1997 from 4.6% in fiscal 1996.
Restructuring Charges. As a result of the change in ownership that occurred
during fiscal 1996, The Pantry restructured its corporate offices. These
charges included $0.8 million for involuntary termination benefits paid to 51
employees and $0.8 million for the termination of the former chairman and
chief executive officer's employment agreement, including related expenses.
These amounts were expended during 1996. As a result of these terminations,
approximately $1.9 million in annual salaries were eliminated.
Income from Operations. Income from operations for fiscal 1997 was $10.8
million compared to $1.9 million for fiscal 1996, an increase of $8.9 million
or 468.4%. The increase is attributable to the items discussed above, as well
as nonrecurring restructuring charges of $1.6 million and charges for
impairment of long-lived assets of $3.0 million in fiscal 1996 which were not
present in fiscal 1997. As a percentage of total revenue, income from
operations increased to 2.5% in fiscal 1997 from 0.5% in fiscal 1996.
EBITDA. EBITDA for fiscal 1997 was $20.3 million compared to $15.6 million
in fiscal 1996, an increase of $4.7 million or 30.1%, due to the items
discussed above.
Interest Expense. Interest expense for fiscal 1997 was $13.0 million
compared to $12.0 million in fiscal 1996, an increase of $1.0 million or 8.3%,
due to a temporary interest rate increase on the senior notes from 12% to 12
1/2% and a nonrecurring decrease of $0.6 million related to an interest
accrual that was reversed in fiscal 1996 and did not occur in fiscal 1997. The
accrual had been recorded related to a potential income tax issue that was
resolved in our favor in fiscal 1996. For the twelve months ended December 26,
1997, the Pantry's consolidated fixed charge coverage ratio fell below 1.63 to
1, as required in the senior notes indenture, resulting in an increase in the
interest rate on the senior notes from 12% to 12 1/2%. On June 26, 1998, the
Pantry exceeded the coverage ratio requirement and the interest rate was
changed back to 12%.
Income Tax Benefit (Expense). The Company's income tax benefit decreased in
fiscal 1997 due to a $9.8 million decrease in pre-tax loss compared to the
prior year and the computation of its tax liability for fiscal 1997.
Additionally, no income tax benefit was recorded in fiscal 1997, which was
principally attributable to an increase in the valuation allowance to provide
for operating loss carryforwards and available tax credits based on estimated
future earnings and for temporary differences based on expected timing of
reversals. In 1997, the valuation allowance increased $325,000.
Net Loss. Net loss for fiscal 1997 was $1.0 million compared to $8.1
million for fiscal 1996, a decrease of $7.1 million or 87.7%. The decrease is
attributable to the items discussed above, as well as nonrecurring
restructuring charges of $1.6 million and charges for impairment of long-lived
assets of $3.0 million in fiscal 1996 not present in fiscal 1997. The Pantry's
loss before extraordinary loss was $1.0 million for fiscal 1997 compared to a
loss of $8.1 million during fiscal 1996, an improvement of $7.1 million.
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Liquidity and Capital Resources
Cash Flows from Operations. Due to the nature of the Company's business,
substantially all sales are for cash, and cash provided by operations is the
Company's primary source of liquidity. Capital expenditures, acquisitions and
interest expense represent the primary uses of funds. The Company relies
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 its operations, pay interest, and fund capital expenditures and
acquisitions. Cash provided by operating activities for fiscal 1996, fiscal
1997 and fiscal 1998 totaled $5.4 million, $7.3 million and $48.0 million,
respectively. The Company had $34.4 million of cash and cash equivalents on
hand at September 24, 1998.
Line and Letter of Credit Facility. On October 23, 1997, to supplement cash
on hand and cash provided by operating activities, the Company entered into
the Bank Credit Facility. On July 2, 1998 and in connection with acquisition
activity and an equity investment by existing shareholders, the Bank Credit
Facility was amended to increase the amount available under the Acquisition
Facility from $30 million to $85 million. The Bank Credit Facility consists of
a $45.0 million Revolving Credit Facility and a $85.0 million Acquisition
Facility. See "Item 8. Consolidated Financial Statements and Supplementary
Data--Notes to Consolidated Financial Statements--Note 5--Long-Term Debt". 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 24, 1998,
there were no borrowings outstanding under the working capital line of credit
and $78.0 million outstanding under the Acquisition Facility. See
"Acquisitions" and "Long-Term Debt". As of September 24, 1998, approximately
$14.0 million of letters of credit were issued under the standby letter of
credit facility. In January 1999 the Bank Credit Facility was restructured and
amended.
1998 Acquisitions and Disposition. In fiscal 1998 the Company acquired a
total of 641 convenience stores in eight transactions for approximately $250.6
million. These acquisitions were funded with the proceeds from the sale of the
Senior Subordinated Notes, borrowings under the Bank Credit Facility, equity
investments by existing shareholders and management and cash on hand. In
connection with the Lil' Champ acquisition the Company sold 48 Lil' Champ
convenience stores, representing all of its convenience store operations and
idle property in Georgia. The sale was completed September 1, 1998. As
required by SFAS No. 121, these assets were measured at fair value less costs
to sell during the allocation period following the consummation date of the
acquisition. Accordingly, no gain or loss was recorded on disposition.
Subsequent to fiscal year end 1998, the Company acquired the operating
assets of 32 stores located in North and South Carolina. The Company funded
these transactions with $7.0 million in proceeds from the Acquisition Facility
and cash on hand. In addition, subsequent to fiscal year end 1998 the Company
has signed an stock purchase agreement for approximately 125 stores located in
its existing market.
Capital Expenditures. Capital expenditures (excluding all acquisitions) for
fiscal 1998 were $48.4 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. The Company
finances 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.
The Company's sale-leaseback program includes the packaging of its owned
convenience store real estate, both land and buildings, for sale to investors
in return for their agreement to leaseback the property to The Pantry under
long-term leases. Generally, the leases are operating leases at market rates
with terms of twenty years with four five-year renewal options. The lease
payment is based on market rates ranging from 10.5% to 11.5% applied to the
cost of each respective property. The Company retains ownership of all
personal property and gasoline marketing equipment. The Bank Credit Facility
limits or caps the proceeds of sale-leasebacks that The Pantry can use to fund
its operations or capital expenditures. Vendor reimbursements primarily relate
to oil company payments to either enter into long term supply agreements or to
upgrade gasoline marketing equipment, including canopies, gasoline dispensers
and signs. Under this sale-leaseback program The Pantry received $4.8 million
during fiscal 1998.
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In fiscal 1998, the Company received approximately $20.7 million in sale-
leaseback and other reimbursements for capital improvements; therefore, net
capital expenditures, excluding all acquisitions, for fiscal 1998 were $27.7
million. The Company anticipates that net capital expenditures for fiscal 1999
will be approximately $45.0 million.
Long-term Debt. At September 24, 1998, the Company's long-term debt
consisted primarily of $49.0 million of the Senior Notes, $200 million of the
Senior Subordinated Notes, and $78.0 million outstanding under the Acquisition
Facility. The interest payments on the Senior Notes are due May 15 and
November 15. The interest payments on the Senior Subordinated Notes are due
October 15 and June 15. The interest payments on the Acquisition Facility are
due monthly.
The Senior Notes are unconditionally guaranteed, on an unsecured basis, as
to the payment of principal, premium, if any, and interest, jointly and
severally, by the Guarantors. The Senior Notes contain covenants that, among
other things, restrict the ability of the Company and any restricted
subsidiary to: (i) incur additional indebtedness; (ii) pay dividends or make
distributions; (iii) issue stock of subsidiaries; (iv) make certain
investments; (v) repurchase stock; (vi) create liens; (vii) enter into
transactions with affiliates; (viii) enter into sale-leaseback transactions;
(ix) merge or consolidate the Company or any of its subsidiaries; and (x)
transfer and sell assets. In January 1999, all Senior Notes were redeemed by
the Company.
The Company also has 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 the
Company's subsidiaries, except for PH Holding and its subsidiaries. The Senior
Subordinated Notes contain covenants that, among other things, restrict the
Company's ability and any restricted subsidiary's ability to (i) pay dividends
or make distributions, except in amounts not in excess of a percentage of the
Company's 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.
The Company 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 the Company doesn't meet this ratio it 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 incurrence, (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 the Company either to reinvest the proceeds of
an asset sale or transfer, or, if it does not reinvest those proceeds, to pay
down its bank credit facility or other senior debt or to offer to redeem its
senior subordinated notes with any asset sale proceeds not so used. Up to 35%
of the senior subordinated notes may be redeemed prior to October 15, 2000 at
a redemption price of 110.25% plus accrued interest with the net proceeds of
one or more public equity offerings. All of the senior subordinated notes may
be redeemed after October 15, 2002 at a redemption price which begins at
105.125% and decreases to 100.0% after October 2005.
Restrictive covenants in the Company's debt agreements may restrict its
ability to implement our acquisition strategy.
During fiscal 1998 and relating to the acquisitions discussed above, the
Company borrowed $78.0 million under its Acquisition Facility. Under the terms
of the Bank Credit Facility, the Acquisition Facility is available to finance
acquisitions of related businesses with certain restrictions. The Bank Credit
Facility contains covenants restricting the ability of the Company and any of
its of subsidiaries to, among other things: (i) incur additional
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debt; (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 and asset sales; and (viii) engage in transactions with
affiliates. The Company is also required to comply with financial covenants
with respect to (a) a minimum coverage ratio, (b) a minimum pro forma EBITDA,
(c) a maximum pro forma leverage ratio, and (d) a maximum capital expenditure
allowance. In January 1999 the Bank Credit Facility was restructured and
amended.
Cash Flows From Financing Activities. The Lil' Champ Acquisition price, the
refinancing of existing Lil' Champ debt, the repurchase of $51.0 million of
the Senior Notes, the total purchase price of all acquisitions and all related
fees and expenses were financed with the proceeds from the offering of the
Senior Subordinated Notes, cash on hand, the net proceeds of approximately
$57.0 million from the sale to existing shareholders and management of the
Company of additional shares of the Company's Common Stock.
Cash Requirements. The Company believes that cash on hand, together with
cash flow anticipated to be generated from operations, short-term borrowing
for seasonal working capital, permitted borrowings under the Company's credit
facilities and permitted borrowings by its Unrestricted Subsidiary will be
sufficient to enable the Company to satisfy anticipated cash requirements for
operating, investing and financing activities, including debt service for the
next twelve months.
Shareholders' Equity. As of September 24, 1998, the Company's shareholders'
equity totaled $39.3 million. The increase in shareholders' equity of $57.2
million is attributed to the proceeds from the sale of additional Common Stock
and the contribution of all outstanding shares of Series A Preferred Stock and
related accrued dividends, which was partially offset by the Company's net
loss of $3.3 million for fiscal 1998.
Additional paid in capital is impacted by the accounting treatment applied
to a 1987 leveraged buyout of the outstanding Common Stock of the Company's
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 the Company by its shareholders. Additionally, the accumulated
deficit includes the cumulative effect of (i) the accrued dividends on
previously outstanding preferred stock of $5.0 million, (ii) the accrued
dividends on current outstanding Series B Preferred Stock of $4.4 million,
(iii) the net cost of equity transactions and (iv) the cumulative results of
operations, which include extraordinary losses and cumulative effect of
accounting changes, interest expense of $17.2 million on previously
outstanding subordinated debentures and preferred stock obligations. This
interest and the related subordinated debt and these dividends and the related
preferred stock were paid or redeemed in full with a portion of the proceeds
from the fiscal 1994 sale of the Senior Notes.
Environmental Considerations. The Company is subject to various federal,
state and local environmental laws and regulations governing USTs that require
the Company to make certain expenditures for compliance. 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 USTs. Regulations enacted by the
EPA in 1988 established requirements for (i) installing UST systems;
(ii) upgrading UST systems; (iii) taking corrective action in response to
releases; (iv) closing UST systems; (v) keeping appropriate records; and (vi)
maintaining evidence of financial responsibility for taking corrective action
and compensating third parties for bodily injury and property damage resulting
from releases. These regulations permit states to develop, administer and
enforce their own regulatory programs, incorporating requirements which are at
least as stringent as the federal standards. The following is an overview of
the requirements imposed by these regulations:
. Leak Detection: The EPA and states' release detection regulations were
phased in based on the age of the USTs. All USTs were required to comply
with leak detection requirements by December 22, 1993. The Company
utilizes several approved leak detection methods for all Company-owned
UST systems. Daily and monthly inventory reconciliations are completed
at the store level and at the corporate support center. The daily and
monthly reconciliation data is also analyzed using statistical inventory
reconciliation which compares the reported volume of gasoline purchased
and sold with the capacity
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of each UST system and highlights discrepancies. The Company believes it
is in full or substantial compliance with the leak detection
requirements applicable to USTs.
. Corrosion Protection: The 1988 EPA regulations require that all UST
systems have corrosion protection by December 22, 1998. The Company's
UST systems have been protected from corrosion either through the
installation of fiberglass tanks or upgrading steel USTs with interior
fiberglass lining or the installation of cathodic protection.
. Overfill/Spill Prevention: The 1988 EPA regulations require that all
sites have overfill/spill prevention devices by December 22, 1998. The
Company has installed these devices on all Company-owned UST systems to
meet these regulations.
The Pantry is required by federal and state regulations to maintain
evidence of financial responsibility for taking corrective action and
compensating third parties in the event of a release from its UST systems. In
order to comply with this requirement, as of September 24, 1998 The Pantry
maintained letters of credit in the aggregate amount of $2.3 million issued by
a commercial bank in favor of state environmental enforcement agencies in the
states of North Carolina, South Carolina, Virginia, Tennessee, Indiana and
Kentucky and relies on reimbursements from applicable state trust funds. In
Florida, the Company meets such financial responsibility requirements by state
trust fund coverage through December 31, 1998 and will meet such requirements
thereafter through private commercial liability insurance and through
qualified self-insurance.
All states in which The Pantry operates or has operated UST systems have
established trust funds for the sharing, recovering, and reimbursing of
certain cleanup costs and liabilities incurred as a result of releases from
UST systems. These trust funds, which essentially provide insurance coverage
for the cleanup of environmental damages caused by the operation of UST
systems, are funded by a UST registration fee and a tax on the wholesale
purchase of motor fuels within each state. The Company has paid UST
registration fees and gasoline taxes to each state where it operates to
participate in these programs and has filed claims and received reimbursement
in North Carolina, South Carolina, Kentucky, Indiana, Georgia, Florida and
Tennessee. The coverage afforded by each state fund varies but generally
provides from $150,000 to $1.0 million per site for the cleanup of
environmental contamination, and most provide coverage for third party
liabilities. Costs for which the Company does not receive reimbursement
include but are not limited to: (i) the per-site deductible; (ii) costs
incurred in connection with releases occurring or reported to trust funds
prior to their inception; (iii) removal and disposal of UST systems; and (iv)
costs incurred in connection with sites otherwise ineligible for reimbursement
from the trust funds. The trust funds require the Company to pay deductibles
ranging from $10,000 to $100,000 per occurrence depending on the upgrade
status of its UST system, the date the release is discovered/reported and the
type of cost for which reimbursement is sought. The Florida trust fund will
not cover releases first reported after December 31, 1998. The Company will
obtain private coverage for remediation and third party claims arising out of
releases reported after December 31, 1998. The Company believes that this
coverage exceeds federal and Florida financial responsibility regulations. In
addition to immaterial amounts to be spent by the Company, a substantial
amount will be expended for remediation on behalf of the Company by state
trust funds established in the Company's operating areas or other responsible
third parties (including insurers). To the extent such third parties do not
pay for remediation as anticipated by the Company, the Company will be
obligated to make such payments, which could materially adversely affect the
Company's financial condition and results of operations. Reimbursement from
state trust funds will be dependent upon the maintenance and continued
solvency of the various funds.
Environmental reserves of $17.1 million as of September 24, 1998, represent
estimates for future expenditures for remediation, tank removal and litigation
associated with 205 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
the Company can make no assurances, the Company anticipates that it will be
reimbursed for a portion of these expenditures from state insurance funds and
private insurance. As of September 24, 1998, amounts which are probable of
reimbursement (based on the Company's experience) from those sources total
$13.2 million and are recorded as long-term environmental
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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
the Company expects substantially all of the costs will be paid by the state
trust fund. The Company will perform remediation in other states through
independent contractor firms engaged by the Company. For certain sites the
trust fund does not cover a deductible or has a copy which may be less than
the cost of such remediation.
The Company 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 the Company's historical claims experience. Although
the Company 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 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 The Pantry as to responsibility for clean
up matters. Additionally, The Pantry is awaiting closure notices on several
other locations which will release the Company from responsibility related to
known contamination at those sites. These sites continue to be included in the
Company's environmental reserve until a final closure notice is received.
YEAR 2000 INITIATIVE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year in respective date
fields. The Company uses a combination of hardware devices run by computer
programs at its support centers and retail locations to process transactions
and other data which are essential to the Company's business operations. The
Year 2000 issue and its impact on data integrity could result in system
interruptions, miscalculations or failures causing disruptions of operations.
