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FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-74221
PROSPECTUS
6,250,000 Shares
The Pantry, Inc.
Common Stock
----------------
This is The Pantry's initial public offering of common stock. All of the
shares of common stock are being sold by The Pantry.
Currently, no public market exists for the shares. The common stock has
been approved for quotation on the Nasdaq National Market under the symbol
"PTRY."
Investing in our common stock involves risks which are described in the
"Risk Factors" section beginning on page 12 of this prospectus.
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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price........................... $13.00 $81,250,000
Underwriting discount........................... $.91 $5,687,500
Proceeds, before expenses, to The Pantry........ $12.09 $75,562,500
</TABLE>
The underwriters may also purchase up to an additional 937,500 shares
from The Pantry, at the public offering price less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of common stock will be ready for delivery in New York, New
York on or about June 14, 1999.
----------------
Merrill Lynch & Co.
Banc of America Securities LLC
Goldman, Sachs & Co.
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The date of this prospectus is June 8, 1999.
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1. Map of southeast region showing store locations
2. Interior/exterior pictures of convenience stores
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary....................................................... 5
Risk Factors............................................................. 12
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Financial Data.................................................. 24
Unaudited Pro Forma Financial Data....................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 41
Industry Overview........................................................ 65
Business................................................................. 67
Management............................................................... 84
Transactions with Affiliates............................................. 92
Principal Shareholders................................................... 94
Description of Capital Stock............................................. 98
Shares Eligible for Future Sale.......................................... 101
Material U.S. Tax Considerations Applicable to Non-U.S. Holders of the
Common Stock............................................................ 103
Underwriting............................................................. 107
Legal Matters............................................................ 110
Experts.................................................................. 111
Where You Can Find More Information...................................... 112
Index to Financial Statements............................................ F-1
</TABLE>
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You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
----------------
Industry data included in this prospectus is derived primarily from the
National Association of Convenience Stores 1998 State of the Industry report.
The Pantry has not independently verified this data.
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4
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including the
"Risk Factors" section and our consolidated financial statements. Unless
otherwise indicated, all information in this prospectus reflects our 51 for 1
stock split which will occur prior to the completion of the offering and
assumes that the underwriters will not exercise their over-allotment option. We
use a 52 or 53 week fiscal year ending on the last Thursday in September of
each year. References to fiscal year refer to the fiscal year in which the
period ends.
The Pantry
The Pantry is a leading convenience store operator in the southeastern
United States. We are the third largest independently operated convenience
store chain in the country and the fourteenth largest chain including stores
owned by major oil companies and independent refiners. Our stores offer a broad
selection of merchandise and gasoline as well as ancillary services designed to
appeal to the convenience needs of our customers. Since the arrival of our
current management team in 1996, we have experienced significant growth through
a combination of management initiatives and strategic acquisitions. As of March
25, 1999, we operated 1,149 stores located in Florida, North Carolina, South
Carolina, Kentucky, Indiana, Tennessee and Virginia.
Operating Strategy
In 1996, our current management team implemented a five-pronged operating
strategy that has contributed to our strong financial results. Specific
elements of our operating strategy include the following:
Focus on Merchandise. Since 1996, we have increased same store
merchandise sales and gross profit dollars by focusing on four key areas:
. increasing the merchandise SKU count in stores
. keeping fully stocked positions of brand name, high demand items
. adding impulse items that carry higher than average margins
. improving promotional displays, signage and overall store presentation
Improve Gasoline Offering. We believe that gasoline is an essential
product offering and have implemented a number of initiatives that have
increased gasoline volume and gasoline gross profit dollars. These initiatives
include:
. increasing the competitiveness of our gasoline pricing
. upgrading gasoline facilities and equipment
. consolidating our gasoline purchases
. adjusting our mix of locations selling branded and unbranded gasoline
. entering into supply agreements that provide volume rebates and vendor
allowances
5
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Reduce Expenses Through Strengthened Vendor Relationships and Tightened
Expense Controls. We have developed strong relationships with our merchandise
and gasoline suppliers, which have led to lower purchasing costs and greater
allowances and rebates. We have also adhered to a disciplined cost-savings
program that has allowed us to reduce operating expenses without sacrificing
customer service.
Increase Capital Expenditures. Since fiscal 1996, we have implemented a
capital expenditure program focused on upgrading store facilities and gasoline
equipment. We also have focused on upgrading our management information systems
and complying with EPA requirements and regulations.
Grow Through Acquisitions and New Store Development. From April 1997
through February 1999, we acquired 890 convenience stores in 11 major and
numerous smaller transactions. Our acquisition strategy is complemented by a
disciplined new store development program in select markets.
Growth Strategy
We believe that there is significant opportunity to continue to expand
our leadership position in our markets and enhance our sales, productivity and
profitability. Specific elements of our growth strategy include the following:
Improve Same Store Merchandise Sales and Gasoline Volume Growth. We focus
on continuous improvement of same store sales and profit growth at existing and
newly acquired stores through the continued implementation of our operating
strategy. Our merchandise and gasoline gallon sales also benefit from the
location of our operations, which are largely in some of the fastest growing
demographic markets in the United States.
Invest in Technology and Store Automation. Over the next two years, we
will invest over $15 million on new technology to increase transaction speed at
the pump and in the store and to improve customer transaction information.
Pursue Acquisitions and New Store Growth. The Pantry believes that growth
through acquisition is currently more economically attractive than growth
through new store development. With over 20,000 convenience stores operating in
our existing markets, we believe there are enough attractive acquisition
opportunities to double our store base in existing markets and expand into
contiguous markets.
Our acquisition strategy is complemented by a new store development
program in existing and contiguous markets. We opened seven new stores in
fiscal 1998 and expect to open eight to ten new stores annually.