The following discussion about the implementation of the Company's Year
2000 program, the costs expected to be associated with the program and the
results the Company expects to achieve constitute forward-looking information.
As noted below, there are many uncertainties involved with the Year 2000
issue, including the extent to which the Company 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 trading partners.
Accordingly, the costs and results of the Company's Year 2000 program and the
extent of any impact on its results of operations could vary materially from
that stated herein.
The Company completed 90% its 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 the Company's
systems would require remediation and 20% of the Company's systems were
planned for replacement or would be best served if replaced. Based on a this
third party assessment, internal assessment, and project results as of
December 16, 1998, the Company believes all system modifications, hardware and
software replacements or upgrades and related testing will be completed by
September 1999. In order to meet this date, the Company has engaged outside
consultants and contractors to assist in the overall project and remediation
effort.
The Company has tested, modified or replaced, or plans to modify or replace
its existing systems and related hardware which did not properly interpret
dates beyond December 31, 1999 to ensure Year 2000 compliance. The Company has
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.
The Company's testing methodology plan includes, but is not limited to,
rolling dates forward to critical dates in the future and simulating
transactions, inclusion of several critical date scenarios, and utilizing
software programs which test for compliance on certain equipment.
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The Company has initiated communications with its significant vendors,
suppliers, and financial institutions to determine the extent to which the
Company is vulnerable to those third-parties' failure to be Year 2000
compliant. Based on these communications and presently available information,
the Company does not anticipate any material effects related to vendor,
supplier, or financial institution compliance. Additionally, the Company does
not believe it has any customers whose failure to be Year 2000 compliant would
materially impact business operations or operating results. Noncompliance by
suppliers and credit card processing companies utilized by the Company could
result in a material adverse effect on the financial condition and results of
operations of the Company. The Pantry will continue to update its assessment
of the readiness of key vendors, suppliers and financial institutions until
they are compliant. If during this ongoing assessment, it determines a third
party's level of compliance will have an adverse effect on The Pantry, the
Company will seek an alternate third party to provide similar products or
services. The Company believes 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 its individual stores.
In addition, the Company has reviewed the assets acquired since its
original assessment for Year 2000 compliance. This includes the acquisition of
other companies, as well as procurement and service arrangements. The Company
believes that its recently acquired assets will be Year 2000 compliant by
September 1999. The assessments have been conducted through the due diligence
process, vendor compliance communications and requests for disclosure
statements as part of contract negotiations. In most instances with the
acquisition of other companies, the systems and suppliers of these companies
are the same as those used in the Company's existing operations.
The Company does not believe either the direct or indirect costs of Year
2000 compliance will be material to its operations or operating results. Its
expenditures, which will be funded through operating cash flow, consist
primarily of internal costs and expenses associated with third-party
contractors. To date, the Company's spending with contractors and consultants
has been $75,000. The Company anticipates spending for the remainder of the
fiscal year to be approximately $300,000.
While the Company believes its planning efforts are adequate to address its
Year 2000 concerns, there can be no assurances that the systems of other
companies on which its systems and operations rely will be converted on a
timely basis and will not have a material impact on the Company. The Company
is in the process of formulating a contingency plan to address possible
noncompliance by our vendors, suppliers, financial institutions and credit
card processors. These plans will be drafted and in place by September 1999,
leaving the fourth calendar quarter to address low priority and low impact
issues.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for the first fiscal
quarter of fiscal 2000. Earlier application of all of the provisions of SFAS
No. 133 is encouraged. As of September 24, 1998, the Company has not
determined the effect of SFAS No. 133 on its consolidated financial
statements.
INFLATION
General inflation has not had a significant impact on the Company over the
past three years. As reported by the Bureau of Labor Statistics, the consumer
price index for fiscal 98 on tobacco products increased approximately 15%.
Subsequent to fiscal year end on November 23, 1998, major cigarette
manufacturers which supply the Company increased prices by $0.45 per pack.
These increases have been passed on in higher retails
25
<PAGE>
throughout the chain. Because the Company expects to pass cigarette cost
increases on to its customers through higher retail prices, these cost
increases are expected to reduce its gross margin percentage for the cigarette
category, but are not expected to have a material impact on the cigarette
category gross profit dollars. Although it is too early to determine the
potential impact on cigarette unit volume, management believes it can pass
along these and other cost increases to its customers over the long-term and,
therefore, does not expect inflation to have a significant impact on the
results of operations or financial condition of the Company in the foreseeable
future.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk
Quantitative Disclosures:
The Company is exposed to certain market risks inherent in the Company's
financial instruments. These instruments arise from transactions entered into
in the normal course of business and, in some cases, relate to the Company's
acquisitions of related businesses. The Company is subject to interest rate
risk on its existing long-term debt and any future financing requirements. The
Company's fixed rate debt consists primarily of outstanding balances on its
Senior Notes and Senior Subordinated Notes and its variable rate debt relates
to borrowings under its Bank Credit Facility.
The following table presents the future principal cash flows and weighted-
average interest rates expected on the Company's existing long-term debt
instruments. Fair values have been determined based on quoted market prices as
of December 16, 1998.
EXPECTED MATURITY DATE
<TABLE>
<CAPTION>
Fair
FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 Thereafter Total Value
------- ------- ------- ------- ------- ---------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt.......... $ 67 $ 39 $49,038 $ 47 $78,049 $200,074 $327,314 $336,814
Weighted Average
Interest Rate.......... 10.06% 10.06% 9.76% 9.72% 10.19% 10.25% 10.06%
</TABLE>
Qualitative Disclosures:
The Company's primary exposure relates to (i) interest rate risk on long-
term and short-term borrowings, (ii) its ability to refinance its Senior Notes
and Senior Subordinated Notes at maturity at market rates, (iii) the impact of
interest rate movements on its ability to meet interest expense requirements
and exceed financial covenants and (iv) the impact of interest rate movements
on the Company's ability to obtain adequate financing to fund future
acquisitions. The Company manages interest rate risk on its outstanding long-
term and short-term debt through its use of fixed and variable rate debt.
While the Company can not predict or manage its ability to refinance existing
debt or the impact interest rate movements will have on its existing debt,
management continues to evaluate its financial position on an ongoing basis.
26
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Independent Auditors' Report.................................... 30
Consolidated Balance Sheet as of September 25, 1997 and
September 24, 1998............................................. 31
Consolidated Statement of Operations for the years ended
September 26, 1996, September 25, 1997, and September 24,
1998........................................................... 33
Consolidated Statement of Changes in Shareholders' Equity
(Deficit) for the years ended September 26, 1996, September 25,
1997, and September 24, 1998................................... 34
Consolidated Statement of Cash Flows for the years ended
September 26, 1996, September 25, 1997, and September 24,
1998........................................................... 35
Notes to Consolidated Financial Statements...................... 37
Financial Statement Exhibit:
Exhibit 12.1--Computation of Ratio of Earnings to Fixed
Charges........................................................ Exhibit 12.1
Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts and Reserves..... S-1
</TABLE>
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders of
The Pantry, Inc.
Sanford, North Carolina
We have audited the accompanying consolidated balance sheets of The Pantry,
Inc. and subsidiaries as of September 25, 1997 and September 24, 1998, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for each of the three years in the period ended September 24,
1998. Our audits also included the financial statement schedule listed in the
Index of 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 25, 1997 and September 24, 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended September 24, 1998 in conformity with generally accepted
accounting principles. 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.
As discussed in Note 1 to the consolidated financial statements, in fiscal
1996 The Pantry adopted Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of.
Raleigh, North Carolina
December 18, 1998
28
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 24,
1997 1998
------------- -------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 3,347 $ 34,404
Receivables (net of allowance for doubtful
accounts of $150 at September 25, 1997; $280 at
September 24, 1998).............................. 2,101 9,907
Inventories (Note 3).............................. 17,161 47,809
Income taxes receivable (Note 6).................. -- 488
Prepaid expenses.................................. 1,204 2,216
Property held for sale............................ 3,323 3,761
Deferred income taxes, net (Note 6)............... 1,142 3,988
-------- --------
Total current assets........................... 28,278 102,573
-------- --------
Property and equipment, net (Notes 4, 5, 7 and
10)............................................... 77,986 300,978
-------- --------
Other assets:
Goodwill (net of accumulated amortization of
$9,705 at September 25, 1997, $11,940 at
September 24, 1998) (Notes 2 and 10)............. 20,318 120,025
Deferred lease costs (net of accumulated
amortization of $8,956 at September 25, 1997,
9,001 at September 24, 1998) .................... 314 269
Deferred financing costs (net of accumulated
amortization of $4,345 at September 25, 1997,
$4,871 at September 24, 1998) (Note 5)........... 4,578 14,545
Environmental receivables (Note 8)................ 6,511 13,187
Deferred income taxes (Note 6).................... 156 --
Escrow for Lil' Champ acquisition (Note 2)........ 4,049 --
Other............................................. 609 3,243
-------- --------
Total other assets............................. 36,535 151,269
-------- --------
Total assets....................................... $142,799 $554,820
======== ========
</TABLE>
29
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS--(Continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 25, September 24,
1997 1998
------------- -------------
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
-----------------------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt (Note 5)......... $ 33 $ 45
Current maturities of capital lease obligations (Note
7)................................................... 285 1,240
Accounts payable:
Trade............................................... 16,035 49,559
Money orders........................................ 3,022 5,181
Accrued interest (Note 5)............................. 4,592 11,712
Accrued compensation and related taxes................ 3,323 6,719
Income taxes payable (Note 6)......................... 296 --
Other accrued taxes................................... 2,194 7,007
Accrued insurance..................................... 3,887 5,745
Other accrued liabilities............................. 2,856 24,348
-------- --------
Total current liabilities......................... 36,523 111,556
-------- --------
Long-term debt (Note 5)................................. 100,305 327,269
-------- --------
Other non-current liabilities:
Environmental costs (Note 8).......................... 7,806 17,137
Deferred income taxes (Note 6)........................ -- 20,366
Capital lease obligations (Note 7).................... 679 12,129
Employment obligations................................ 1,341 934
Accrued dividends on preferred stock (Notes 2 and
13).................................................. 7,958 4,391
Other................................................. 6,060 21,734
-------- --------
Total other non-current liabilities............... 23,844 76,691
-------- --------
Commitments and contingencies (Notes 5, 7, 8 and 15)....
Shareholders' Equity (Deficit):
Preferred stock, $.01 par value, 150,000 shares
authorized; 43,499 issued and outstanding at
September 25, 1997 and 17,500 issued and outstanding
at September 24, 1998 and March 25, 1999 (aggregate
liquidation value: September 25, 1997--$43,499;
September 24, 1998) (Notes 2 and 13) -- --
Common stock, $.01 par value, 300,000 shares
authorized; 114,109 issued and outstanding at
September 25, 1997, 229,507 issued and outstanding at
September 24, 1998 (Note 12)......................... 1 2
Additional paid-in capital............................ 5,396 69,054
Shareholder loans..................................... -- (215)
Accumulated deficit................................... (23,270) (29,537)
-------- --------
Total shareholders' equity (deficit).............. (17,873) 39,304
-------- --------
Total liabilities and shareholders' equity (deficit).... $142,799 $554,820
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 24,
1996 1997 1998
------------- ------------- -------------
(52 WEEKS) (52 WEEKS) (52 WEEKS)
<S> <C> <C> <C>
Revenues:
Merchandise sales.................. $188,091 $202,440 $460,798
Gasoline sales..................... 192,737 220,166 509,958
Commissions........................ 3,979 4,787 14,128
-------- -------- --------
Total revenues.................... 384,807 427,393 984,884
-------- -------- --------
Cost of sales:
Merchandise........................ 125,979 132,846 303,968
Gasoline........................... 167,610 197,268 447,565
-------- -------- --------
Total cost of sales............... 293,589 330,114 751,533
-------- -------- --------
Gross profit......................... 91,218 97,279 233,351
-------- -------- --------
Operating expenses:
Store expenses..................... 57,841 60,208 140,089
General and administrative
expenses.......................... 17,751 16,796 32,761
Merger integration costs (Note 2).. -- -- 1,016
Restructuring charges (Note 11).... 1,560 -- --
Impairment of long-lived assets
(Note 10)......................... 3,034 -- --
Depreciation and amortization...... 9,158 9,504 27,642
-------- -------- --------
Total operating expenses.......... 89,344 86,508 201,508
-------- -------- --------
Income from operations............... 1,874 10,771 31,843
-------- -------- --------
Other income (expense):
Interest expense................... (11,992) (13,039) (28,946)
Miscellaneous...................... (660) 1,293 1,776
-------- -------- --------
Total other expense............... (12,652) (11,746) (27,170)
-------- -------- --------
Income (loss) before income taxes and
extraordinary loss.................. (10,778) (975) 4,673
Income tax benefits (expense) (Note
6).................................. 2,664 -- --
-------- -------- --------
Income (loss) before extraordinary
loss................................ (8,114) (975) 4,673
Extraordinary loss (Note 5).......... -- -- (7,998)
-------- -------- --------
Net loss............................. (8,114) (975) (3,325)
Preferred dividends.................. (2,654) (5,304) (2,942)
-------- -------- --------
Net loss applicable to common
shareholders........................ $(10,768) $ (6,279) $ (6,267)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
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 28,
1995................... -- $ -- 100,000 $ 1 $ 6,998
Net loss................ -- -- -- -- --
Issuances of common and
preferred stock........ 25,999 -- 14,029 -- (446)
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ------- -------- --------
Balance, September 26,
1996................... 25,999 -- 114,029 1 6,552
Net loss................ -- -- -- -- --
Net proceeds from stock
issue.................. 17,500 -- -- -- 15,953
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ------- -------- --------
Balance, September 25,
1997................... 43,499 -- 114,029 1 22,505
-------- -------- ------- -------- --------
Net loss................ -- -- -- -- --
Issuances of common
stock.................. -- -- 115,478 1 57,150
Contribution of Series A
Preferred Stock and
related dividends to
Additional Paid in
Capital................ (25,999) -- -- -- 6,508
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ------- -------- --------
Balance, September 24,
1998................... 17,500 -- 229,507 2 86,163
======== ======== ======= ======== ========
<CAPTION>
Total
Additional
Paid in Shareholder Accumulated
Other(1) Capital Loans Deficit Total
-------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, September 28,
1995................... $(17,109) $(10,111) $ -- $ (6,223) $(16,333)
Net loss................ -- -- -- (8,114) (8,114)
Issuances of common and
preferred stock........ -- (446) -- -- (446)
Dividends on preferred
stock.................. -- -- -- (2,654) (2,654)
-------- -------- ------- -------- --------
Balance, September 26,
1996................... (17,109) (10,557) -- (16,991) (27,547)
Net loss................ -- -- -- (975) (975)
Net proceeds from stock
issue.................. -- 15,953 -- -- 15,953
Dividends on preferred
stock.................. -- -- -- (5,304) (5,304)
-------- -------- ------- -------- --------
Balance, September 25,
1997................... (17,109) 5,396 -- (23,270) (17,873)
-------- -------- ------- -------- --------
Net loss................ -- -- -- (3,325) (3,325)
Issuances of common
stock.................. -- 57,150 (215) -- 56,936
Contribution of Series A
Preferred Stock and
related dividends to
Additional Paid in
Capital................ -- 6,508 -- -- 6,508
Dividends on preferred
stock.................. -- -- -- (2,942) (2,942)
-------- -------- ------- -------- --------
Balance, September 24.
1998................... (17,109) 69,054 (215) (29,537) 39,304
======== ======== ======= ======== ========
</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.
32
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 24,
1996 1997 1998
------------- ------------- -------------
(52 WEEKS) (52 WEEKS) (52 WEEKS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss............................ $(8,114) $ (975) $ (3,325)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Extraordinary loss................ -- -- 2,006
Impairment of long-lived assets... 3,034 -- --
Depreciation and amortization..... 9,158 9,504 27,642
Provision for deferred income
taxes............................ (1,558) 371 138
(Gain) loss on sale of property
and equipment.................... 470 (1,054) 531
Provision for environmental
expenses......................... 512 1,574 6,181
Provision for closed stores....... 673 (11) 50
Write-off of property held for
sale............................. 168 -- --
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Receivables....................... (539) (527) (8,512)
Inventories....................... (937) (2,273) (4,518)
Prepaid expenses.................. 20 (429) 390
Other non-current assets.......... 432 (4,295) 5,111
Accounts payable.................. 2,104 603 13,896
Other current liabilities and
accrued expenses................. (639) 3,393 2,241
Employment obligations............ (255) (698) (407)
Other noncurrent liabilities...... 886 2,155 6,608
------- -------- ---------
Net cash provided by operating
activities......................... 5,415 7,338 48,032
------- -------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property held for
sale............................... (4,050) (1,828) (5,203)
Additions to property and
equipment.......................... (7,084) (14,749) (43,153)
Proceeds from sale of property held
for sale........................... 2,462 1,345 4,807
Proceeds from sale of property and
equipment.......................... 1,468 2,315 7,648
Acquisitions of related businesses,
net of cash acquired............... -- (12,162) (250,592)
------- -------- ---------
Net cash used in investing
activities......................... (7,204) (25,079) (286,493)
------- -------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal repayments under capital
leases............................. (347) (303) (1,424)
Proceeds from issuance of capital
leases............................. -- -- 1,086
Principal repayments of long-term
debt............................... (20) (26) (51,543)
Net proceeds from issuance of long-
term debt.......................... -- 200 278,508
Net proceeds from equity issues..... -- 15,953 56,935
Other financing costs............... (3,505) (74) (14,044)
------- -------- ---------
Net cash provided by (used in)
financing activities............... (3,872) 15,750 269,518
------- -------- ---------
Net increase (decrease) in cash..... (5,661) (1,991) 31,057
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 10,999 5,338 3,347
------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD ............................ $ 5,338 $ 3,347 $ 34,404
======= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 24,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Cash paid (refunded)
during the year:
Interest................ $12,719 $12,863 $21,826
======= ======= =======
Taxes................... $ (403) $ (917) $ 784
======= ======= =======
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1997 and 1998, The Pantry entered into several business
acquisitions and divestitures. See Note 2--Business Acquisitions and Note 12--
Common Stock. In connection with the Lil' Champ acquisition, the holders of
The Pantry's Series A preferred stock contributed all outstanding shares of
Series A preferred stock and related accrued and unpaid dividends to the
capital of The Pantry, resulting in an increase in paid in capital of $6,508.