Recent Developments
Letters of Intent. We have entered into two non-binding letters of intent
with respect to the acquisition of an aggregate of 83 convenience stores
located in the Southeast. The letters of intent are subject to numerous
conditions, including negotiation and execution of definitive purchase
agreements and completion of due diligence. There can be no assurance that
these acquisitions will be completed.
6
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ETNA Acquisition. On February 25, 1999, we acquired 60 convenience stores
operated under the trade name ETNA located throughout North Carolina and
Virginia. Many of these convenience stores are located in markets where we are
underrepresented, including Virginia. Gasoline is sold at all locations with 50
stores offering unbranded gasoline and 10 selling gasoline under the CITGO
brand.
Handy Way Acquisition. On January 28, 1999, we acquired 121 convenience
stores operated under the name Handy Way located in central Florida. The stores
are strategically located in rural and urban fringe market areas with
relatively limited competition from major convenience store chains and
supermarkets. Gasoline is sold at Handy Way stores under the brand name CITGO.
In addition, Handy Way has developed a food service operation, including 76
locations offering quick service restaurants with nationally branded food
franchises such as Subway, Church's, Taco Bell and Hardee's.
Our Controlling Shareholders
Freeman Spogli & Co. Incorporated currently controls The Pantry and has
five representatives on our seven member board of directors. Chase Manhattan
Capital, L.P. is also a significant shareholder of The Pantry and has one
representative on our board. After the offering affiliated investment funds of
Freeman Spogli will own 9,349,524 shares of common stock and warrants to
purchase 2,346,000 shares of common stock, which will represent beneficial
ownership of approximately 57.2% of the outstanding shares, including shares
underlying the warrants. After the offering, Chase Capital and its affiliates
will beneficially own 2,298,438 shares, or 12.7% of the outstanding shares.
After the offering, public investors will own 6,250,000 shares of common stock,
or 34.5% of the outstanding shares (30.5% assuming the Freeman Spogli warrant
is exercised).
Through their stock ownership and board representation, Freeman Spogli
and Chase Capital will be in a position to significantly affect our corporate
actions. See "Risk Factors--The interests of Freeman Spogli, our controlling
shareholder, may conflict with our interests and the interests of our other
shareholders." Freeman Spogli and Chase Capital are parties to a stockholders
agreement that provides for various rights relating to the sale of shares of
common stock by the parties. See "Transactions with Affiliates--Stockholders'
Agreement."
7
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Our Corporate Structure
We conduct our operations directly at The Pantry, Inc. as well as through
wholly-owned subsidiaries. The following chart shows our principal
subsidiaries.
[Chart of Principal Subsidiaries]
Lil' Champ and Miller Enterprises conduct convenience store operations in
Florida. Sandhills owns our Pantry trademarks. Global Communications was formed
to own and operate video amusement machines in South Carolina.
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The Pantry was founded in North Carolina in 1967. Our principal executive
offices are located at 1801 Douglas Drive, Sanford, North Carolina 27331-1410.
Our telephone number is (919) 774-6700.
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The Offering
Common stock offered by
The Pantry............. 6,250,000 shares
Shares outstanding
after the offering..... 18,111,478 shares
Use of proceeds......... The net proceeds from the offering will be
approximately $74.6 million. We intend to use these
net proceeds to:
. repay outstanding debt
. redeem outstanding preferred stock and pay accrued
dividends
. make acquisitions during the nine month period
following the offering
Nasdaq National Market
symbol................. PTRY
Shares that May Be Issued After the Offering Upon the Exercise of Options and
Warrants
We are permitted, and in some cases obligated, to issue shares of common
stock in addition to the common stock to be outstanding after the offering. If
and when we issue these shares, the percentage of the common stock you own may
be diluted. The following is a summary of additional shares of common stock
that we have currently approved for issuance upon the exercise of options and
warrants after the offering:
. 576,861 shares issuable upon the exercise of options granted under our
1998 stock option plan and 4,523,139 options available for future
awards under our 1998 and 1999 stock option plans after the offering
. 2,346,000 shares issuable upon the exercise of outstanding warrants at
an exercise price of $7.45 per share
. 937,500 shares issuable upon the exercise of the underwriters' over-
allotment option
9
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Summary Financial Data
The following table presents summary consolidated financial and store
operating data which is derived from our consolidated financial statements. Our
financial results in the periods presented below reflect the operating strategy
implemented by our current management team that joined The Pantry in 1996.
The financial position and results of operations for the six month
periods ended March 26, 1998 and March 25, 1999 have been derived from The
Pantry's unaudited financial statements and, in our opinion, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation. They are not necessarily indicative of the results that may
occur for the full fiscal year. Since the information in this table is only a
summary, you should read "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and our consolidated financial statements
and related notes.
The as adjusted balance sheet data reflects the sale of 6,250,000 shares
of common stock in the offering and the application of net proceeds from the
sale after deducting underwriting discounts and commissions and estimated
offering expenses. See "Use of Proceeds" and "Capitalization."
The statement of operations data includes unusual items and events that
affect comparability with other periods:
. During fiscal 1996, we recorded restructuring charges of $1.6 million
pursuant to a formal plan to restructure our corporate offices and
impairment of assets of $3.0 million.
. During fiscal 1998, we recorded a merger integration charge of
approximately $1.0 million for costs of combining our existing
business with the acquired business of Lil' Champ.
. During fiscal 1998, The Pantry incurred an extraordinary loss of
$8.0 million. This loss related to the cost of the redemption of $51.0
million of senior notes and related consent fee payments and write-off
of deferred financing costs.
The stores included in calculating comparable store sales growth are
stores that were under our management and in operation for the comparative
periods presented.
We have provided information in this prospectus relating to EBITDA.
EBITDA represents income from operations before depreciation and amortization,
merger integration costs, restructuring charges and impairment of long-lived
assets. EBITDA is not a measure of performance under generally accepted
accounting principles, and should not be considered as a substitute for net
income, cash flows from operating activities and other income or cash flow
statement data prepared in accordance with generally accepted accounting
principles, or as a measure of profitability or liquidity. We have included
information concerning EBITDA as one measure of our cash flow and historical
ability to service debt and because we believe investors find this information
useful. EBITDA as defined may not be comparable to similarly-titled measures
reported by other companies.
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<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
------------------------------ --------------------
Sept. Sept. Sept. 24, March 26, March 25,
26, 1996 25, 1997 1998 1998 1999
-------- -------- --------- --------- ---------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenue........... $384,807 $427,393 $ 984,884 $ 415,841 $ 675,399
Gross profit............ 91,218 97,279 233,351 98,652 155,941
Income from operations.. 1,874 10,771 31,843 9,492 20,540
Interest expense........ (11,992) (13,039) (28,946) (12,851) (18,873)
Net income (loss) before
income taxes and
extraordinary loss..... (8,114) (975) 4,673 (2,585) 1,795
Extraordinary loss...... -- -- (7,998) (6,800) (3,557)
Net income (loss)....... (8,114) (975) (3,325) (8,469) (2,480)
Earnings (loss) per
share before
extraordinary loss:
Basic.................. $ (1.89) $ (1.08) $ 0.18 $ (0.36) $ (0.03)
Diluted................ $ (1.89) $ (1.08) $ 0.16 $ (0.36) $ (0.03)
Weighted-average number
of shares outstanding:
Basic.................. 5,688 5,815 9,732 8,937 11,857
Diluted................ 5,688 5,815 11,012 8,937 11,857
Other Financial Data:
EBITDA.................. $ 15,626 $ 20,275 $ 60,501 $ 21,267 $ 38,370
Net cash provided by
(used in):
Operating activities... $ 5,415 $ 7,338 $ 48,032 $ 17,652 $ 13,405
Investing activities... (7,204) (25,079) (286,493) (163,153) (151,288)
Financing activities... (3,872) 15,750 269,518 170,698 128,478
Store operating expenses
as a percentage of
sales.................. 15.0% 14.1% 14.2% 14.9% 14.1%
General and
administrative expenses
as a percentage of
sales.................. 4.6% 3.9% 3.3% 3.7% 3.3%
Operating income as a
percentage of sales.... 0.5% 2.5% 3.2% 2.3% 3.0%
Store Operating Data:
Number of stores (end of
period)................ 379 390 954 883 1,149
Average sales per store:
Merchandise sales...... $ 481.1 $ 525.8 $ 533.3 $ 304.2 $ 304.3
Gasoline gallons (in
thousands)............ 450.0 501.2 603.9 329.2 397.5
Comparable store sales
growth:
Merchandise sales...... 2.8% 8.5% 5.3% 4.4% 11.4%
Gasoline gallons....... (4.3)% 7.2% 4.8% 5.8% 6.8%
</TABLE>
<TABLE>
<CAPTION>
March 25, 1999
---------------------
Actual As Adjusted
-------- -----------
(dollars in
thousands)
<S> <C> <C>
Balance Sheet Data:
Working capital deficiency................................ $(34,836) $ (2,611)
Total assets.............................................. 722,930 755,155
Total debt and capital lease obligations.................. 472,446 453,446
Shareholders' equity...................................... 36,446 93,508
</TABLE>
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties not presently known to
us, or that we currently deem immaterial, may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In that case, the trading price of our common stock could decline,
and you may lose all or part of your investment.
Because gasoline sales comprise a substantial portion of our revenues,
interruptions in the supply of gasoline and increases in the cost of gasoline
could adversely affect our business, financial condition or results of
operations
Gasoline profit margins have a significant impact on our earnings because
gasoline revenue has increased as a percentage of our total revenue over the
past three fiscal years. Gasoline revenue has averaged 51.4% of our revenues
during that period. Several factors beyond our control affect the volume of
gasoline we sell and the gasoline profit margins we achieve:
. the supply and demand for gasoline
. any volatility in the wholesale gasoline market
. the pricing policies of competitors in local markets
In particular, a material increase in the price of gasoline could adversely
affect demand for our gasoline.
In addition, sudden increases in the cost of gasoline could adversely
affect our business, financial condition or results of operations if gasoline
sales volume is reduced. We face this particular risk because:
. we typically have no more than a seven-day supply of gasoline
. our gasoline contracts do not guarantee an uninterrupted, unlimited
supply of gasoline in the event of a shortage
Reductions in volume of gasoline sold or our gasoline profit margins
could have a material adverse effect on our results of operations. In addition,
because gasoline sales generate customer traffic to our stores, decreases in
gasoline sales could impact merchandise sales.
If we are unable to pass along price increases of tobacco products to our
customers, our business, financial condition or results of operations could be
adversely affected because tobacco sales comprise an important part of our
revenues
Sales of tobacco products have averaged approximately 13% of our total
revenue over the past three fiscal years. National and local campaigns to
discourage smoking in the United States, as well as increases in taxes on
cigarettes and other tobacco products, may have a material impact on our sales
of tobacco products. The consumer price index for fiscal 1998 on tobacco
products increased approximately 15%. In November 1998, major cigarette
manufacturers that supply The
12
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Pantry increased prices by $0.45 per pack. However, during December 1998, major
cigarette manufacturers offered a rebate to retailers of $0.45 per pack to
offset the November 1998 price increase. We passed along this rebate to our
customers. Major cigarette manufacturers offered no rebate in January 1999, a
$0.30 per pack rebate in February 1999, a $0.55 per pack rebate in March 1999,
no rebate in April 1999 and a $0.35 per pack rebate in May 1999. We cannot
assure you that major cigarette manufacturers will continue to offer these
rebates or that any resulting increase in prices to our customers will not have
a material adverse effect on our cigarette sales and gross profit dollars. A
reduction in the amount of cigarettes sold by The Pantry could adversely affect
our business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Our Operations--Merchandise Sales."