34
<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. and its wholly-owned subsidiaries, Sandhills, Inc., Lil' Champ Food
Stores, Inc., and its wholly-owned subsidiary, Miller Enterprises Inc., Global
Communications, Inc., PH Holding Corporation and PH Holding's wholly-owned
subsidiaries, TC Capital Management, Inc. and Pantry Properties, Inc. All
intercompany transactions and balances have been eliminated in consolidation.
The Pantry owns and operates approximately 1,149 convenience stores in North
Carolina, South Carolina, Florida, Tennessee, Kentucky, Indiana and Virginia.
Prior to November 2, 1993, The Pantry was a wholly-owned subsidiary of
Montrose Pantry Acquisition Corporation, an entity formed to affect the 1987
leveraged buy-out of The Pantry. On November 2, 1993, The Pantry was merged
into Montrose and Montrose's name was changed to The Pantry. Montrose had no
assets or operations other than its investment in The Pantry.
On November 30, 1995, Freeman Spogli & Co. Incorporated, through its
affiliates, FS Equity Partners III, L.P., and FS Equity Partners
International, L.P., acquired a 39.9% interest in The Pantry and Chase
Manhattan Capital Corporation acquired a 12.0% interest in The Pantry through
a series of transactions which included the purchase of common stock from
certain shareholders and the purchase of newly issued common and preferred
stock. The Freeman Spogli entities and Chase Capital subsequently acquired the
remaining interests of approximately 37.0% and 11.1%, respectively, on August
19, 1996 through the purchase of common and preferred stock from certain
shareholders. On December 30, 1996, the Freeman Spogli entities purchased
additional preferred stock of The Pantry.
On October 23, 1997, The Pantry acquired 100% of the outstanding common
stock of Lil' Champ from Docks U.S.A., Inc. Also during fiscal 1998, The
Pantry acquired several smaller convenience store chains. See the discussion
of 1998 acquisitions at Note 2--Business Acquisitions. As of September 24,
1998, The Pantry was owned 76.4% and 17.0% by the Freeman Spogli entities and
Chase Capital, respectively.
ACQUISITION ACCOUNTING
Montrose acquired all of The Pantry's common stock in a leveraged buy-out
as of August 13, 1987. Certain individuals and entities which held an
ownership interest in The Pantry retained approximately 45% of ownership
interest after the August 13, 1987 transaction. A new basis of accounting was
established as a result of the acquisition to the extent of the "new" equity
interests, resulting in a partial step-up in basis. The original basis of
accounting was retained for those shareholders that retained an equity
interest in Montrose after the acquisition. To the extent of ownership change,
the excess amount paid over The Pantry's net book value was allocated to
property and equipment, inventories, deferred lease cost and goodwill based on
relative fair market values. To the extent that certain individuals and
entities maintained their equity interests, the excess amount paid over net
book value was recorded as a debit in shareholders' deficit ($17,109,000). Had
there not been a partial step-up, this amount would have been allocated to
property and equipment, inventories, deferred lease cost and goodwill based on
relative fair market values.
ACCOUNTING PERIOD
The Pantry operates on a 52 or 53 week fiscal year ending on the last
Thursday in September. For 1996, 1997 and 1998, each of The Pantry's fiscal
years contained 52 weeks.
35
<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 include
.cash
.deposits in interest bearing accounts
. other financial instruments with original maturities of less than three
months
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out method, except for gasoline inventories
maintained by Lil' Champ, for which cost is determined using the first-in,
first-out method.
PROPERTY HELD FOR SALE
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 Statement of
Accounting Financial Standards 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
36
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
results. Estimated future results are based on a trend of historical results
for the trailing three fiscal years and management's estimate of future
results which indicate that the goodwill balances will be recovered over the
various periods remaining to be benefited.
LONG-LIVED ASSETS
In 1996, The Pantry early-adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of. Accordingly, long-lived assets are
reviewed for impairment on a store-by-store basis whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. When an evaluation is required, the projected future undiscounted
cash flows attributable to each store are compared to the carrying value of
the long-lived assets, including an allocation of goodwill if appropriate, of
that store to determine if a write-down to fair value is required. See Note
10--Impairment of Long-Lived Assets.
DEFERRED LEASE COST
Deferred lease cost represents the value assigned to favorable leases
acquired. Such amounts are being amortized over the remaining term of the
respective leases.
DEFERRED FINANCING COST
Deferred financing cost represents expenses related to issuing The Pantry's
long-term debt, 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 at sales for
fiscal year 1997 and fiscal year 1998, were $9.0 million and $20.7 million,
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 a discounted basis.
37
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
. 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.
. 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 Statement of Accounting
Financial Standards 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
$52,676,000, $61,192,000, and $154,954,000 for 1996, 1997, and 1998,
respectively.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was
approximately $1,047,000, $581,000 and $1,019,000 for fiscal 1996, 1997 and
1998, respectively.
STOCK BASED COMPENSATION
The Pantry's stock option plan is accounted for in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. The Pantry follows the disclosure requirements of Statement of
Financial Accounting Standards 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.
38
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
RECLASSIFICATIONS
Certain amounts in the fiscal 1996 and 1997 consolidated financial
statements have been reclassified to conform to the current year presentation.
NEWLY ADOPTED ACCOUNTING STANDARDS AND RECENTLY ISSUED ACCOUNTING STANDARDS
NOT YET ADOPTED
In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 96-1, Environmental Remediation Liabilities. Statement of Position
96-1 contains authoritative guidance on specific accounting issues that are
present in the recognition, measurement, display and disclosure of
environmental remediation liabilities. The adoption of Statement of Position
96-1 in fiscal 1998 did not have a material effect on The Pantry's 1998
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income.
Statement of Financial Accounting Standards No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. Statement of Financial Accounting Standards 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
Statement of Financial Accounting Standards No. 130 is effective for fiscal
1999. The adoption of Statement of Financial Accounting Standards No. 130 is
not expected to have a material impact on The Pantry's net income or
stockholder's equity as The Pantry has historically had no differences between
net loss and comprehensive income.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. Statement of Financial Accounting Standards No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as
. a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment
. a hedge of the exposure to variable cash flows of a forecasted
transaction
. 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 Statement of Financial Accounting Standards 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. Statement of Financial Accounting
39
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Standards No. 133 is effective for the first quarter of fiscal 2000. Earlier
application of all of the provisions of Statement of Financial Accounting
Standards No. 133 is encouraged. As of September 24, 1998, The Pantry has not
determined the effect of Statement of Financial Accounting Standards No. 133
on its consolidated financial statements.
NOTE 2--BUSINESS ACQUISITIONS:
FISCAL 1998 ACQUISITIONS:
During fiscal 1998, The Pantry acquired the businesses described below,
which were accounted for by the purchase method of accounting:
. The October 23, 1997 acquisition of all of the common stock of Lil' Champ
for $136.4 million (including direct acquisition costs, net of cash
acquired), including the repayment of $10.7 million in outstanding
indebtedness of Lil' Champ. Lil' Champ is a leading operator of
convenience stores in Florida and the largest convenience store operator
in northern Florida. Lil' Champ's 488 stores are located primarily in
northern Florida and Georgia. The purchase price, the refinancing of
existing Lil' Champ debt, and the fees and expense of the Lil' Champ
acquisition were financed with the proceeds from the offering of $200.0
million principal amount of senior subordinated notes due 2007, cash on
hand and the purchase by existing shareholders and management of The
Pantry of an additional $32.4 million of The Pantry's capital stock.
. The March 19, 1998 acquisition of the operating assets of Wooten Oil
Company, Inc., located in eastern North Carolina, for approximately $9.0
million, which was financed primarily from The Pantry's 1998 bank credit
facility and cash on hand.
. The May 2, 1998 acquisition of 10 convenience stores from United Fuels
Corporation, Inc. for approximately $18.3 million. These stores are
located in the Gainesville, Florida area and were financed from The
Pantry's 1998 bank credit Facility.
. The July 2, 1998 acquisition of assets of Quick Stop Food Mart, Inc.
including 75 convenience stores located throughout North Carolina and
South Carolina. Total consideration paid was approximately $56.0 million,
and was funded by proceeds of $25.0 million from The Pantry's 1998 bank
credit facility, an equity investment of $25.0 million by existing
shareholders of The Pantry, and cash on hand.
. The July 15, 1998 acquisition of assets of Stallings Oil Company, Inc.
including 42 convenience stores located throughout North Carolina and
Virginia. Total consideration paid was approximately $29.3 million. The
Stallings acquisition was financed by proceeds of $25.0 million from The
Pantry's 1998 bank credit facility 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>
STALLINGS,
QUICK STOP
LIL' CHAMP AND OTHERS TOTAL
---------- ---------- --------
<S> <C> <C> <C>
ASSETS ACQUIRED:
Receivables, net............................... $ 1,617 $ 2,100 $ 3,717
Inventories.................................... 20,113 8,758 28,871
Deferred income taxes.......................... 2,992 -- 2,992
Prepaid expenses and other current assets...... 1,402 -- 1,402
Property and equipment......................... 155,382 48,682 204,064
Other noncurrent assets........................ 3,696 -- 3,696
-------- -------- --------
Total assets acquired.......................... 185,202 59,540 244,742
-------- -------- --------
LIABILITIES ASSUMED:
Short-term capital lease obligations........... 1,027 -- 1,027
Accounts payable--trade........................ 10,870 228 11,098
Other liabilities and accrued expenses......... 36,093 -- 36,093
Long-term capital lease obligations............ 11,716 -- 11,716
Environmental remediation liabilities.......... 3,150 -- 3,150
Noncurrent deferred income taxes............... 20,530 -- 20,530
Other noncurrent liabilities................... 8,070 996 9,066
-------- -------- --------
Total liabilities assumed...................... 91,456 1,224 92,680
-------- -------- --------
Net tangible assets acquired................... 93,746 58,316 152,062
Goodwill....................................... 42,622 55,908 98,530
-------- -------- --------
Total consideration paid, including direct
costs, net of cash acquired................... $136,368 $114,224 $250,592
======== ======== ========
</TABLE>
The Stallings and Quick Stop purchase price allocations are preliminary
estimates, based on available information, internal estimates and certain
assumptions management believes are reasonable. Accordingly, the purchase
price allocations are subject to finalization pending the completion of
internal and external appraisals of assets acquired. The purchase price
allocations for other 1998 acquisitions have been finalized. The excess of the
purchase prices over fair values of the net assets acquired for all 1998
acquisitions, $98,530,000 has been recorded as goodwill, which is being
amortized on a straight-line basis over 30 years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of The Pantry and acquired businesses as if
the 1998 transactions occurred at the beginning of the fiscal year for each of
the periods presented (amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Total revenues.................................... $1,246,596 $1,235,520
Income (loss) before extraordinary loss........... $ (9,684) $ 4,278
Net loss.......................................... $ (9,684) $ (3,720)
</TABLE>
In management's opinion, the unaudited pro forma information is not
necessarily indicative of actual results that would have occurred had the
acquisitions been consummated at the beginning of fiscal 1997 or fiscal 1998,
or of future operations of the combined companies.
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 for costs of combining its
existing businesses with the acquired businesses of Lil' Champ. The charge
includes
. $.3 million for relocation costs
. $.6 million for elimination of duplicated contractual services for which
there is no future economic benefit
. $.1 million for other consolidation and related expenses
The Pantry's integration plan includes
. 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
The integration plan is substantially complete as of September 24, 1998. 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 Statement of Financial Accounting
Standards 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.
During fiscal 1997, The Pantry acquired 35 stores, acquired the gasoline
operations at 23 third-party locations and disposed of 21 stores. The net
assets acquired and liabilities assumed are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 25,
1997
-------------
<S> <C>
Inventories................................................ $ 1,665
Property and equipment..................................... 6,374
Other noncurrent assets.................................... 9
Accrued expenses........................................... (43)
-------
8,005
Goodwill................................................... 4,157
-------
Total consideration, including direct costs................ $12,162
=======
</TABLE>
42
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--INVENTORIES:
At September 25, 1997 and September 24, 1998, inventories consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Inventories at FIFO cost:
Merchandise.......................................... $16,877 41,967
Gasoline............................................. 4,969 11,510
------- -------
21,846 53,477
Less adjustment to LIFO cost:
Merchandise.......................................... (4,203) (5,668)
Gasoline............................................. (482) --
------- -------
Inventories at LIFO cost............................... $17,161 $47,809
======= =======
</TABLE>
Total inventories at September 24, 1998 include $5,213,000 of gasoline
inventories held by Lil' Champ that are recorded under the FIFO method.
The positive effect on cost of sales of LIFO inventory liquidations was
$68,000, $4,141 and $482,000 for fiscal years 1996, 1997 and 1998,
respectively.
NOTE 4--PROPERTY AND EQUIPMENT:
At September 25, 1997 and September 24, 1998, property and equipment
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Land..................................................... $ 16,109 62,183
Buildings................................................ 29,928 85,278
Gasoline equipment....................................... 50,362 95,729
Other equipment, furniture and fixtures.................. 26,657 96,874
Leasehold improvements................................... 10,743 28,286
Automobiles.............................................. 134 516
Construction in progress................................. 1,471 9,443
-------- --------
135,404 378,309
Less--accumulated depreciation and amortization.......... (57,418) (77,331)
-------- --------
$ 77,986 $300,978
======== ========
</TABLE>
43
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--LONG-TERM DEBT:
At September 25, 1997 and September 24, 1998, long-term debt consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Senior notes payable; due November 15, 2000; interest
payable semi-annually at 12%.......................... $ 99,995 $ 48,995
Senior subordinated notes payable; due October 15,
2007; interest payable semi-annually at 10.25%........ -- 200,000
Acquisition facility; interest payable monthly at LIBOR
(5.85% at September 24, 1998) plus 2.5%; principal due
in quarterly installments through October 31, 2002.... -- 78,000
Other notes payable; various interest rates and
maturity dates........................................ 343 319
-------- --------
100,338 327,314
Less--current maturities............................... (33) (45)
-------- --------
$100,305 $327,269
======== ========
</TABLE>
While the senior notes are unsecured, the terms of the senior notes contain
certain covenants restricting
. the use of proceeds from the offering
. the placing of liens on properties
. "restricted payments" as defined in the agreement, including dividends
. the incurrance of additional debt
. the sale of assets
. any merger, consolidation or change in control
. lines of business and
. transactions with affiliates
In addition, the indenture requires certain positive covenants including the
maintenance of a consolidated fixed charge ratio of greater than 1.69 to 1.0.
On October 23, 1997 in connection with the Lil' Champ acquisition, The
Pantry completed the offering of the senior subordinated notes and, in a
related transaction, completed the tender offer and consent solicitation with
respect to the senior notes. The tender offer resulted in The Pantry's
purchase of $51 million in principal amount of the senior notes at a purchase
price of 110% of the aggregate principal amount plus accrued and unpaid
interest and other related fees. In connection with this repurchase, The
Pantry incurred an extraordinary loss of approximately $8.0 million related to
costs of the tender offer and consent solicitation and write-off of deferred
financing costs.
The senior subordinated notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, as to the payment of principal, premium,
if any, and interest, jointly and severally, by all guarantors. See Note 17--
Supplemental Guarantors Information. The senior subordinated notes contain
covenants that, among other things, restrict the ability of The Pantry and any
restricted subsidiary to:
. incur additional indebtedness
. pay dividends or make distributions
44
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
. issue stock of subsidiaries
. make certain investments
. repurchase stock
. create liens
. enter into transactions with affiliates
. enter into sale-leaseback transactions
. merge or consolidate The Pantry or any of its subsidiaries
. transfer and sell assets
On October 23, 1997 in connection with the Lil' Champ acquisition, The
Pantry entered into the 1998 bank credit facility consisting of a $45.0
million revolving credit facility and a $30 million acquisition facility.