Our growth and operating results could suffer if we are unable to identify and
acquire suitable companies, obtain financing or integrate acquired stores or if
we discover previously undisclosed liabilities
An important part of The Pantry's growth strategy is to acquire other
convenience stores that complement our existing stores or broaden our
geographic presence. From April 1997 through April 1999, we acquired 890
convenience stores in 11 major and numerous smaller transactions. We expect to
continue to acquire convenience stores as an element of our growth strategy.
Acquisitions involve risks that could cause our actual growth or operating
results to differ adversely compared to our expectations or the expectations of
security analysts. For example:
. We may not be able to identify suitable acquisition candidates or
acquire additional convenience stores on favorable terms. We compete
with others to acquire convenience stores. We believe that this
competition may increase and could result in decreased availability
or increased price for suitable acquisition candidates. It may be
difficult to anticipate the timing and availability of acquisition
candidates.
. During the acquisition process we may fail or be unable to discover
some of the liabilities of companies or businesses which we acquire.
These liabilities may result from a prior owner's noncompliance with
applicable federal, state or local laws.
. We may not be able to obtain the necessary financing, on favorable
terms or at all, to finance any of our potential acquisitions.
. We may fail to successfully integrate or manage acquired convenience
stores.
. Acquired convenience stores may not perform as we expect or we may
not be able to obtain the cost savings and financial improvements we
anticipate.
If we are unable to complete sufficient acquisitions over the next nine months,
unused proceeds of the offering must be used to pay down debt
Approximately $31.6 million of the net proceeds of this offering will be
invested in short term cash instruments pending the completion of additional
acquisitions. Such funds may be used to pay for acquisitions for up to nine
months after completion of this offering. There can be no assurance that we
will complete additional acquisitions in such time period. If the amount of net
proceeds is not used to pay for acquisitions within nine months, it must be
used instead to repay outstanding bank debt.
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Restrictive covenants in our debt agreements may restrict our ability to
implement our growth strategy, respond to changes in industry conditions,
secure additional financing and engage in acquisitions
Restrictive covenants contained in our existing bank credit facility and
indenture could limit our ability to finance future acquisitions, new locations
and other expansion of our operations. Credit facilities entered into in the
future likely will contain similar restrictive covenants. These covenants may
require us to achieve specific financial ratios and to obtain lender consent
prior to completing acquisitions. Any of these covenants could become more
restrictive in the future. Our ability to respond to changing business
conditions and to secure additional financing may be restricted by these
covenants. We also may be prevented from engaging in transactions including
acquisitions which are important to our growth strategy. Any breach of these
covenants could cause a default under our debt obligations and result in our
debt becoming immediately due and payable which would adversely affect our
business, financial condition and results of operations.
We are growing rapidly and our failure to effectively manage our growth may
adversely affect our business, financial condition and results of operations
The Pantry is growing rapidly. We have grown from total revenue of $384.8
million in fiscal 1996 to total pro forma revenue of $1.7 billion in fiscal
1998. Our ability to manage the growth of our operations will require us to
continue to improve our operational, financial and human resource management
information systems and our other internal systems and controls. Failure to
make these improvements may affect our business, financial condition and
results of operations.
The Pantry is in the process of upgrading its management information
systems. The new systems will fully automate our inventory and management
reporting processes. We expect that this upgrade will cost approximately $9.0
million over the next two fiscal years. We expect that the upgrade will be
completed prior to the end of fiscal 2000. Any failure to complete our
transition to these new systems may inhibit our growth plans.
In addition, our growth will increase our need to attract, develop,
motivate and retain both our management and professional employees. The
inability of our management to manage our growth effectively, or the inability
of our employees to achieve anticipated performance or utilization levels,
could have a material adverse effect on our business, financial condition and
results of operations.
We depend on one principal wholesaler for the majority of our merchandise and
loss of this supplier could have an adverse impact on our cost of goods and
business, financial condition and results of operations
The Pantry purchases over 50% of its general merchandise, including most
tobacco products and grocery items, from a single wholesale grocer, McLane
Company, Inc., a wholly-owned subsidiary of Wal-Mart. In addition, McLane
supplies health and beauty aids, toys and seasonal items to all of our stores.
We have a contract with McLane until 2003, and we may not be able to renew the
contract upon expiration. We believe that our arrangements with vendors,
including McLane, have enabled us to decrease the operating expenses of
acquired companies after we complete an acquisition. Therefore, a change of
suppliers could have a material adverse affect on our cost of goods and
business, financial condition and results of operations.
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Changes in traffic patterns and the type, number and location of competing
stores could result in the loss of customers and a corresponding decrease in
revenues for affected stores
The convenience store and retail gasoline industries are highly
competitive and we may not be able to compete successfully. Changes in traffic
patterns and the type, number and location of competing stores could result in
the loss of customers and a corresponding decrease in revenues for affected
stores. Major competitive factors include, among others, location, ease of
access, gasoline brands, pricing, product and service selections, customer
service, store appearance, cleanliness and safety. In addition, inflation,
increased labor and benefit costs and the lack of availability of experienced
management and hourly employees may adversely affect the profitability of the
convenience store industry. Any or all of these factors could create heavy
competitive pressures and have an adverse effect on our business, financial
condition and results of operations.
The Pantry competes with numerous other convenience stores and
supermarkets. In addition, our stores offering self-service gasoline compete
with gasoline service stations and, more recently, supermarkets. Our stores
also compete to some extent with supermarket chains, drug stores, fast food
operations and other similar retail outlets. In some of our markets our
competitors have been in existence longer and have greater financial, marketing
and other resources than us. As a result, our competitors may be able to
respond better to changes in the economy and new opportunities in our industry.