Under the terms of the 1998 bank credit facility, the acquisition facility
is available to finance acquisition of related businesses. See Note 2--
Business Acquisitions. The 1998 bank credit facility contains covenants
restricting the ability of The Pantry and any of its subsidiaries to among
other things:
. incur additional indebtedness
. declare dividends or redeem or repurchase capital stock
. prepay, redeem or purchase debt
. incur liens
. make loans and investments
. make capital expenditures
. engage in mergers, acquisitions or asset sales
. engage in transactions with affiliates
The Pantry is also required to comply with financial covenants with respect to
. a minimum coverage ratio
. a minimum pro forma cash flow
. a maximum pro forma leverage ratio
. a maximum capital expenditure allowance
During fiscal 1998, the 1998 bank credit facility was amended to increase
the amount available to The Pantry for acquisitions from $30.0 million to
$85.0 million. In addition, amendments were made to certain of The Pantry's
financial covenants under the bank credit facility, including
. the minimum coverage ratio
. the minimum pro forma cash flow
. the maximum pro forma leverage ratio
. the maximum capital expenditure allowance
45
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of September 24, 1998, there was $78,000,000 outstanding under the
acquisition line. The Pantry had outstanding letters of credit of $13,545,000
at September 24, 1998, issued under the revolving credit facility.
As of September 24, 1998, The Pantry was in compliance with all covenants
and restrictions relating to all its outstanding borrowings.
As of September 24, 1998, substantially all of The Pantry's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
The annual maturities of notes payable at September 24, 1998 are as follows
(in thousands):
<TABLE>
<S> <C>
Year Ending September:
1999............................................................ $ 67
2000............................................................ 39
2001............................................................ 49,038
2002............................................................ 47
2003............................................................ 78,049
Thereafter...................................................... 200,074
--------
Total........................................................... $327,314
========
</TABLE>
NOTE 6--INCOME TAXES:
The components of income tax expense (benefit) are summarized below (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ----- -----
<S> <C> <C> <C>
Current:
Federal............................................. $(1,111) $ 163 $ --
State............................................... 5 (534) 138
------- ----- -----
(1,106) (371) 138
------- ----- -----
Deferred:
Federal............................................. (1,074) 371 --
State............................................... (484) -- (138)
------- ----- -----
(1,558) 371 (138)
------- ----- -----
$(2,664) $ -- $ --
======= ===== =====
</TABLE>
46
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of September 25, 1997 and September 24, 1998, deferred tax liabilities
(assets) are comprised of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Depreciation.............................................. $ 6,513 $ 32,921
Deferred lease cost....................................... 27 17
Inventory................................................. 940 3,417
Other..................................................... 469 1,672
------- --------
Gross deferred tax liabilities............................ 7,949 38,027
------- --------
Capital lease obligations................................. (321) (1,207)
Allowance for doubtful accounts........................... (58) (108)
Environmental expenses.................................... (500) (2,114)
Accrued insurance reserves................................ (1,607) (4,482)
Exit and employee termination costs....................... -- (1,860)
Accrued compensation...................................... (667) --
Other..................................................... (616) (3,154)
------- --------
Gross deferred tax assets................................. (3,769) (12,925)
Net operating loss carryforwards.......................... (2,622) (6,836)
General business credits.................................. (1,846) (1,832)
AMT Credits............................................... (2,696) (2,492)
Deferred tax assets valuation allowance................... 1,686 2,436
------- --------
$(1,298) $ 16,378
======= ========
</TABLE>
As of September 25, 1997 and September 24, 1998, net current deferred
income tax assets totaled $1,142,000 and $3,988,000, respectively, and net
noncurrent deferred income tax assets (liabilities) totaled $156,000 and
$(20,366,000), respectively.
Reconciliations of income taxes at the Federal statutory rate (34%) to
actual taxes provided are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ----- -------
<S> <C> <C> <C>
Tax benefit at Federal statutory rate............. $(3,665) $(332) $(1,131)
Tax benefit at state rate, net of Federal income
tax benefit...................................... (316) (325) (153)
Permanent differences:
Amortization of goodwill........................ 1,127 235 474
Other........................................... 14 248 190
Tax benefit from creation of general business
credits.......................................... -- (151) --
Valuation allowance............................... 176 325 620
------- ----- -------
Net income tax benefit............................ $(2,664) $ -- $ --
======= ===== =======
</TABLE>
47
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of September 24, 1998 The Pantry had net operating loss carryforwards,
general business credits and AMT credits which can be used to offset future
Federal income taxes. The benefit of these carryforwards is recognized, net of
a valuation allowance for a portion of the net operating losses and credits
which The Pantry believes may expire unused, as deferred tax assets. Loss
carryforwards as of September 24, 1998 have the following expiration dates (in
thousands):
<TABLE>
<CAPTION>
FEDERAL STATE
------- -------
<S> <C> <C>
2009........................................................ $ -- $ 3,158
2010........................................................ -- 2,974
2011........................................................ -- 10,919
2012........................................................ 2,332 5,101
2013........................................................ -- 12,820
2018........................................................ 12,022 --
------- -------
Total loss carryforwards.................................... $14,354 $34,972
======= =======
</TABLE>
The valuation allowance increased $176,000 and $325,000 in 1996 and 1997,
primarily to provide for operating loss carryforwards and available tax
credits that more likely than not will not be realized, based on estimates of
future earnings and expected timing of reversals of temporary differences. The
valuation allowance increased $620,000 in 1998, which was primarily
attributable to federal net operating losses, net of a decrease for state tax
net economic loss carryovers (as discussed below).
The State of North Carolina and the State of Tennessee have assessed
Sandhills, Inc., a subsidiary of The Pantry, with additional taxes plus
penalties and accrued interest totaling approximately $5 million, for the
periods February 1, 1992 to September 26, 1996. In December 1998, The Pantry
reached a preliminary settlement with the State of North Carolina, which is
pending final approval by the State. Under the proposed settlement, The Pantry
will reduce State net economic loss carryforwards and pay a de minimis amount
of additional tax. The expected settlement is reflected in the financial
statements as a reduction to State net economic losses and a reduction of
deferred tax assets of approximately $1.2 million, which is fully offset by a
corresponding reduction to the valuation allowance. The Pantry is contesting
the Tennessee assessment and believes that, in the event of a mutual
settlement, the assessment amount and related penalties (approximately
$250,000) would be substantially reduced. Based on this, The Pantry believes
the outcome of the audits will not have a material adverse effect on The
Pantry's financial condition or financial statements.
NOTE 7--LEASES:
The Pantry leases store buildings, office facilities and store equipment
under both capital and operating leases. The asset balances related to capital
leases at September 25, 1997, and September 24, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Buildings................................................ $ 2,196 $12,344
Less--accumulated amortization........................... (1,649) (2,142)
------- -------
$ 547 $10,202
======= =======
</TABLE>
Amortization expense related to capitalized leased assets was $261,000,
$185,000, and $1,249,000 for fiscal 1996, 1997, and 1998 respectively.
48
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments as of September 24, 1998, for capital leases
and operating leases that have initial or remaining terms in excess of one
year are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------- ---------
<S> <C> <C>
1999..................................................... $ 2,507 $ 21,462
2000..................................................... 2,396 20,179
2001..................................................... 2,309 18,203
2002..................................................... 2,307 16,954
2003..................................................... 2,307 15,817
Thereafter............................................... 5,022 38,083
------- --------
Net minimum lease payments............................... 16,848 $130,698
========
Amount representing interest (8% to 20%)................. 3,479
-------
Present value of net minimum lease payments.............. 13,369
Less--current maturities................................. 1,240
-------
$12,129
=======
</TABLE>
Rental expense for operating leases was approximately $8,126,000,
$9,618,000 and $23,758,000 for fiscal years 1996, 1997 and 1998, respectively.
Some of The Pantry's leases require contingent rental payments; such amounts
are not material for the fiscal years presented.
During 1996, 1997, and 1998, The Pantry entered into sale-leaseback
transactions with unrelated parties with net proceeds of $2,462,000,
$1,345,000 and $4,807,000, 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. There were no
continuing involvement provisions or other conditions placed upon The Pantry
under the sale or lease agreements.
NOTE 8--COMMITMENTS AND CONTINGENCIES:
As of September 24, 1998, The Pantry was contingently liable for
outstanding letters of credit in the amount of $13.5 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.
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 25, 1997 and September 24, 1998, were $5.0 million and $23.4
million, respectively.
McLane Company, Inc.--The Pantry purchases over 50% of our general
merchandise from a single wholesaler, McLane. The Pantry's arrangement with
McLane is governed by a five-year distribution service
49
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 seven to thirteen
years and in some cases include minimum annual purchase requirements. In
connection with these agreements, The Pantry may receive upfront vendor
allowances, volume incentive payments and other vendor assistance payments. If
The Pantry were to default under the terms of any contract or terminate the
supply agreement prior to the end of the initial term, The Pantry must
reimburse the respective oil company for the unearned, unamortized portion of
the payments received to date. In accordance with generally accepted
accounting principles, these payments are amortized using the specific
amortization periods in accordance with the terms of each agreement, either
using the straight-line method or based on gasoline volume purchased. The
Pantry has exceeded the minimum required annual purchases each year and
expects to exceed the minimum required annual purchase levels in future years.
ENVIRONMENTAL LIABILITIES AND CONTINGENCIES
The Pantry is subject to various federal, state and local environmental
laws and regulations governing underground petroleum storage tanks that
require The Pantry to make certain expenditures for compliance. In particular,
at the federal level, the Resource Conservation and Recovery Act, as amended,
requires the EPA to establish a comprehensive regulatory program for the
detection, prevention, and cleanup of leaking underground storage tanks.
Regulations enacted by the EPA in 1988 established requirements for
. installing underground storage tank systems
. upgrading underground storage tank systems
. taking corrective action in response to releases
. closing underground storage tank systems
. keeping appropriate records
. maintaining evidence of financial responsibility for taking corrective
action and compensating third parties for bodily injury and property
damage resulting from releases
These regulations permit states to develop, administer and enforce their own
regulatory programs, incorporating requirements which are at least as
stringent as the federal standards. The Florida rules for 1998 upgrades are
more stringent than the 1988 EPA regulations. The Pantry facilities in Florida
all meet or exceed such rules. The following is an overview of the
requirements imposed by these regulations:
. Leak Detection: The EPA and states' release detection regulations were
phased in based on the age of the underground storage tanks. All
underground storage tanks were required to comply with leak detection
requirements by December 22, 1993. The Pantry utilizes several approved
leak detection methods for all company-owned underground storage tank
systems. Daily and monthly inventory reconciliations are completed at the
store level and at the corporate support center. The daily and monthly
50
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reconciliation data is also analyzed using statistical inventory
reconciliation which compares the reported volume of gasoline purchased
and sold with the capacity of each underground storage tank system and
highlights discrepancies. The Pantry believes it is in full or substantial
compliance with the leak detection requirements applicable to underground
storage tanks.
. Corrosion Protection: The 1988 EPA regulations require that all
underground storage tank systems have corrosion protection by December
22, 1998. All of The Pantry's underground storage tanks have been
protected from corrosion either through the installation of fiberglass
tanks or upgrading steel underground storage tanks with interior
fiberglass lining and the installation of cathodic protection.
. Overfill/Spill Prevention: The 1988 EPA regulations require that all
sites have overfill/spill prevention devices by December 22, 1998. The
Pantry has installed spill/overfill equipment on all company-owned
underground storage tank systems to meet these regulations.
In addition to the technical standards, The Pantry is required by federal
and state regulations to maintain evidence of financial responsibility for
taking corrective action and compensating third parties in the event of a
release from its underground storage tank systems. In order to comply with
this requirement, The Pantry maintains surety bonds in the aggregate amount of
approximately $900,000 in favor of state environmental enforcement agencies in
the states of North Carolina, Virginia and South Carolina and a letter of
credit in the aggregate amount of approximately $1.1 million issued by a
commercial bank in favor of state environmental enforcement agencies in the
states of Florida, Tennessee, Indiana and Kentucky and relies on
reimbursements from applicable state trust funds. In Florida, The Pantry meets
such financial responsibility requirements by state trust fund coverage
through December 31, 1998 and will meet such requirements thereafter through
private commercial liability insurance. The Pantry has sold all of its Georgia
stores but has retained responsibility for pre-closing environmental
remediation. The costs of such remediation and third party claims should be
covered by the state trust fund, subject to applicable deductibles and caps on
reimbursements.
All states in which The Pantry operates or has operated underground storage
tank systems have established trust funds for the sharing, recovering, and
reimbursing of certain cleanup costs and liabilities incurred as a result of
releases from underground storage tank systems. These trust funds, which
essentially provide insurance coverage for the cleanup of environmental
damages caused by the operation of underground storage tank systems, are
funded by a underground storage tank registration fee and a tax on the
wholesale purchase of motor fuels within each state. The Pantry has paid
underground storage tank registration fees and gasoline taxes to each state
where it operates to participate in these programs and has filed claims and
received reimbursement in North Carolina, South Carolina, Kentucky, Indiana,
Florida, Georgia, and Tennessee. The coverage afforded by each state fund
varies but generally provides from $150,000 to $1.0 million per site or
occurrence for the cleanup of environmental contamination, and most provide
coverage for third party liabilities.
Costs for which The Pantry does not receive reimbursement include but are
not limited to, the per-site deductible, costs incurred in connection with
releases occurring or reported to trust funds prior to their
inception, removal and disposal of underground storage tank systems, and costs
incurred in connection with sites otherwise ineligible for reimbursement from
the trust funds. The trust funds require The Pantry to pay deductibles ranging
from $10,000 to $100,000 per occurrence depending on the upgrade status of its
underground storage tank system, the date the release is discovered/reported
and the type of cost for which reimbursement is sought. The Florida trust fund
will not cover releases first reported after December 31, 1998. The Pantry
will meet Florida financial responsibility requirements for remediation and
third party claims arising out of releases reported after December 31, 1998
through a combination of private insurance and a letter of credit. In addition
to material amounts to be spent by The Pantry, a substantial amount will be
expended for remediation on behalf of The Pantry by state trust funds
established in The Pantry's operating areas or other responsible third parties
(including insurers). To the extent such third parties do not pay for
remediation as anticipated by The Pantry,
51
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Pantry will be obligated to make such payments, which could materially
adversely affect The Pantry's financial condition and results of operations.
Reimbursement from state trust funds will be dependent upon the maintenance
and continued solvency of the various funds.
Environmental reserves of $7.8 million and $17.1 million as of September
25, 1997, September 24, 1998, respectively, represent estimates for future
expenditures for remediation, tank removal and litigation associated with 92
and 205 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 24, 1998 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 24, 1999 are
as follows:
<TABLE>
<CAPTION>
EXPECTED
FISCAL YEAR PAYMENTS
----------- --------
<S> <C>
1999............................................................ $ 433
2000............................................................ 424
2001............................................................ 248
2002............................................................ 68
2003............................................................ 38
Thereafter...................................................... 43
-------
Total undiscounted amounts not covered by a third party......... 1,254
Other current cost amounts...................................... 16,158
-------
Amount representing interest (10%).............................. (227)
-------
Environmental reserve........................................... $17,185
-------
</TABLE>
The increase in the environmental reserve between September 25, 1997 and
September 24, 1998 related primarily to sites acquired in connection with the
Lil' Champ, Quick Stop and Stallings acquisitions.
The Pantry anticipates that it will be reimbursed for a portion of these
expenditures from state insurance funds and private insurance. As of September
24, 1998, anticipated reimbursements of $13.2 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 copay 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.
52
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
NOTE 9--BENEFIT PLANS:
The Pantry sponsors a 401(k) Employee Retirement Savings Plan for eligible
employees. Employees must be at least nineteen years of age and have one year
of service with at least 1,000 hours worked to be eligible to participate in
the plan. Employees may contribute up to 15% of their annual compensation, and
contributions are matched by The Pantry on the basis of 50% of the first 5%
contributed. Matching contribution expense was $330,000, $305,000 and $396,000
for fiscal years 1996, 1997 and 1998, respectively.
NOTE 10--IMPAIRMENT OF LONG-LIVED ASSETS:
In fiscal year 1996, The Pantry early-adopted Statement of Financial
Accounting Standards No. 121, which establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used and for long-lived and certain
identifiable intangible assets to be disposed of.
Pursuant to Statement of Financial Accounting Standards No. 121, The Pantry
evaluated its long-lived assets for impairment on a store-by-store basis by
comparing the sum of the projected future undiscounted cash flows attributable
to each store to the carrying value of the long-lived assets (including an
allocation of goodwill, if appropriate) of that store. Projected future cash
flows for each store were estimated for a period approximating the remaining
lives of that store's long-lived assets, based on earnings history, lease
expiration dates and renewal periods, market conditions and assumptions
reflected in internal operating plans and strategies. Based on this
evaluation, The Pantry determined that certain long-lived assets were impaired
and recorded an impairment loss based on the difference between the carrying
value and the fair value of the assets. Fair value was determined based on an
evaluation of each property's value. The impairment related to stores that
will continue to be operated and consisted of the following assets (in
thousands):
<TABLE>
<S> <C>
Property, plant and equipment.................................... $ 415
Goodwill......................................................... 2,619
------
Total............................................................ $3,034
======
</TABLE>
NOTE 11--RESTRUCTURING CHARGES:
As a result of the change in ownership that occurred during fiscal 1996,
The Pantry restructured its corporate offices. These charges include $0.8
million for involuntary termination benefits paid to 58 employees and
$0.8 million for the termination of the former Chairman and Chief Executive
Officer's employment agreement, including related expenses. These amounts were
expended during 1996.