Because substantially all of our stores are located in the southeastern United
States, our revenues could suffer if the economy of that region deteriorates
Substantially all of our stores are located in the Southeast region of
the United States. As a result, our results of operations are subject to
general economic conditions in that region. In the event of an economic
downturn in the Southeast, our business, financial condition and results of
operations could be adversely impacted.
Unfavorable weather conditions in the spring and summer months could adversely
affect our business, financial condition and results of operations
Weather conditions in our operating area impact our business, financial
condition and results of operations. During the spring and summer vacation
season, customers are more likely to purchase higher profit margin items at our
stores, such as fast foods, fountain drinks and other beverages, and more
gasoline at our gasoline locations. As a result, we typically generate higher
revenues and gross margins during warmer weather months in the Southeast, which
fall within our third and fourth quarters. If weather conditions are not
favorable during these periods, our operating results and cash flow from
operations could be adversely affected.
In addition, approximately 37% of our stores are concentrated in coastal
areas in the southeastern United States, and are therefore exposed to damages
associated with hurricanes, tropical storms and other weather conditions in
these areas. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Quarterly Results of Operations."
15
<PAGE>
If our history of losses continues, we may be unable to complete our growth
strategy and financing plans
We have experienced losses during our most recent three fiscal years. Our
net losses were $8.1 million in fiscal 1996, $1.0 million in fiscal 1997, $3.3
million in fiscal 1998 and $2.5 million during the six months ended March 25,
1999. We incurred interest expense of $12.0 million in fiscal 1996, $13.0
million in fiscal 1997 and $28.9 million in fiscal 1998 and $18.9 million in
the six months ended March 25, 1999. We also incurred an extraordinary loss of
$8.0 million in fiscal 1998 and $3.6 million in the six months ended March 25,
1999, in each case related to the early extinguishment of debt.
If we incur net losses in future periods, we may not be able to implement
our growth strategy in accordance with our present plans. Continuation of our
net losses may also require us to secure additional financing sooner than
anticipated. Such financing may not be available in sufficient amounts, or on
terms acceptable to us, and may dilute existing shareholders. If we do achieve
profitability, we may not sustain or increase profitability in the future. This
may, in turn, cause our stock price to decline.
We are subject to extensive environmental regulation, and increased regulation
or our failure to comply with existing regulations could require substantial
capital expenditures or affect our business, financial condition and results of
operations
Our business is subject to extensive environmental requirements,
particularly environmental laws regulating underground storage tanks.
Compliance with these regulations may require significant capital expenditures.
Federal, state and local regulations governing underground storage tanks
were phased in over a period ending in December 1998. These regulations
required us to make expenditures for compliance with corrosion protection and
leak detection requirements and required spill/overfill equipment by December
1998. We are in material compliance with the December 1998 upgrade
requirements. Failure to comply with any environmental regulations or an
increase in regulations could affect our business, financial condition and
results of operations.
We may incur substantial liabilities for remediation of environmental
contamination at our locations
Under various federal, state and local laws, ordinances and regulations,
we may, as the owner or operator of our locations, be liable for the costs of
removal or remediation of contamination at these or our former locations,
whether or not we knew of, or were responsible for, the presence of such
contamination. The failure to properly remediate such contamination may subject
us to liability to third parties and may adversely affect our ability to sell
or rent such property or to borrow money using such property as collateral.
Additionally, persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs of removal or remediation of
such substances at sites where they are located, whether or not such site is
owned or operated by such person. Although we do not typically arrange for the
treatment or disposal of hazardous substances, we may be deemed to have
arranged for the disposal or treatment of hazardous or toxic substances and,
therefore, may be liable for removal or remediation costs, as well as other
related costs, including governmental fines, and injuries to persons, property
and natural resources.
16
<PAGE>
We estimate that our future expenditures for remediation of current
locations net of reimbursements will be approximately $4.5 million for which
reserves have been established on our financial statements. In addition, The
Pantry estimates that up to $12.7 million may be expended for remediation on
our behalf by state trust funds established in our operating areas or other
responsible third parties including insurers. To the extent third parties do
not pay for remediation as we anticipate, we will be obligated to make these
payments, which could materially adversely affect our financial condition and
results of operations.
Reimbursements from state trust funds will be dependent on the continued
viability of these funds. The State of Florida trust fund ceased accepting new
claims for reimbursement for releases discovered after December 31, 1998.
However, the State of Florida trust fund will continue to reimburse claims for
remedial work performed on sites that were accepted into its program before
December 31, 1998. We have obtained private coverage for remediation and third
party claims arising out of releases reported after December 31, 1998. We meet
federal and Florida financial responsibility requirements with respect to
underground storage tanks in Florida through a combination of private insurance
and a letter of credit.
We may incur additional substantial expenditures for remediation of
contamination that has not been discovered at existing locations or locations
which we may acquire in the future. We cannot assure you that we have
identified all environmental liabilities at all of our current and former
locations; that material environmental conditions not known to us do not exist;
that future laws, ordinances or regulations will not impose material
environmental liability on us; or that a material environmental condition does
not otherwise exist as to any one or more of our locations. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--
Liquidity and Capital Resources" and "Business--Government Regulation and
Environmental Matters."
The large amount of our total outstanding debt and our obligation to service
that debt could divert necessary funds from operations, limit our ability to
obtain financing for future needs and expose us to interest rate risks
We are highly leveraged, which means that the amount of our outstanding
debt is large compared to the net book value of our assets, and have
substantial repayment obligations under our outstanding debt. As of March 25,
1999 we had:
. Total consolidated debt including capital lease obligations of
approximately $472.4 million
. Shareholders' equity of approximately $36.4 million
As of March 25, 1999, our borrowing availability under our bank credit
facility was approximately $56.0 million.