NOTE 12--COMMON STOCK:
The Pantry has filed a Form S-1, amended June 4, 1999, for the sale of
6,250,000 shares of stock in an initial public offering.
53
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Upon completion of the planned initial public offering, Freeman Spogli will
own approximately 183,324 shares, or approximately 51.6% of the shares of
Common stock expected to be outstanding after the offering, and will own
warrants for the purchase of an additional 46,000 shares. (Unaudited)
In connection with the Lil' Champ acquisition and related transactions, The
Pantry issued 72,000 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 Capital contributed all
outstanding shares of Series A Preferred Stock and related accrued and unpaid
dividends to the capital of The Pantry. As a result, preferred stock and
accrued dividends were reduced by $260 and $6,508,000 respectively, and
additional paid in capital was increased by $6,508,260.
On July 2, 1998 in connection with two acquisitions completed in July 1998,
The Pantry issued 43,478 shares of common stock, par value $0.01 per share, to
certain existing shareholders for an aggregate purchase price of $25.0
million.
NOTE 13--PREFERRED STOCK:
As of September 24, 1998, preferred stock consists of 150,000 authorized
shares. As discussed in Note 12--Common Stock, holders of The Pantry's 25,999
shares of Series A contributed all outstanding shares of Series A and related
accrued and unpaid dividends to the capital of The Pantry in connection with
the Lil' Champ acquisition. Issued and outstanding shares at September 24,
1998 include 17,500 shares designated as Series B, all of which is held by the
Freeman Spogli entities. The Pantry is limited from paying dividends under the
terms and conditions of the senior notes indenture, senior subordinated notes
indenture and the certificate of designation for the Series B preferred stock.
In addition, the certificate of designation for the Series B preferred
stock, without consent of the holders of a majority of the outstanding shares
of Series B preferred stock, voting separately as a single class, restricts
the following:
. the issuance of any securities with equal or superior rights with respect
to dividends or liquidation preferences
. the repurchase of any shares of, making of any dividend or distribution
to, or any reclassification with respect to, any of The Pantry's
outstanding shares of capital stock
. amendment or modification of The Pantry's certificate of incorporation or
bylaws so as to adversely affect the relative rights, preferences,
qualification, limitations or restrictions or the Series B preferred
stock
. amendment of the related paragraph regarding restrictions and limitations
in the certificate of designation for the Series B preferred stock
At all meetings of the stockholders of The Pantry and in the case of any
actions of shareholders in lieu of a meeting date, the holders of the Series B
preferred stock shall be entitled to ten (10) votes per share and, except as
required by Delaware law, shall vote together with the holders of common stock
as a single class. The holders of Series B preferred stock are entitled to
cumulative dividends from The Pantry on each share of Series B preferred stock
at a quarterly rate equal to $32.5 per share plus an amount determined by
applying a thirteen percent (13%) annual rate compounded quarterly to any
accrued but unpaid dividend. Except as limited
54
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
by both the senior notes and senior subordinated notes indentures, such
dividends on the outstanding shares of Series B preferred stock shall be
payable at such intervals as the board of directors of The Pantry may from
time to time determine and may be paid in cash or by issuing additional
shares, including fractional shares of Series B preferred stock, at the rate
of one share for each $1,000 of dividends outstanding. As of September 24,
1998, substantially all of The Pantry's and its subsidiaries' net assets are
restricted as to payment of dividends and other distributions.
Upon the dissolution, liquidation or winding up of The Pantry, whether
voluntary or involuntary, the holders of outstanding shares of Series B
preferred stock, shall be entitled to be paid out of the assets of The Pantry
available for distribution to its stockholders, whether such assets are
capital, surplus or earnings, before any payment or declaration and setting
apart for payment of any amount shall be made in respect of the outstanding
shares of any other class or series of The Pantry's capital stock, including
without limitation, shares of common stock, an amount equal to $1,000 per
share of Series B preferred stock then outstanding, plus all accrued but
unpaid dividends thereon to the date fixed for liquidation (whether or not
declared), and no more. If upon the dissolution, liquidation or winding up of
The Pantry, whether voluntary or involuntary, the assets to be distributed
among the holders of outstanding shares of Series B preferred stock shall be
insufficient to permit the payment to such stockholders of the full
preferential amounts aforesaid, then the entire assets of The Pantry are to be
distributed ratably among the holders of outstanding shares of Series B
preferred stock based on the full preferential amounts for the number of
outstanding shares of Series B preferred stock held by each holder.
NOTE 14--STOCK OPTIONS AND OTHER EQUITY INSTRUMENTS:
On January 1, 1998, The Pantry adopted an incentive and non-qualified stock
option plan. Pursuant to the provisions of the plan, options may be granted to
officers, key employees and consultants of The Pantry or any of its
subsidiaries and certain members of the board of directors to purchase up to
25,000 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 11,311 shares of common stock were
granted under the plan with exercise prices ranging from $450-$575 per share
(weighted-average exercise price of $479 per share).
The following table summarizes information about stock options outstanding
at September 24, 1998:
<TABLE>
<CAPTION>
NUMBER
OUTSTANDING AT WEIGHTED-AVERAGE
DATE SEPTEMBER 24, REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES ISSUED 1998 CONTRACTUAL LIFE EXERCISE PRICE
--------------- ------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
$8.82.............. 1/1/98 8,701 9 years $450
$11.27............. 8/25/98 2,610 9 years $575
------
Total............ 11,311
</TABLE>
55
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All options granted in 1998 vest over a three-year period, with one-third
of each grant vesting on the anniversary of the initial grant. None of the
options outstanding at September 24, 1998 had vested as of that date. All
stock options are granted at estimated fair market value of the common stock
at the grant date. Had compensation cost for the plan been determined
consistent with Statement of Financial Accounting Standards 123, The Pantry's
pro-forma net loss for 1998 would have been approximately $3,395,000. The fair
value of each option grant is estimated on the date of grant using the minimum
value method with the following assumptions:
<TABLE>
<CAPTION>
1998
-----
<S> <C>
Weighted-average grant date fair value................................ $ 479
Weighted-average expected lives (years)............................... 2.33
Risk-free interest rate............................................... 5.5%
Dividend yield........................................................ 0.00%
</TABLE>
On August 31, 1998, The 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, 2,636 shares, net of subsequent
repurchases of 123 shares, were sold under the subscription plan. These shares
were sold at fair value ($575), 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. (Unaudited)
In December 1996, in connection with its purchase of 17,500 shares of
Series B preferred stock, Freeman Spogli acquired warrants to purchase 46,000
shares of common stock. The warrants are exercisable at $380 per share until
December 30, 2006, and contain adjustment provisions in the event The Pantry
declares dividends or distributions, makes stock splits, or engages in
mergers, reorganizations or reclassifications. None of these warrants had been
exercised at September 24, 1999.
56
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--RELATED PARTIES:
LEASES
Certain of The Pantry's leases are with partnerships and corporations
controlled by individuals who were shareholders, officers and directors of The
Pantry during 1996. Rents under these leases were approximately $1,274,000 for
fiscal year 1996. Such leases expire at various intervals over the next twenty
years. Such individuals were no longer related parties subsequent to 1996.
TRANSACTIONS WITH AFFILIATES
STOCK ISSUANCES
In November 1995, Freeman Spogli purchased 45,501 shares of common stock
and 10,374.228 shares of Series A preferred stock for an aggregate purchase
price of approximately $17.2 million. Of the shares purchased by Freeman
Spogli, 329 common shares and 75.012 shares of Series A preferred stock were
purchased from us for $125,020 and the remaining shares were purchased from
existing shareholders. Chase Capital purchased from us 13,700 shares of common
stock and 3,123.6 shares of Series A preferred stock for an aggregate purchase
price of approximately $5.2 million. The purchase price for the common stock
was $152 per share and the purchase price for the Series A preferred stock was
$1,000.00 per share. In connection with these transactions, total costs
incurred by The Pantry exceeded the net proceeds received from the sale of new
shares by $447,000, which resulted in a charge to equity.
In August 1996, Freeman Spogli and Chase Capital purchased the outstanding
common stock and Series A preferred stock held by other shareholders. Freeman
Spogli purchased 42,212 shares of common stock and 9,624.336 shares of Series
A preferred stock for an aggregate purchase price of approximately $16.0
million and Chase Capital purchased 12,616 shares of common stock and
2,876.448 shares of Series A preferred stock for an aggregate purchase price
of approximately $4.8 million. The purchase price for the common stock was
$152 per share and the purchase price for the Series A preferred stock was
$1,000.00 per share.
In December 1996, Freeman Spogli purchased 17,500 shares of Series B
preferred stock and warrants to purchase 46,000 shares of common stock for
approximately $17.5 million. The purchase price for the Series B preferred
stock was $1,000.00 per share and the purchase price for the warrants was
$1.00. The warrants are exercisable at $380 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 this offering, The Pantry will
repurchase the Series B preferred stock from Freeman Spogli for $17.5 million,
plus approximately $6.0 million in accrued dividends.
In October 1997, in connection with the Lil' Champ acquisition, Freeman
Spogli purchased 59,421 shares of common stock and Chase Capital purchased
11,690 shares of common stock for an aggregate purchase price of approximately
$32.0 million. Peter J. Sodini, The Pantry's Chief Executive Officer,
purchased 889 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 $450
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 36,190 shares of common
stock and Chase Capital purchased 7,288 shares of common stock for an
aggregate purchase price of $25.0 million. The purchase price for the common
stock was $575 per share.
57
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In November 1998, Peter Starrett, a director of The Pantry, purchased 435
shares of common stock for a purchase price of $250,125. Freeman Spogli has
the right to require the sale of Mr. Starrett's shares in the event it sells
all of its holdings of common stock. In addition, The Pantry has the right to
repurchase Mr. Starrett's shares in the event he ceases to serve as a
director. This right terminates on the first anniversary of the purchase date.
(Unaudited)
PAYMENTS TO FREEMAN SPOGLI
Transaction fees of $1.0 million, $1.5 million and $3.0 million, for the
fiscal years ended September 26, 1996, September 25, 1997 and September 24,
1998, respectively, were paid to Freeman Spogli in connection with previous
investments and assistance with analyzing acquisition candidates and obtaining
financing.
STOCKHOLDERS' AGREEMENT
The Pantry has a stockholders' agreement, as amended July 1998, with
Freeman Spogli, Chase Capital and Peter J. Sodini in which:
. Freeman Spogli has a right of first offer enabling it to purchase
shares held by Chase Capital or Mr. Sodini prior to transfers of
shares of common stock to non-affiliates, other than transfers
pursuant to a registration statement or under Rule 144
. Freeman Spogli has the right to require Chase Capital 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 Capital and Mr. Sodini have rights to be
included in sales of common stock by the other stockholders
. Freeman Spogli has agreed, as long as Chase Capital holds 10% of The
Pantry's common stock, to vote for a director nominated by Chase
Capital
. Transactions with affiliates will be on terms no less favorable to
The Pantry than would be obtained in an arms length transaction and
to limit the fees payable to Freeman Spogli
58
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--SUPPLEMENTAL GUARANTORS INFORMATION:
In connection with the Lil' Champ acquisition and commitments under the
Bank Credit Facility, Lil' Champ, Sandhills, Inc. and Global Communications,
Inc. (the "Guarantors") jointly and severally, unconditionally guaranteed, on
an unsecured senior subordinated basis, the full and prompt performance of The
Pantry's obligations under its Senior Subordinated Notes, its Senior Notes
Indenture and its Bank Credit Facility.
The senior subordinated notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, as to the payment of principal, premium,
if any, and interest, jointly and severally, by all current direct and
indirect restricted subsidiaries (currently, Sandhills and Lil Champ, wholly-
owned subsidiaries of The Pantry) and future direct and indirect restricted
subsidiaries. The senior subordinated notes contain covenants that, among
other things, restrict the ability of The Pantry and any restricted subsidiary
to:
. incur additional indebtedness
. pay dividends or make distributions
59
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
. issue stock of subsidiaries
. make certain investments
. repurchase stock
. create liens
. enter into transaction with affiliates
. enter into sale-leaseback transactions;
. merge or consolidate The Pantry or any of its subsidiaries
. transfer and sell assets
As of September 24, 1998, substantially all of The Pantry's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
Management has determined that separate, full financial statements of the
guarantors (Sandhills and Lil' Champ as of September 24, 1998) 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.