Our bank credit facility contains numerous financial and operating
covenants that limit our ability, and the ability of most of our subsidiaries,
to engage in activities such as acquiring or disposing of assets, engaging in
mergers or reorganizations, making investments or capital expenditures and
paying dividends. These covenants require that we meet interest coverage, net
worth and leverage tests. The indenture governing our senior subordinated notes
and our bank credit facility permit us and our subsidiaries to incur or
guarantee additional debt, subject to limitations.
17
<PAGE>
Our level of debt and the limitations imposed on us by our debt
agreements could have other important consequences to our shareholders,
including the following:
. We will have to use a portion of our cash flow from operations for
debt service, rather than for our operations or to implement our
growth strategy
. We may not be able to obtain additional debt financing for future
working capital, capital expenditures, acquisitions or other
corporate purposes
. We are vulnerable to increases in interest rates because the debt
under our bank credit facility is at a variable interest rate
Violations of or changes to government regulations could adversely impact wage
rates and other aspects of our business
Convenience stores, including stores that sell tobacco and alcohol
products, are subject to federal and state laws governing such matters as wage
rates, overtime, working conditions, citizenship requirements and alcohol and
tobacco sales. At the federal level, there are proposals under consideration
from time to time to increase minimum wage rates and to introduce a system of
mandated health insurance. A violation or change of these laws, or adoption of
any these proposals, could have a material adverse effect on our business,
financial condition and results of operations.
There are numerous legislative proposals pending in the South Carolina
legislature relating to video gaming, including initiatives to impose
additional significant taxes or regulatory measures as well as initiatives to
ban video gaming. Enactment of some of these initiatives could adversely impact
our results of operations. See "Business--Government Regulation and
Environmental Matters."
The interests of Freeman Spogli, our controlling shareholder, may conflict with
our interests and the interests of our other shareholders
As a result of its stock ownership and board representation, Freeman
Spogli will be in a position to affect our corporate actions such as mergers or
takeover attempts in a manner that could conflict with the interests of our
other shareholders. Freeman Spogli will own 9,349,524 shares of common stock
and warrants to purchase 2,346,000 shares of common stock after the offering.
Based on its ownership of common stock and warrants after the offering, Freeman
Spogli will beneficially own 57.2% of the common stock. In addition, five of
the seven members of our board of directors will be representatives of Freeman
Spogli immediately after the offering.
Because we depend on our senior management's experience and knowledge of our
industry, we would be materially affected if senior management left The Pantry
We are dependent on the continued efforts of our senior management team,
including our President and Chief Executive Officer, Peter Sodini. Mr. Sodini's
employment contract terminates in September 2001. If, for any reason, our
senior executives do not continue to be active in management, our operations
could be materially adversely affected. We cannot assure you that we will be
able to attract and retain additional qualified senior personnel as needed in
the future. We do not maintain key personnel life insurance on our senior
executives and other key employees.
18
<PAGE>
Future sales of additional shares into the market may depress the market price
of the common stock
If our existing shareholders sell shares of common stock in the public
market following the offering, including shares issued upon the exercise of
outstanding options and warrants, or if the market perceives such sales could
occur, the market price of our common stock could fall. These sales also might
make it more difficult for us to sell equity or equity-related securities in
the future at a time and price that we deem appropriate or to use equity as
consideration for future acquisitions.
Upon completion of the offering, we will have 18,111,478 outstanding
shares of common stock, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options or warrants. Of these
shares, the 6,250,000 shares sold in the offering are freely tradable. Of the
remaining shares, 11,647,962 shares are held by affiliated investment funds of
Freeman Spogli and affiliates of Chase Capital, who may be deemed to be
affiliates of The Pantry. Pursuant to Rule 144 under the Securities Act,
affiliates of The Pantry can resell up to 1% of the aggregate outstanding
common stock during any three month period. For more details, see "Shares
Eligible for Future Sale." In addition, Freeman Spogli and Chase Capital have
registration rights allowing them to require The Pantry to register the resale
of their shares. If Freeman Spogli and Chase exercise their registration rights
and sell shares of common stock in the public market, the market price of our
common stock could fall. See "Shares Eligible for Future Sale--Registration
Rights Agreement."
Because our common stock has never been publicly traded, we cannot predict the
extent to which a trading market will develop for our common stock
There was no public market for the common stock prior to the offering,
and an active public market for the common stock may not develop or be
sustained after the offering. Negotiations between us and representatives of
the underwriters will determine the initial public offering price. The price at
which the common stock will trade after the offering may be unrelated to the
initial public offering price. You may not be able to resell your common stock
at favorable prices. The price at which the common stock will trade will depend
upon a number of factors, including our historical and anticipated quarterly
and annual operating results, variations between such results and analyst and
investor expectations, investor perceptions of us and comparable public
companies, changes in the convenience store industry and general market and
economic conditions. Some of these factors are beyond our control.
You will experience immediate and substantial dilution in the book value of the
common stock
The initial public offering price is substantially higher than the book
value per share of our common stock. If you purchase common stock in the
offering, you will experience immediate and substantial dilution of $17.19 per
share in the net tangible book value of the common stock from the initial
public offering price. This means that if The Pantry were to be liquidated
immediately after the offering, there may be no assets available for
distribution to public shareholders after satisfaction of all creditors
assuming the amount carried as goodwill on our financial statements has no
value. See "Dilution."
19
<PAGE>
Our charter includes provisions which may have the effect of preventing or
hindering a change in control and adversely affecting the market price of our
common stock
Our certificate of incorporation gives our board of directors the
authority to issue up to five million shares of preferred stock and to
determine the rights and preferences of the preferred stock without obtaining
shareholder approval. The existence of this preferred stock could make more
difficult or discourage an attempt to obtain control of The Pantry by means of
a tender offer, merger, proxy contest or otherwise. Furthermore, this preferred
stock could be issued with other rights, including economic rights, senior to
our common stock, and, therefore, issuance of the preferred stock could have an
adverse effect on the market price of our common stock. We have no present
plans to issue any shares of our preferred stock.
Other provisions of our certificate of incorporation and bylaws and of
Delaware law could make it more difficult for a third party to acquire us or
hinder a change in management even if doing so would be beneficial to our
shareholders. These governance provisions could hurt the market price of our
common stock. See "Description of Capital Stock--Antitakeover Provisions."
We may, in the future, adopt other measures that may have the effect of
delaying, deferring or preventing an unsolicited takeover, even if such a
change in control were at a premium price or favored by a majority of
unaffiliated shareholders. These measures may be adopted without any further
vote or action by our shareholders.
The failure of The Pantry, third party vendors or acquired entities to be Year
2000 compliant could adversely impact our operations
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. As a result, software
that records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results.
We use a combination of hardware devices run by computers at our support
centers and retail locations to process transactions and other data which are
essential to our business operations. Because of the overall complexity of the
Year 2000 issue and the uncertainty surrounding third party responses to Year
2000 issues, we may experience material unanticipated negative consequences
and/or material costs caused by undetected errors or defects in our systems,
systems of acquired companies or third party systems or by our failure to
adequately prepare for the results of such errors or defects, including costs
of related litigation.
We believe that the worst case scenario in the event of a Year 2000-
related failure would be delays in the receipt of payment from credit card
processing companies utilized by us and a return to manual accounting
processing at our individual stores. The impact of such consequences could have
a material adverse effect on our business, financial condition or results of
operations. For more details see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Initiative."
20
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 6,250,000 shares of common
stock at a price of $13.00 per share are approximately $74.6 million, after
deducting the underwriting discount and estimated offering expenses payable by
us. Net proceeds will be $85.9 million if the over-allotment option is
exercised in full.
We expect to use the net proceeds of the offering to repay indebtedness
under our bank credit facilities ($19.0 million), to redeem our outstanding
preferred stock ($17.5 million), pay accrued dividends on the preferred stock
($6.5 million) and to make acquisitions ($31.6 million). We intend to invest
the $31.6 million, pending use for acquisitions, in short term, investment
grade money-market instruments. If we have not used any portion of this $31.6
million to make acquisitions within nine months after the offering, our bank
credit facility requires that any unused portion must be used to repay term
loan indebtedness.
We continuously evaluate and review acquisition candidates as part of our
growth strategy and we are at various stages of evaluation, discussion or
negotiation with a number of such candidates. Some of these candidates may be
material. At this time we have no definitive agreements to make acquisitions.
There can be no assurance that we will complete additional acquisitions in the
nine month time period.
The $19.0 million used to repay indebtedness under the bank credit
facility will be applied to the acquisition term facility, which has been
amended to permit reborrowing of the $19.0 million after the offering. The
acquisition term facility matures in January 2004. As of April 30, 1999 $19.0
million was outstanding under the acquisition term facility and an additional
$239.0 million of term indebtedness was outstanding under our bank credit
facility. Borrowings under the acquisition term facility bear interest, as of
April 30, 1999, at a rate of 7.92%. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
DIVIDEND POLICY
We do not expect to pay cash dividends on our common stock for the
foreseeable future. We intend to retain earnings to support operations and to
finance expansion. The payment of cash dividends in the future will depend upon
our earnings, operations, capital requirements, financial condition and other
factors deemed relevant by the board of directors. The payment of any cash
dividends is prohibited by the indenture relating to the senior subordinated
notes and our bank credit facility.
21
<PAGE>
CAPITALIZATION
The following table describes our capitalization as of March 25, 1999 on
an actual basis and on an as adjusted basis to reflect our receipt of the net
proceeds of $74.6 million from the sale of 6,250,000 shares of common stock.
The as adjusted amount also assumes the application of $19.0 million of the net
proceeds to repay indebtedness under our bank credit facility, $17.5 million to
redeem our preferred stock and $5.8 million to pay accrued dividends. The
following should be read together with our consolidated financial statements
and related notes, "Unaudited Pro Forma Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
At March 25, 1999
---------------------
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents................................ $ 24,999 $ 57,224
======== ========
Current debt:
Current maturities of long-term debt.................... 5,431 5,431
Current maturities of capital lease obligations......... 1,240 1,240
-------- --------
Total current debt................................... 6,671 6,671
-------- --------
Long-term debt:
Senior subordinated notes............................... 200,000 200,000
Bank credit facility.................................... 252,629 233,629
Other long-term debt.................................... 1,648 1,648
Capital lease obligations............................... 11,498 11,498
-------- --------
Total long-term debt................................. 465,775 446,775
-------- --------
Total debt......................................... 472,446 453,446
-------- --------
Shareholders' equity:
Preferred stock, par value $.01 per share; 150,000
shares authorized, actual; 5,000,000 authorized, as
adjusted; 17,500 Series B shares issued and
outstanding, actual; no shares issued and outstanding,
as adjusted........................................... -- --
Common stock, par value $.01 per share; 300,000 shares
authorized, actual (50,000,000 after stock split);
50,000,000 shares authorized, as adjusted; 11,861,478
shares issued and outstanding, actual; 18,111,478
shares issued and outstanding, as adjusted(a)......... 119 181
Additional paid-in capital............................. 70,727 127,727
Shareholder loans...................................... (937) (937)
Retained earnings (deficit)............................ (33,463) (33,463)
-------- --------
Total shareholders' equity........................... 36,446 93,508
-------- --------
Total capitalization............................... $508,892 $546,954
======== ========
</TABLE>
- --------
(a) Does not include 2,922,861 shares issuable upon exercise of outstanding
stock options and warrants.