60
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 26, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE GUARANTOR NON-GUARANTOR
PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
-------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $188,091 $ -- $ -- $ -- $188,091
Gasoline sales........ 192,737 -- -- -- 192,737
Commissions........... 3,979 -- -- -- 3,979
-------- ------- ----- -------- --------
Total revenues...... 384,807 -- -- -- 384,807
-------- ------- ----- -------- --------
Cost of sales:
Merchandise........... 125,979 -- -- -- 125,979
Gasoline.............. 167,610 -- -- -- 167,610
-------- ------- ----- -------- --------
Total cost of
sales.............. 293,589 -- -- -- 293,589
-------- ------- ----- -------- --------
Gross profit............ 91,218 -- -- -- 91,218
-------- ------- ----- -------- --------
Operating expenses:
Store expenses........ 69,605 -- (293) (11,471) 57,841
General and
administrative
expenses............. 17,648 80 23 -- 17,751
Restructuring
charges.............. 1,560 -- -- -- 1,560
Impairment of long-
lived assets......... 3,034 -- -- -- 3,034
Depreciation and
amortization......... 9,138 14 6 -- 9,158
-------- ------- ----- -------- --------
Total operating
expenses........... 100,985 94 (264) (11,471) 89,344
-------- ------- ----- -------- --------
Income from operations.. (9,767) (94) 264 11,471 1,874
-------- ------- ----- -------- --------
Equity in earnings of
subsidiaries........... 14,597 -- -- (14,597) --
-------- ------- ----- -------- --------
Other income (expense):
Interest expense...... (14,540) -- (14) 2,562 (11,992)
Miscellaneous......... (1,068) 14,243 198 (14,033) (660)
-------- ------- ----- -------- --------
Total other
expense............ (15,608) 14,243 184 (11,471) (12,652)
-------- ------- ----- -------- --------
Income (loss) before
income taxes........... (10,778) 14,149 448 (14,597) (10,778)
Income tax benefit
(expense).............. 2,664 (4,811) (128) 4,939 2,664
-------- ------- ----- -------- --------
Net income (loss)....... (8,114) 9,338 320 (9,658) (8,114)
Preferred dividends..... (2,654) -- -- -- (2,654)
-------- ------- ----- -------- --------
Net income (loss)
applicable to common
shareholders........... $(10,768) $ -- $ -- $ -- $(10,768)
======== ======= ===== ======== ========
</TABLE>
61
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 26, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
---------- ---------- ------------- ------------ -------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)...... $(8,114) $ 9,339 $ 319 $(9,658) $(8,114)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Impairment of long-
lived assets........ 3,034 -- -- -- 3,034
Depreciation and
amortization........ 9,152 -- 6 -- 9,158
Provision for
deferred income
taxes............... (1,558) -- -- -- (1,558)
Loss on sale of
property and
equipment........... 470 -- -- -- 470
Provision for
environmental
expenses............ 512 -- -- -- 512
Provision for closed
stores.............. 673 -- -- -- 673
Write-off of property
held for sale....... 168 -- -- -- 168
Equity earnings of
affiliates.......... (9,658) -- -- 9,658 --
Changes in operating
assets and
liabilities, net:
Receivables.......... (627) (392) (8) 488 (539)
Inventories.......... (937) -- -- -- (937)
Prepaid expenses..... 19 (1) 2 -- 20
Other non-current
assets.............. 448 (17) 1 -- 432
Accounts payable..... 2,104 -- -- -- 2,104
Other current
liabilities and
accrued expenses.... (641) 125 (27) (96) (639)
Employment
obligations......... (255) -- -- -- (255)
Other noncurrent
liabilities......... 1,279 -- (1) (392) 886
------- ------- ------ ------- -------
Net cash provided by
(used in) operating
activities............. (3,931) 9,054 292 -- 5,415
------- ------- ------ ------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (3,301) -- (799) 50 (4,050)
Additions to property
and equipment......... (7,070) -- (14) -- (7,084)
Proceeds from sale of
property held for
sale.................. 2,462 -- 50 (50) 2,462
Proceeds from sale of
property and
equipment............. 1,458 -- 10 -- 1,468
Intercompany notes
receivable
(payable)............. 12,502 (12,502) -- --
Acquisition of related
businesses............ -- -- -- -- --
------- ------- ------ ------- -------
Net cash provided by
(used in) investing
activities............. 6,051 (12,502) (753) -- (7,204)
------- ------- ------ ------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital lease
obligations........... (347) -- -- -- (347)
Principal repayments
of long-term debt..... (5) -- (15) -- (20)
Net proceeds from
equity issue.......... -- -- -- -- --
Other financing
costs................. (3,505) -- -- -- (3,505)
------- ------- ------ ------- -------
Net cash provided by
(used in) financing
activities............. (3,857) -- (15) -- (3,872)
------- ------- ------ ------- -------
Net increase (decrease)
in cash................ (1,737) (3,448) (476) -- (5,661)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR...... 3,247 3,584 4,168 -- 10,999
------- ------- ------ ------- -------
CASH AND CASH
EQUIVALENTS AT END OF
YEAR................... $ 1,510 $ 136 $3,692 $ -- $ 5,338
======= ======= ====== ======= =======
</TABLE>
62
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
SEPTEMBER 25, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE GUARANTOR NON-GUARANTOR
PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
-------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents........... $ 2,247 $ 279 $ 821 $ -- $ 3,347
Receivables, net....... 4,056 4,562 30 (6,547) 2,101
Inventories............ 17,161 -- -- -- 17,161
Prepaid expenses....... 1,195 6 3 -- 1,204
Property held for
sale.................. 3,323 -- -- -- 3,323
Deferred income
taxes................. 1,142 -- -- -- 1,142
-------- ------- ------ -------- --------
Total current
assets............ 29,124 4,847 854 (6,547) 28,278
-------- ------- ------ -------- --------
Investment in
subsidiaries........... 47,225 -- -- (47,225) --
-------- ------- ------ -------- --------
Property and equipment,
net.................... 77,641 -- 345 -- 77,986
-------- ------- ------ -------- --------
Other assets:
Goodwill, net.......... 20,318 -- -- -- 20,318
Deferred lease cost,
net................... 314 -- -- -- 314
Deferred financing
cost, net............. 4,578 -- -- -- 4,578
Environmental
receivables........... 6,511 -- -- -- 6,511
Deferred income
taxes................. 156 -- -- -- 156
Escrow for Lil' Champ
acquisition........... -- -- 4,049 -- 4,049
Intercompany notes
receivable............ -- 39,434 -- (39,434) --
Other.................. 534 74 1 -- 609
-------- ------- ------ -------- --------
Total other
assets............ 32,411 39,508 4,050 (39,434) 36,535
-------- ------- ------ -------- --------
Total assets....... $186,401 $44,355 $5,249 $(93,206) $142,799
======== ======= ====== ======== ========
</TABLE>
63
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
SEPTEMBER 25, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE GUARANTOR NON-GUARANTOR
PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
-------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
- -----------------------------
Current liabilities:
Current maturities of long-
term debt.................. $ 17 $ -- $ 16 $ -- $ 33
Current maturities of
capital lease
obligations................ 285 -- -- -- 285
Accounts payable:
Trade..................... 16,032 3 -- -- 16,035
Money orders.............. 3,022 -- -- -- 3,022
Accrued interest............ 5,564 -- 1 (973) 4,592
Accrued compensation and
related taxes.............. 3,322 -- 1 -- 3,323
Income taxes payable........ 313 1,560 235 (1,812) 296
Other accrued taxes......... 2,194 -- -- -- 2,194
Accrued insurance........... 3,887 -- -- -- 3,887
Other accrued liabilities... 6,382 113 122 (3,761) 2,856
-------- ------- ------ -------- --------
Total current
liabilities............ 41,018 1,676 375 (6,546) 36,523
-------- ------- ------ -------- --------
Long-term debt............... 100,168 -- 137 -- 100,305
-------- ------- ------ -------- --------
Other non-current
liabilities:
Environmental reserve....... 7,806 -- -- -- 7,806
Capital lease obligations... 679 -- -- -- 679
Employment obligations...... 1,341 -- -- -- 1,341
Accrued dividends on
preferred stock............ 7,958 -- -- -- 7,958
Intercompany note payable... 39,434 -- -- (39,434) --
Other....................... 5,870 150 40 -- 6,060
-------- ------- ------ -------- --------
Total other non-current
liabilities............ 63,088 150 40 (39,434) 23,844
-------- ------- ------ -------- --------
Shareholders' Equity
(Deficit):
Preferred stock.............. -- -- -- -- --
Common stock................. 1 -- -- -- 1
Additional paid-in capital... 5,396 25 5,001 (5,026) 5,396
Retained earnings (deficit).. (23,270) 42,504 (304) (42,200) (23,270)
-------- ------- ------ -------- --------
Total shareholders'
equity (deficit)....... (17,873) 42,529 4,697 (47,226) (17,873)
-------- ------- ------ -------- --------
Total liabilities and
shareholders' equity
(deficit).............. $186,401 $44,355 $5,249 $(93,206) $142,799
======== ======= ====== ======== ========
</TABLE>
64
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 25, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $202,440 $ -- $ -- $ -- $202,440
Gasoline sales........ 220,166 -- -- -- 220,166
Commissions........... 4,787 -- -- -- 4,787
-------- ------ ----- ------- --------
Total revenues...... 427,393 -- -- -- 427,393
-------- ------ ----- ------- --------
Cost of sales:
Merchandise........... 132,846 -- -- -- 132,846
Gasoline.............. 197,268 -- -- -- 197,268
-------- ------ ----- ------- --------
Total cost of
sales.............. 330,114 -- -- -- 330,114
Gross profit............ 97,279 -- -- -- 97,279
-------- ------ ----- ------- --------
Operating expenses:
Store expenses........ 73,225 -- (291) (12,726) 60,208
General and
administrative
expenses............. 16,731 42 23 -- 16,796
Depreciation and
amortization......... 9,485 13 6 -- 9,504
-------- ------ ----- ------- --------
Total operating
expenses........... 99,441 55 (262) (12,726) 86,508
-------- ------ ----- ------- --------
Income from operations.. (2,162) (55) 262 12,726 10,771
-------- ------ ----- ------- --------
Equity in earnings of
subsidiaries........... 16,605 -- -- (16,605) --
Other income (expense):
Interest expense...... (16,095) -- (13) 3,069 (13,039)
Miscellaneous......... 677 16,207 204 (15,795) 1,293
-------- ------ ----- ------- --------
Total other
expense............ (15,418) 16,207 191 (12,726) (11,746)
-------- ------ ----- ------- --------
Income (loss) before
income taxes........... (975) 16,152 453 (16,605) (975)
Income tax benefit
(expense).............. -- (5,492) (155) 5,647 --
-------- ------ ----- ------- --------
Net income (loss)....... (975) 10,660 298 (10,958) (975)
Preferred dividends..... (5,304) -- -- -- (5,304)
-------- ------ ----- ------- --------
Net loss applicable to
common shareholders.... $ (6,279) -- -- -- $ (6,279)
======== ====== ===== ======= ========
</TABLE>
65
<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 operating
activities:
Depreciation and
amortization......... 9,499 -- 5 -- 9,504
Provision for deferred
income taxes......... 371 -- -- -- 371
Gain on sale of
property and
equipment............ (1,054) -- -- -- (1,054)
Provision for
environmental
expenses............. 1,574 -- -- -- 1,574
Provision for closed
stores............... (11) -- -- -- (11)
Equity earnings of
affiliates........... (10,958) -- -- 10,958 --
Changes in operating
assets and
liabilities, net:
Receivables........... 129 (664) 8 -- (527)
Inventories........... (2,273) -- -- -- (2,273)
Prepaid expenses...... (426) (3) -- -- (429)
Other non-current
assets............... (5,378) 14 1 1,068 (4,295)
Accounts payable...... 600 3 -- -- 603
Other current
liabilities and
accrued expenses..... 3,396 246 135 (384) 3,393
Employment
obligations.......... (698) -- -- -- (698)
Other noncurrent
liabilities.......... 2,970 (131) -- (684) 2,155
-------- ------- ------ -------- --------
Net cash provided by
(used in) operating
activities............. (3,234) 10,125 447 -- 7,338
-------- ------- ------ -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (1,874) -- (4) 50 (1,828)
Additions to property
and equipment......... (14,749) -- -- -- (14,749)
Proceeds from sale of
property held for
sale.................. 642 -- 753 (50) 1,345
Proceeds from sale of
property and
equipment............. 2,315 -- -- -- 2,315
Intercompany notes
receivable (payable).. 9,982 (9,982) -- -- --
Acquisition of related
businesses............ (12,162) -- -- -- (12,162)
-------- ------- ------ -------- --------
Net cash provided by
(used in) investing
activities............. (15,846) (9,982) 749 -- (25,079)
-------- ------- ------ -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital lease
obligations........... (303) -- -- -- (303)
Principal repayments of
long-term debt........ (10) -- (16) -- (26)
Proceeds from issuance
of long-term debt..... 200 -- -- -- 200
Net proceeds from equity
issue.................. 15,953 -- -- -- 15,953
Other financing costs.. (74) -- -- -- (74)
-------- ------- ------ -------- --------
Net cash provided by
(used in) financing
activities............. 15,766 -- (16) -- 15,750
-------- ------- ------ -------- --------
Net increase (decrease)
in cash................ (3,314) 143 1,180 -- (1,991)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR...... 1,512 136 3,690 -- 5,338
-------- ------- ------ -------- --------
CASH AND CASH
EQUIVALENTS AT END OF
YEAR................... $ (1,802) $ 279 $4,870 $ -- $ 3,347
======== ======= ====== ======== ========
</TABLE>
66
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THE PANTRY, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINING BALANCE SHEETS
YEAR ENDED SEPTEMBER 24, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE NON-
PANTRY GUARANTOR GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
-------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents.......... $ 24,031 $ 6,300 $4,073 $ -- $ 34,404
Receivables, net...... 11,211 9,263 1,030 (11,597) 9,907
Inventories........... 24,933 22,876 -- -- 47,809
Income taxes
receivable........... 270 (2,098) (472) 2,788 488
Prepaid expenses...... 1,206 1,007 3 -- 2,216
Property held for
sale................. 3,761 -- -- -- 3,761
Deferred income
taxes................ 1,262 2,726 -- -- 3,988
-------- -------- ------ --------- --------
Total current
assets............. 66,674 40,074 4,634 (8,809) 102,573
-------- -------- ------ --------- --------
Investment in
subsidiaries........... 69,317 -- -- (69,317) --
-------- -------- ------ --------- --------
Property and equipment,
net.................... 125,340 175,298 340 -- 300,978
-------- -------- ------ --------- --------
Other assets:
Goodwill, net......... 72,375 47,650 -- -- 120,025
Deferred lease cost,
net.................. 269 -- -- -- 269
Deferred financing
cost, net............ 14,545 -- -- -- 14,545
Environmental
receivables, net..... 11,566 1,621 -- -- 13,187
Intercompany notes
receivable........... 19,803 49,705 -- (69,508) --
Other................. 155 3,088 -- -- 3,243
-------- -------- ------ --------- --------
Total other assets.. 118,713 102,064 -- (69,508) 151,269
-------- -------- ------ --------- --------
Total assets........ $380,044 $317,436 $4,974 $(147,634) $554,820
======== ======== ====== ========= ========
</TABLE>
67
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THE PANTRY, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINING BALANCE SHEETS--(CONTINUED)
YEAR ENDED SEPTEMBER 24, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE NON-
PANTRY GUARANTOR GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
-------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS'
EQUITY (DEFICIT):
-----------------
Current liabilities:
Current maturities of
long-term debt....... $ 17 $ 10 $ 18 $ -- $ 45
Current maturities of
capital lease
obligations.......... 213 1,027 -- -- 1,240
Accounts payable:
Trade............... 28,563 20,996 -- -- 49,559
Money orders........ 4,112 1,069 -- -- 5,181
Accrued interest...... 11,564 1,283 1 (1,136) 11,712
Accrued compensation
and related taxes.... 4,366 2,352 1 -- 6,719
Other accrued taxes... 3,108 3,899 -- -- 7,007
Accrued insurance..... 3,188 2,557 -- -- 5,745
Other accrued
liabilities.......... 11,118 18,877 122 (5,769) 24,348
-------- -------- ------ --------- --------
Total current
liabilities...... 66,249 52,070 142 (6,905) 111,556
-------- -------- ------ --------- --------
Long-term debt.......... 188,151 139,000 118 -- 327,269
-------- -------- ------ --------- --------
Other non-current
liabilities:
Environmental
reserve.............. 13,487 3,650 -- -- 17,137
Deferred income
taxes................ (36) 22,001 -- (1,599) 20,366
Capital lease
obligations.......... 1,534 10,595 -- -- 12,129
Employment
obligations.......... 934 -- -- -- 934
Accrued dividends on
preferred stock...... 4,391 -- -- -- 4,391
Intercompany note
payable.............. 50,705 20,822 -- (71,527)
Other................. 15,325 5,737 38 634 21,734
-------- -------- ------ --------- --------
Total other non-current
liabilities............ 86,340 62,805 38 (72,492) 76,691
-------- -------- ------ --------- --------
Shareholders' Equity
(Deficit):
Preferred stock....... -- -- -- -- --
Common stock.......... 2 1 -- (1) 2
Additional paid-in
capital.............. 69,054 6,758 5,001 (11,759) 69,054
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>
68
<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 PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
---------- ------------ ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $245,402 $215,396 $ -- $ -- $460,798
Gasoline sales........ 269,865 240,093 -- -- 509,958
Commissions........... 6,838 7,290 -- -- 14,128
-------- -------- ----- -------- --------
Total revenues...... 522,105 462,779 -- -- 984,884
-------- -------- ----- -------- --------
Cost of sales:
Merchandise........... 162,027 141,941 -- -- 303,968
Gasoline.............. 238,381 209,184 -- -- 447,565
-------- -------- ----- -------- --------
Total cost of
sales.............. 400,408 351,125 -- -- 751,533
-------- -------- ----- -------- --------
Gross profit............ 121,697 111,654 -- -- 233,351
-------- -------- ----- -------- --------
Operating expenses:
Store expenses........ 89,774 66,046 (240) (15,491) 140,089
General and
administrative
expenses............. 18,398 14,341 22 -- 32,761
Merger integration
costs................ -- 1,016 -- -- 1,016
Depreciation and
amortization......... 14,003 13,633 6 -- 27,642
-------- -------- ----- -------- --------
Total operating
expenses........... 122,175 95,036 (212) (15,491) 201,508
-------- -------- ----- -------- --------
Income (loss) from
operations............. (478) 16,618 212 15,491 31,843
-------- -------- ----- -------- --------
Equity in earnings of
subsidiaries........... 22,864 -- -- (22,864) --
-------- -------- ----- -------- --------
Other income (expense):
Interest expense...... (18,241) (14,926) (12) 4,233 (28,946)
Miscellaneous......... 528 20,943 29 (19,724) 1,776
-------- -------- ----- -------- --------
Total other income
(expense).......... (17,713) 6,017 17 (15,491) (27,170)
-------- -------- ----- -------- --------
Income (loss) before
income taxes and
extraordinary loss..... 4,673 22,635 229 (22,864) 4,673
Income tax benefit
(expense).............. -- (8,337) (250) 8,587 --
-------- -------- ----- -------- --------
Net income (loss) before
extraordinary item..... 4,673 14,298 (21) (14,277) 4,673
Extraordinary loss...... (7,998) -- -- -- (7,998)
-------- -------- ----- -------- --------
Net income (loss)....... (3,325) 14,298 (21) (14,277) (3,325)
Preferred dividends..... (2,942) -- -- -- (2,942)
-------- -------- ----- -------- --------
Net loss applicable to
common shareholders.... $ (6,267) $ -- $ -- $ -- $ (6,267)
======== ======== ===== ======== ========
</TABLE>
69
<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>
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
---------- ------------ ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)....... $ (3,325) $ 14,298 $ (21) $(14,277) $ (3,325)
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Extraordinary loss..... 2,006 -- -- -- 2,006
Depreciation and
amortization.......... 14,014 13,623 5 -- 27,642
Change in deferred
income taxes.......... -- 1,737 -- (1,599) 138
(Gain) loss on sale of
property and
equipment............. 88 443 -- -- 531
Provision for
environmental
expenses.............. 5,681 500 -- -- 6,181
Provision for closed
stores................ 50 -- -- -- 50
Equity earnings of
affiliates............ (15,359) -- -- 15,359 --
Changes in operating
assets and liabilities,
net:
Receivables............ (10,380) (2,165) (1,017) 5,050 (8,512)
Inventories............ 986 (5,504) -- -- (4,518)
Prepaid expenses....... (11) 401 -- -- 390
Other noncurrent
assets................ 379 681 4,050 1 5,111
Accounts payable....... 13,393 503 -- -- 13,896
Other current
liabilities and
accrued expenses...... 11,632 (6,497) 254 (3,148) 2,241
Employment
obligations........... (407) -- -- -- (407)
Other noncurrent
liabilities........... 8,459 (2,483) (2) 634 6,608
--------- --------- ------- -------- ---------
Net cash provided by
operating activities... 27,206 15,537 3,269 2,020 48,032
--------- --------- ------- -------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (5,203) -- -- -- (5,203)
Additions to property
and equipment......... (27,569) (15,584) -- -- (43,153)
Proceeds from sale of
property held for
sale.................. 4,807 -- -- -- 4,807
Proceeds from sale of
property and
equipment............. 2,102 5,546 -- -- 7,648
Intercompany notes
receivable (payable).. (8,532) 10,551 -- (2,019) --
Acquisition of related
businesses, net of
cash acquired......... (102,684) (147,908) -- -- (250,592)
--------- --------- ------- -------- ---------
Net cash used in
investing activities... (137,079) (147,395) -- (2,019) (286,493)
--------- --------- ------- -------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases.. (303) (1,121) -- -- (1,424)
Proceeds from issuance
of capital leases..... 1,086 -- -- -- 1,086
Principal repayments of
long-term debt........ (51,516) (10) (17) -- (51,543)
Proceeds from issuance
of long-term debt..... 139,499 139,010 -- (1) 278,508
Net proceeds from
equity issue.......... 56,935 -- -- -- 56,935
Other financing costs.. (14,044) -- -- -- (14,044)
--------- --------- ------- -------- ---------
Net cash provided by
(used in) financing
activities............. 131,657 137,879 (17) (1) 269,518
--------- --------- ------- -------- ---------
Net increase in cash.... 21,784 $ 6,021 3,252 -- 31,057
Cash and Cash
Equivalents at
Beginning of Year...... 2,247 279 821 -- 3,347
--------- --------- ------- -------- ---------
Cash and Cash
Equivalents at End of
Year................... $ 24,031 $ 6,300 $ 4,073 $ -- $ 34,404
========= ========= ======= ======== =========
</TABLE>
70
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--SUBSEQUENT EVENTS:
In two separate transactions, subsequent to fiscal year end, the Company
acquired 32 stores located in North and South Carolina. These transactions
were primarily funded from borrowings under the Company's Acquisition Facility
and cash on hand. In addition, subsequent to fiscal year end the Company
signed a purchase agreement to acquire approximately 125 convenience stores in
its existing market. There can be no assurances that this transaction will be
consummated.
71
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors
and executive officers of the Company as of December 15, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Peter J. Sodini......... 57 President, Chief Executive Officer and Director
Dennis R. Crook......... 55 Senior Vice President, Administration and Gasoline Marketing
William T. Flyg......... 56 Senior Vice President and Chief Financial Officer
Douglas M. Sweeney...... 59 Senior Vice President, Operations
Daniel J. McCormack..... 55 Vice President, Marketing
William M. Wardlaw...... 51 Director
Charles P. Rullman...... 50 Director
Todd W. Halloran........ 36 Director
Jon D. Ralph............ 34 Director
Christopher C. Behrens.. 37 Director
</TABLE>
Peter J. Sodini, President, Chief Executive Officer and Director, joined
The Pantry in February 1996 as Chief Operating Officer and was named President
of the Company since November 1995. Mr. Sodini is a director of Buttrey Food
and Drug Stores Company and Pamida Holding Corporation. From December 1991 to
November 1995, Mr. Sodini was Chief Executive Officer and a director of Purity
Supreme, Inc. ("Purity"). Prior to 1991, Mr. Sodini held executive positions
at several supermarket chains including Boys Markets, Inc. and Piggly Wiggly
Southern, Inc.
Dennis R. Crook, Senior Vice President, Administration and Gasoline
Marketing, joined The Pantry in March 1996. From December 1987 to November
1995, Mr. Crook was Senior Vice President, Human Resources and Labor Relations
of Purity.
William T. Flyg, Senior Vice President, Finance and Chief Financial
Officer. Mr. Flyg joined The Pantry in January 1997. He was employed by Purity
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 until
December 1996.
Douglas M. Sweeney, Senior Vice President, Operations, joined The Pantry in
March 1996. From December 1991 to December 1995, Mr. Sweeney was Senior Vice
President, Operations of Purity.
Daniel J. McCormack, Vice President, Marketing, joined The Pantry in March
1996. From 1989 to February 1996, Mr. McCormack was Director of Purchasing of
Purity.
William M. Wardlaw, Director, has been a director of the Company since
August 1998. Mr. Wardlaw joined Freeman Spogli in 1988 and became a General
Partner in 1991. From 1984 to 1988, Mr. Wardlaw was Managing Partner in the
Los Angeles law firm of Riordan & McKinzie. Prior to 1984, he served as a
partner in the law firm of O'Melveny & Myers. Mr. Wardlaw received his
bachelor's degree with highest honors from Whittier College in 1968 and earned
a juris doctor degree in 1972 from the University of California, Los Angeles.
Charles P. Rullman, Director, has been a director of the Company since
November 1995. Mr. Rullman joined FS&Co. as a General Partner in 1995. From
1992 to 1995, Mr. Rullman was a General Partner of Westar
72
<PAGE>
Capital, a private equity investment firm specializing in middle market
transactions. Prior to joining Westar, Mr. Rullman spent twenty years at
Bankers Trust Company and its affiliate BT Securities Corporation where he was
a Managing Director and Partner.
Todd W. Halloran, Director, has been a director of the Company since
November 1995. Mr. Halloran joined FS&Co. in 1995. From 1994 to 1995 and from
1990 to 1994, Mr. Halloran was a Vice President and Associate at Goldman,
Sachs & Co., respectively, where he worked in the Principal Investment Area
and the Mergers and Acquisition Department.
Jon D. Ralph, Director, has been a director of the Company since November
1995. Mr. Ralph joined FS&Co. in 1989. Prior to joining FS&Co., Mr. Ralph
spent three years at Morgan Stanley & Co. where he served as an Analyst in the
Investment Banking Division. Mr. Ralph is also a director of EnviroSource,
Inc.
Christopher C. Behrens, Director, has been a director of the Company since
February 1996. Since 1994, he has been a principal of Chase Capital Partners,
an affiliate of The Chase Manhattan Corporation engaged in the venture capital
and leveraged buyout business. From 1990 to 1994, Mr. Behrens was a Vice
President in The Chase Manhattan Corporation's Merchant Banking Group. Mr.
Behrens is a director of Portola Packaging and a number of other private
companies.
Directors of the Company are elected annually and hold office until the
next annual meeting of stockholders and until their successors are duly
elected and qualified.
73
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to the fiscal 1996,
fiscal 1997 and fiscal 1998 compensation for services in all capacities of the
Company's Chief Executive Officer and four other most highly compensated
executive officers who were serving as executive officers at the end of the
last completed fiscal year (collectively, the "Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
OTHER ANNUAL SECURITIES ALL OTHER
FISCAL COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (A) OPTIONS/SARS (B)
--------------------------- ------ -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sodini................ 1998 $475,000 $250,000 $42,337 5,221 $2,500
President and Chief Executive 1997 305,218 150,000 98,892 -- 2,500
Officer(c) 1996 124,086 50,000 3,392 -- --
Dennis R. Crook................ 1998 175,000 87,000 7,471 1,178 4,253
Senior Vice President, 1997 151,832 70,000 1,025 -- 2,019
Administrative and Gasoline(d) 1996 82,933 20,000 41,250 -- --
William T. Flyg................ 1998 175,000 75,000 6,041 1,128 --
Senior Vice President, 1997 109,615 54,000 3,076 -- --
Finance and Chief Financial
Officer(e)
Douglas Sweeney................ 1998 180,000 90,000 10,174 1,410 4,651
Senior Vice President, 1997 149,983 72,000 2,593 -- 2,014
Operations(f) 1996 91,334 20,000 1,352 -- --
Daniel J. McCormack............ 1998 110,000 60,000 10,412 1,178 2,645
Vice President, Marketing(g) 1997 95,488 45,000 4,269 -- 1,279
1996 45,334 15,000 5,934 -- --
</TABLE>
- --------
(a) Consists primarily of executive medical, moving and relocation
reimbursements.
(b) Consists of matching contributions to the Company's 401(k) Savings Plan.
See "Benefit Plan" below.
(c) Mr. Sodini was appointed Chief Operating Officer in February 1996 and
appointed President and Chief Executive Officer of the Company in June
1996.
(d) Dennis R. Crook was appointed Senior Vice President, Administration and
Gasoline Marketing in March 1996.
(e) William T. Flyg was appointed Senior Vice President, Finance and Chief
Financial Officer of the Company in January 1997 and, accordingly, only
fiscal 1997 and fiscal 1998 information is provided.
(f) Douglas M. Sweeney was appointed Senior Vice President, Operations in
March 1996.
(g) Daniel J. McCormack was appointed Vice President, Marketing in September
30, 1996.
74
<PAGE>
OPTION GRANTS
The following table sets forth information with respect to stock options
granted to the Company's Chief Executive Officer and four other most highly
compensated executives during the year ended September 24, 1998:
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL EXERCISE ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE OR PRICE APPRECIATION
UNDERLYING GRANTED TO BASE FOR OPTION TERM
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---- ------------ ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sodini......... 4,061(a) 35.9 $450 01/15/08 $3,212,036 $5,282,695
1,160(b) 10.3 575 08/31/08 820,047 1,621,004
Dennis R. Crook......... 928(a) 8.2 450 01/15/08 733,999 1,207,176
250(b) 2.2 575 08/31/08 176,734 349,354
William T. Flyg......... 928(a) 8.2 450 01/15/08 733,999 1,207,176
200(b) 1.8 575 08/31/08 141,387 279,483
Douglas Sweeney......... 1,160(a) 10.3 450 01/15/08 917,499 1,508,970
250(b) 2.2 575 08/31/08 176,734 349,354
Daniel J. McCormack..... 928(a) 8.2 450 01/15/08 733,999 1,207,176
250(b) 2.2 575 08/31/08 176,734 349,354
</TABLE>
- --------
(a) This option vests and becomes exercisable in three equal, annual
installments beginning on the first anniversary of the vesting
commencement date and expires to the extent not exercised by January 15,
2008.
(b) This option vests and becomes exercisable in three equal, annual
installments beginning on the first anniversary of the vesting
commencement date and expires to the extent not exercised by August 31,
2008.
AGGREGATE OPTION EXERCISES AND OPTION VALUES
The following table sets forth information with respect to the Company's
Chief Executive Officer and four other most highly compensated executive
officers concerning option exercises for the fiscal year ended September 24,
1998 and exercisable and unexercisable options held as of September 24, 1998:
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
VALUE SEPTEMBER 24, 1998 (#) SEPTEMBER 24, 1998 ($)(A)
SHARES ACQUIRED REALIZED ------------------------- -------------------------
NAME ON EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sodini......... -- -- 4,061 1,160 $507,422 $ 0
Dennis R. Crook......... -- -- 309 869 38,651 77,302
William T. Flyg......... -- -- 309 819 38,651 77,302
Douglas Sweeney......... -- -- 386 1,024 48,314 96,628
Daniel J. McCormack..... -- -- 309 869 38,651 77,302
</TABLE>
- --------
(a) These values are calculated using a share price of $11.27 per share, less
the exercise price of the options. This price was the price at which The
Pantry sold shares in July 1998.
75
<PAGE>
EXECUTIVE EMPLOYMENT CONTRACTS
On October 1, 1997, the Company entered into an employment agreement with
Mr. Sodini. The term of this agreement has recently been extended until
September 30, 2001. This agreement contains customary employment terms and
provides for an annual base salary of $475,000, subject to annual adjustment
by the Board of Directors, participation in any of the Company's benefit or
bonus programs, participation in an incentive bonus program which provides for
a payout of a minimum of 25% upon the achievement of goals determined by the
Board of Directors, and other perquisites. Mr. Sodini's bonus arrangement is
not tied to specific objectives. Principal factors considered by the board of
directors are EBITDA improvement, comparable sales growth, acquisition quality
and future outlook. Principal factors considered by the Board of Directors are
EBITDA improvement, comparable sales growth, acquisition quality and future
outlook.
Pursuant to the terms of the agreement, if Mr. Sodini is terminated by the
Company prior to a change in control with just cause or upon death or
disability, Mr. Sodini shall be entitled to his then effective compensation
and benefits through the last day of his actual employment by the Company for
termination for just cause or upon death or his effective date of termination,
as determined by the Board of Directors for termination upon disability. In
addition, if Mr. Sodini is terminated because of death or disability, the
Company will pay to the estate of Mr. Sodini or to Mr. Sodini, as the case may
be, one year's pay less amounts paid under any disability plan. If Mr. Sodini
is terminated by the Company prior to a change in control without cause, Mr.
Sodini shall be entitled to severance pay including regular benefits through
the term of the agreement until such time as he engages in other employment.
If Mr. Sodini is terminated by the Company following a change in control
without cause or Mr. Sodini terminates his employment for good reason, Mr.
Sodini shall generally be entitled to severance pay including regular benefits
for a period of 18 months from the termination date.
For purposes of Mr. Sodini's employment agreement, a change of control
would occur if any person, other than the existing stockholders, becomes the
beneficial owner of more than 50% of The Pantry's outstanding voting
securities, whether by merger or otherwise, or upon liquidation of The Pantry.
Good reason includes the occurrence of a reduction in Mr. Sodini's
compensation or benefits, the inability of Mr. Sodini to discharge his duties
effectively or moving Mr. Sodini's employment base more than 25 miles from its
current location. Just cause includes a willful and continued failure to
perform, engaging in conduct injurious to The Pantry, or being convicted of a
felony or any crime of moral turpitude.
This agreement contains covenants prohibiting Mr. Sodini, through the
period ending on the latter of 18 months after termination or such time at
which he no longer received severance benefits from the Company, from
competing with the Company or soliciting employment from the Company's
employees.
The Company has severance arrangements with each of Mr. Crook, Mr. Sweeney
and Mr. McCormack that remain in effect so long as each continues to be
employed by the Company. Pursuant to these arrangements, if the employee is
terminated by the Company prior to a change of control without cause, he shall
be entitled to severance pay for one year from the termination date. If the
employee is terminated by the Company following a change of control without
cause or if the employee terminates his employment for good reason, he shall
be entitled to severance pay including regular benefits for a period of two
years from the termination date. For purposes of these severance arrangements,
a change of control would occur if the FS Group and Chase no longer had voting
control of The Pantry's Board of Directors. Good reason includes the reduction
in the employee's compensation or benefits, the inability of the employee to
discharge his duties effectively or moving the employee's employment base
outside of North Carolina.
COMPENSATION OF DIRECTORS
Directors of the Company receive no compensation as directors. Directors
are reimbursed for their reasonable expenses in attending meetings.
76
<PAGE>
BENEFIT PLAN
The Company sponsors a 401(k) employee retirement savings plan with
Fidelity Investments for eligible employees. Employees must be at least
nineteen years of age and have one year of service working at least
1,000 hours to be eligible to participate in the 401(k) plan. Employees may
contribute up to 15% of their annual compensation and contributions are
matched by the Company on the basis of 50% of the first 5% contributed.
Matching contribution expense was $330,000, $305,000 and $396,000 for fiscal
years 1996, 1997, and 1998 respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company determines the compensation of
Executive Officers. During fiscal 1997, Mr. Sodini participated in Board of
Director deliberations regarding the compensation of the Company's Executive
Officers.
STOCK OPTION PLANS
The Company adopted a stock option plan in January 1998. The 1998 stock
option plan provides for the grant of incentive stock options and nonqualified
stock options, as appropriate, to the Company's officers, employees,
consultants and members of the Board of Directors. An aggregate of 25,000
shares of common stock has been reserved for issuance under the 1998 stock
option plan. As of September 24, 1998, 11,311 options to purchase shares of
common stock were outstanding, and 13,689 shares were available for future
grant. In granting stock options, the Board of Directors considers the
individual and collective performance of the management team. Key items
considered are EBITDA improvements, comparable store sales growth, acquisition
results and base store operating efficiency, such as expense ratios and shrink
losses.
The 1998 stock option plan is administered by the Board of Directors,
although the Board of Directors may designate a committee to undertake the
administration. The 1998 stock option plan provides that the administrator
may, among other things, select the participants in the plan, determine the
number of options which may be granted to such participants, and determine the
vesting schedule of the options granted. The exercise price of options granted
under the 1998 stock option plan will be determined by the administrator,
although the exercise price of incentive stock options must be at least equal
to the fair market value of the Common Stock on the date of grant. The 1998
stock option plan will terminate in the event of acquisitions of The Pantry as
set forth in the plan, and in such event, the administrator may determine
whether unvested options will accelerate. The 1998 stock option plan will
terminate when all shares authorized thereunder have been issued, unless
terminated earlier pursuant to the terms of the plan or by the Board of
Directors. The FS Group has the right to require the sale of all shares
purchased under the 1998 stock option plan in the event it sells all its
holdings of Common Stock.
STOCK SUBSCRIPTION PLAN
The Company adopted a stock subscription plan in August 1998. This plan
permits the Company's employees, including directors and executive officers,
to purchase up to an aggregate of 3,100 shares of Common Stock at fair market
value. The purchase price for all common stock purchased under the stock
subscription plan was $575 per share and was paid in cash and/or the delivery
to the Company of a secured promissory note payable to the Company or one of
its subsidiaries. As of September 24, 1998, the Company had issued
2,636 shares of common stock to 38 employees under its stock subscription
plan. The FS Group has the right to require the sale of all shares purchased
under the stock subscription plan in the event it sells all its holdings of
Common Stock. The Company has the right to repurchase shares purchased under
this plan upon an employee's termination of employment. This right terminates
on the first anniversary of the purchase date.
77
<PAGE>
The following table sets forth for the Chief Executive Officer and the
Company's four other most highly compensated executive officers the number of
shares purchased pursuant to the stock subscription plan and the amount
borrowed, if any, to finance the purchase of such shares:
<TABLE>
<CAPTION>
Number of Amount of
Shares of Purchase Price Interest Rate
Common Stock Subject to Due Date of of
Name Purchased Promissory Note Promissory Note Promissory Note
---- ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Peter J. Sodini......... 348 $100,100 8/31/2003 8.5%
Dennis R. Crook......... 87 50,025 8/31/2003 8.5%
William T. Flyg......... -- -- -- --
Douglas Sweeney......... 174 -- -- --
Daniel J. McCormack..... 87 50,025 8/31/2003 8.5%
</TABLE>
Key Personnel Life Insurance
The Company is not the beneficiary of any key personnel life insurance
policy on any of its key management personnel.
Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law, the Company may
indemnify its directors and officers against liabilities they may incur in
such capacities, including liabilities under the Securities Act. The Company's
directors and officers are indemnified to the full extent permitted by
Delaware law under the Company's certificate of incorporation and bylaws. The
Company has also purchased liability insurance covering its directors and
officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to its directors or officers pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities, other
than the payment by The Pantry of expenses incurred or paid by a director or
officer or of The Pantry in the successful defense of any action, suit or
proceeding, is asserted by such director or officer in connection with the
securities being registered, The Pantry will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The Pantry's certificate of incorporation provides that its directors shall
not be liable for monetary damages for breach of such director's fiduciary
duty of care to the Company and its stockholders except for liability for
breach of the director's duty of loyalty to the Company or its stockholders,
for acts or omissions not in good faith or involving intentional misconduct or
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. This provision does not
eliminate the duty of care and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal or state securities
or environmental laws.
There is no pending litigation or proceeding involving any of the Company's
directors, officers, employees or other agents as to which indemnification is
being sought, nor is the Company aware of any pending or threatened litigation
that may result in claims for indemnification by any director, officer,
employee or other agent.
78
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of December 21,
1998, with respect to the beneficial ownership of Common Stock by (i) each
person who beneficially owns more than 5% of such shares, (ii) each of the
executive officers named in the Summary Compensation Table, (iii) each
director of the Company and (iv) all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
Shares of Shares of
Name and Address of Common Stock Percentage Preferred Stock Percentage
Beneficial Owner(1) Beneficially Owned of Class Beneficially Owned of Class
------------------- ------------------ ---------- ------------------ ----------
<S> <C> <C> <C> <C>
Freeman Spogli & Co.
Incorporated(2)........ 229,324 82.3% 17,500(3) 100.0%
William M. Wardlaw(2).. -- -- -- --
Charles P. Rullman(2).. -- -- -- --
Jon D. Ralph(2)........ -- -- -- --
Todd W. Halloran(2).... -- -- -- --
Chase Manhattan Capital,
L.P.(4)................ 39,804 17.1% -- --
Christopher C.
Behrens(4)(5)......... 5,263 2.3% -- --
Peter J. Sodini(6)...... 5,298 2.2% -- --
Dennis R. Crook(7)...... 396 * -- --
William T. Flyg(8)...... 309 * -- --
Douglas Sweeney(9)...... 560 * -- --
Daniel J.
McCormack(10).......... 396 * -- --
All directors and
executive officers as a
group
(10 individuals)....... 281,350 99.1% 17,500 100.0%
</TABLE>
- --------
* Less than 1.0%.
(1) Unless indicated otherwise, the address of the shareholder is c/o The
Pantry, P.O. Box 1410, 1801 Douglas Drive, Sanford, North Carolina 27331.
Unless indicated otherwise, each shareholder has sole voting and
investment power with respect to the shares of common stock beneficially
owned by such shareholder.
(2) Includes 46,000 shares issuable on the exercise of currently exercisable
warrants. 141,441 shares, 36,190 and 5,693 shares of Common Stock are
held of record, by FSEP III, FSEP IV and FSEP International,
respectively. As general partner of FS Capital Partners, L.P. ("FS
Capital"), which is general partner of FSEP III, FS Holdings, Inc.
("FSHI") has the sole power to vote and dispose of the shares owned by
FSEP III. As general partner of FS&Co. International, L.P. ("FS&Co.
International"), which is the general partner of FSEP International, FS
International Holdings Limited ("FS International Holdings") has the sole
power to vote and dispose of the shares owned by FSEP International.
Bradford M. Freeman, J. Frederick Simmons, Ronald P. Spogli, John M. Roth
and Messrs. Wardlaw and Rullman are the sole directors, officers and
shareholders of FSHI, FS International Holdings and Freeman Spogli & Co.
Incorporated, and as such may be deemed to be the beneficial owners of
the shares of the Common Stock and rights to acquire the Common Stock
owned by FSEP III and FSEP International. As general partner of FSEP IV,
FS Capital Partners LLC has the sole power to vote and dispose of the
shares owned by FSEP IV. Messrs. Freeman, Spogli, Wardlaw, Rullman,
Ralph, Halloran, Roth and Mark J. Doran are the sole directors, officers
and beneficial owners of FS Capital Partners and may be deemed to be the
beneficial owners of the shares of the common stock and rights to acquire
the common stock owned by, FSEP IV. The business address of Freeman
Spogli, FSEP III, FSEP IV, FS Capital, FS Holdings and FS Capital
Partners and their directors, officers and beneficial owners is 11100
Santa Monica Boulevard, Suite 1900, Los Angeles, California 90025. The
business address of FSEP International, FS&Co. International and FS
International Holdings is c/o Padget-Brown & Company, Ltd., West Winds
Building, Third Floor, Grand Cayman, Cayman Islands, British West Indies.
(3) Includes 16,823 and 677 shares of preferred stock are held of record by
FSEP III and FSEP International, respectively.
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(4) Includes 21,053 shares held of record by Chase Manhattan Capital, L.P.
and 18,751.43 shares held by CB Capital Investors, L.P. The business
address of Chase Capital and CB Capital Investors is c/o Chase Capital
Partners, 380 Madison Avenue, 12th Floor, New York, New York, 10017. The
general partner of Chase Capital is Chase Manhattan Capital Corporation,
a New York corporation, whose business address is the same as that of
Chase Capital. The general partner of CB Capital Investors is CB Capital
Investors, Inc., a New York corporation, whose business address is the
same as that of CB Capital Investors. Each of CMCC and CBCI is a wholly
owned subsidiary of The Chase Manhattan Bank, which is a wholly owned
subsidiary of The Chase Manhattan Corporation, each of whose business
addresses is 270 Park Avenue, New York, New York 10017. The directors of
each of CMCC and CBCI are general partners of Chase Capital Partners,
which is also the limited partner of each of Chase Capital and CB Capital
Investors and the investment manager of each of CMCC and CBCI. The
business address of CCP is the same as that of each of Chase Capital, CB
Capital Investors, CMCC and CBCI. The individual general partners of
Chase Capital Partners are John R. Baron, Christopher C. Behrens,
Mitchell J. Blutt, Arnold L. Chavkin, Michael R. Hannon, Donald J.
Hofmann, Stephen P. Murray, John M.B. O'Connor, Brian J. Richmond, Jonas
Steinman, Shahan D. Soghikian, Jeffrey C. Walker and Damion E. Wicker,
each of whom is a U.S. citizen, whose principal occupation is general
partner of CCP and whose business address (other than Mr. Soghikian) is
the same as that of CCP. Mr. Soghikian's address is c/o Chase Capital
Partners, 50 California Street, Suite 2940, San Francisco, CA 94111. The
remaining general partners of CCP are Chase Capital Corporation, a New
York corporation, CCP Principals, L.P. and CCP European Principals, L.P.,
each a Delaware limited partnership. Beneficial ownership of the shares
held by Chase Capital and CB Capital Investors may thus be deemed to be
attributable to each of CMCC, CBCI, CCP and each of the general partners
of CCP. Beneficial ownership of a portion of such shares may be deemed to
be attributable to Mr. Behrens as a general partner of Chase Capital
Partners, which is the limited partner of, and which acts as the
investment manager for, each of Chase Capital and CB Capital Investors.
The actual pro rata portion of such beneficial ownership by each such
entity or individual is subject to several variables, including rates of
return, and thus is not readily determinable. Mr. Behrens is also the
managing general partner of Baseball Partners, which may be deemed to be
an affiliate of Chase Capital Partners, Chase Capital and CB Capital
Investors. Each of Chase Capital Partners, Chase Capital and CB Capital
Investors disclaims any beneficial ownership interest in the shares held
by Baseball Partners that may be attributable to it as a result of any
such affiliation.
(5) Includes 5,263 shares held of record by Baseball Partners, a New York
general partnership, of which Mr. Behrens is the managing general
partner. Mr. Behrens disclaims beneficial ownership of such shares except
to the extent of his pecuniary interest therein. Baseball Partners is
party to a Stockholders Agreement with Chase Capital that contains
various provisions pertaining to the voting, acquisition and disposition
of such shares, including Baseball Partner's grant to Chase Capital of a
proxy to vote such shares and restrictions on Baseball Partner's ability
to transfer such shares. Chase Capital disclaims any beneficial ownership
interest in such shares that may be attributable to it as a result of
such provisions.
(6) Includes 4,061 shares of common stock issuable upon the exercise of
options exercisable within 60 days after December 21, 1998.
(7) Includes 309 shares of common stock issuable upon the exercise of options
exercisable within 60 days after December 21, 1998.
(8) Includes 309 shares of common stock issuable upon the exercise of options
exercisable within 60 days after December 21, 1998.
(9) Includes 386 shares of common stock issuable upon the exercise of options
exercisable within 60 days after December 21, 1998.
(10) Includes 309 shares of common stock issuable upon the exercise of options
exercisable within 60 days after December 21, 1998.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CAPITAL AND OTHER TRANSACTIONS
Stock Issuances
In November 1995, the FS Group purchased 45,501 shares of Common Stock and
10,374.228 shares of Series A preferred stock for an aggregate purchase price
of approximately $17.2 million and Chase purchased 13,700 shares of Common
Stock and 3,123.6 shares of Series A preferred stock for an aggregate purchase
price of approximately $5.2 million. The purchase price for the common stock
was $152 per share and the purchase price for the Series A preferred stock was
$1,000.00 per share. A portion of these shares were purchased from the Company
and the rest from existing shareholders.
In August 1996, the FS Group and Chase purchased the outstanding Common
Stock and Series A preferred stock held by other shareholders. The FS Group
purchased 42,212 shares of Common Stock and 9,624.336 shares of Series A
preferred stock for an aggregate purchase price of approximately $16.0 million
and Chase purchased 12,616 shares of Common Stock and 2,876.448 shares of
Series A preferred stock for an aggregate purchase price of approximately $4.8
million. The purchase price for the Common Stock was $152 per share and the
purchase price for the Series A preferred stock was $1,000.00 per share.
In December 1996, the FS Group purchased 17,500 shares of Series B
preferred stock and warrants to purchase 46,000 shares of Common Stock for
approximately $17.5 million. The purchase price for the Series B preferred
stock was $1,000.00 per share and the purchase price for the warrants was
$1.00. The warrants are exercisable at $7.45 per share until December 30, 2006
and contain adjustment provisions in the event the Company declares dividends
or distributions, make stock splits or engage in mergers, reorganizations or
reclassifications.
In October 1997, in connection with the Lil' Champ acquisition, the FS
Group purchased 59,421 shares of common stock and Chase purchased 11,690
shares of Common Stock for an aggregate purchase price of approximately $32.0
million. Peter J. Sodini purchased 889 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 the Company's favor. The purchase price for
the Common Stock was $450 per share. All of the Company's 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, the FS Group purchased 36,190 shares of common stock
and Chase purchased 7,288 shares of Common Stock for an aggregate purchase
price of $25.0 million. The purchase price for the Common Stock was $575 per
share.
In November 1998, Peter Starrett, a director of The Pantry, purchased 435
shares of Common Stock for an aggregate purchase price of $250,125. The FS
Group has the right to require the sale of Mr. Starrett's shares in the event
it sells all of its holdings of Common Stock. In addition, the Company has the
right to repurchase Mr. Starrett's shares in the event he ceases to serve as a
director. This right terminates on the first anniversary of the purchase date.
See "Management--Stock Subscription Plan" for a description of loans made
to the Company's Chief Executive Officer and four other most highly
compensated executive officers for purchases of common stock under its stock
subscription plan.
PAYMENTS TO FREEMAN SPOGLI
Since November 1995, the Company has paid transaction fees in the amount of
$5.5 million to the FS Group in connection with previous investments and
assistance with analyzing acquisition candidates and obtaining financing.
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STOCKHOLDERS' AGREEMENT
The Company has entered into a stockholders' agreement with the FS Group,
Chase and Peter J. Sodini in which:
. the FS Group 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
. the FS Group 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 the
FS Group if the FS Group is selling all of its shares
. the FS Group, Chase and Mr. Sodini have rights to be included in sales
of common stock by the other stockholders
. the FS Group has agreed, as long as Chase holds 10% of The Pantry's
common stock, to vote for a director nominated by Chase Capital
. the Company have agreed to provide financial and other information to
Chase
. the Company have agreed that all it 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 the FS Group to
fees paid in connection with a material acquisition, merger,
divestiture, reorganization or restructuring, provided that such fees
are no more favorable to the FS Group than would be available from a
nationally recognized investment banking firm
There is no termination provision in the stockholders' agreement.
REGISTRATION RIGHTS AGREEMENT
The Company has entered into a registration rights agreement with the FS
Group, Chase and Mr. Sodini obligating it:
. on up to three occasions at the request of holders of at least 50% of
the common stock held by the parties to the agreement, to register the
resale of all common stock held by the requesting holders
. at any time commencing six months after this offering, to register the
resale of shares of common stock having a value of more than $5 million
at the request of any party
. at any time, to allow any party to include shares in any registration of
common stock by us
Under the registration rights agreement, the FS Group, Chase and Mr. Sodini
have the right to purchase their pro rata portion of additional shares issued
by the Company.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused Amendment No. 1 to 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: June 4, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
Amendment No. 1 to the annual report 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 June 4, 1999
____________________________________ Officer and Director
Peter J. Sodini (Principal Executive
Officer)
/s/ William T. Flyg Senior Vice President and June 4, 1999
____________________________________ Chief Financial Officer
William T. Flyg (Principal Financial
Officer)
/s/ Joseph J. Duncan Vice President and Corporate June 4, 1999
____________________________________ Controller (Principal
Joseph J. Duncan Accounting Officer)
/s/ William M. Wardlaw Director June 4, 1999
____________________________________
William M. Wardlaw
/s/ Charles P. Rullman Director June 4, 1999
____________________________________
Charles P. Rullman
/s/ Jon D. Ralph Director June 4, 1999
____________________________________
Jon D. Ralph
/s/ Todd W. Halloran Director June 4, 1999
____________________________________
Todd W. Halloran
/s/ Christopher C. Behrens Director June 4, 1999
____________________________________
Christopher C. Behrens
/s/ Peter M. Starrett Director June 4, 1999
____________________________________
Peter M. Starrett
</TABLE>
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THE PANTRY, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
BALANCE AT CHARGED TO ADDITIONS FOR BALANCE
BEGINNING COSTS AND CHARGED TO PAYMENTS OR AT END
OF PERIOD EXPENSES GOODWILL WRITE-OFFS OF PERIOD
---------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Year ended September 26,
1996:
Allowance for doubtful
accounts............. $ 251 $ (46) -- $ (55) $ 150
Reserve for
environmental
issues............... 5,720 617 -- (105) 6,232
Reserve for closed
stores............... 463 707 -- (210) 960
Deferred tax asset
valuation allowance.. 573 1,209 -- -- 1,782
------- ------ ------ ----- -------
$ 7,007 $2,487 -- $(370) $ 9,124
======= ====== ====== ===== =======
Year ended September 25,
1997:
Allowance for doubtful
accounts............. $ 150 $ -- -- $ -- $ 150
Reserve for
environmental
issues............... 6,232 1,620 -- (46) 7,806
Reserve for closed
stores............... 960 60 -- (70) 950
Deferred tax asset
valuation allowance.. 1,782 (96) -- -- 1,686
------- ------ ------ ----- -------
$ 9,124 $1,584 -- $(116) $10,592
======= ====== ====== ===== =======
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.. 1,686 750 -- -- 2,436
------- ------ ------ ----- -------
$10,592 $7,716 $3,533 $(385) $21,456
======= ====== ====== ===== =======
</TABLE>