22
<PAGE>
DILUTION
Our net tangible book value as of March 25, 1999 was a deficit of $133.0
million or $(11.21) per share of common stock. Net tangible book value per
share represents the amount of our total tangible assets, which excludes
goodwill of $169.4 million, less our total liabilities, divided by the total
number of outstanding shares of common stock outstanding.
After giving effect to the sale of 6,250,000 shares at an initial public
offering price of $13.00 per share and the receipt and application of the net
proceeds (after deducting the underwriting discount and offering expenses) our
adjusted net tangible book value as of March 25, 1999 would have been a deficit
of approximately $75.9 million or approximately $(4.19) per share. This
represents an immediate increase in such net tangible book value of $7.02 per
share to existing shareholders and an immediate dilution of $(17.19) per share
to new shareholders purchasing shares in the offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $ 13.00
Net tangible book value per share as of March 25, 1999...... $(11.21)
Increase per share attributable to new shareholders......... 7.02
-------
Adjusted net tangible book value per share as of March 25,
1999 after the offering.................................... (4.19)
-------
Dilution per share to new investors......................... $(17.19)
=======
</TABLE>
The calculations in the table set forth above assume that the
underwriters will not exercise their over-allotment option. The calculations do
not reflect 5,100,000 shares of common stock reserved for issuance pursuant to
options outstanding under our stock option plans and 2,346,000 shares of common
stock reserved for issuance pursuant to common stock warrants issued to Freeman
Spogli. See "Transactions with Affiliates" and "Management--Stock Option
Plans."
The following table describes, as of March 25, 1999, the difference
between the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid by the existing
shareholders and by the new investors, before deducting the underwriting
discount and estimated offering expenses payable by us, at the initial public
offering price of $13.00 per share.
<TABLE>
<CAPTION>
Total Consideration Average
Shares Purchased Paid (in thousands) Price
--------------------- ---------------------- ---------
Number Percentage Amount Percentage Per Share
---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 11,861,478 65.5% $102,497(a) 55.8% $ 8.64
New investors(b)........ 6,250,000 34.5 81,250 44.2 13.00
---------- ----- -------- ----- ------
Total................. 18,111,478 100.0% $183,747 100.0% $10.15
========== ===== ======== ===== ======
</TABLE>
- --------
(a) Includes $26.0 million paid for Series A preferred stock which was
contributed to The Pantry in October 1997.
(b) The number of shares held by new public investors will be 6,250,000 or
approximately 34.5% of the total number of shares outstanding after the
offering. If the underwriters exercise their over-allotment option in full,
public investors will own 7,187,500 shares, or approximately 37.7% of the
total number of shares of common stock outstanding after the offering.
23
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial
data and store operating data that is derived from our consolidated financial
statements. Our financial results for the 1996 fiscal year and subsequent
periods reflect the operating strategy implemented by our current management
team in 1996. The financial position and results of operations for the six
month periods ended March 26, 1998 and March 25, 1999 have been derived from
our unaudited financial statements and, in our opinion, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation. They are not necessarily indicative of the results that may
occur for the full fiscal year. Since this table contains only selected
financial data, you should read "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and related notes.
The statement of operations data includes unusual items and events that
affect comparability with other periods:
. During 1998, we recorded an integration charge of approximately $1.0
million for costs of combining our existing business with the
acquired business of Lil' Champ.
. On October 23, 1997 in connection with the Lil' Champ acquisition, we
completed the offering of our senior subordinated notes and, in a
related transaction, redeemed $51.0 million in principal amount of
our senior notes at a purchase price of 110% of the aggregate
principal amount, plus accrued and unpaid interest, a consent fee and
other related fees. In connection with this redemption, we incurred
an extraordinary loss of $8.0 million during the year ended September
24, 1998 related to the cost of the redemption of $51.0 million of
our senior notes and related consent fee payments and write-off of
deferred financing costs.
. During 1996, we recorded restructuring charges of $1.6 million
pursuant to a formal plan to restructure our corporate offices. Also
during fiscal 1996, we early-adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." In addition, pursuant to SFAS No. 121, we evaluated our
long-lived assets for impairment on a store-by-store basis. Based on
this evaluation, we recorded an impairment loss of $0.4 million for
property and equipment and $2.6 million for goodwill.
. In fiscal 1995, we adopted SFAS No. 112, "Employer's Accounting for
Post Retirement Benefits," and as a result, recorded a cumulative
effect for a change in accounting principle of $1.0 million, net of
taxes.
. In fiscal 1994, we recorded an extraordinary loss of $0.7 million,
net of taxes, related to the early extinguishment of debt.
The stores included in calculating same store sales growth are stores
that were under our management and in operation for the comparative periods
presented.
24
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
--------------------------------------------------- --------------------
Sept. Sept. Sept. Sept. Sept. 24, March 26, March 25,
29, 1994 28, 1995 26, 1996 25, 1997 1998 1998 1999
-------- -------- -------- -------- --------- --------- ---------
(dollars in thousands, except operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Merchandise sales...... $189,244 $187,380 $188,091 $202,440 $ 460,798 $ 193,765 $ 303,962
Gasoline sales......... 175,083 187,165 192,737 220,166 509,958 215,718 360,917
Commissions............ 4,466 4,516 3,979 4,787 14,128 6,358 10,520
-------- -------- -------- -------- --------- --------- ---------
Total revenue........... 368,793 379,061 384,807 427,393 984,884 415,841 675,399
Cost of sales:
Merchandise............ 123,142 121,976 125,979 132,846 303,968 126,865 204,825
Gasoline............... 153,476 161,179 167,610 197,268 447,565 190,324 314,633
-------- -------- -------- -------- --------- --------- ---------
Gross profit............ 92,175 95,906 91,218 97,279 233,351 98,652 155,941
Store operating
expense................ 53,201 56,206 57,841 60,208 140,089 61,853 95,215
General and
administrative
expenses............... 17,893 18,159 17,751 16,796 32,761 15,532 22,356
Unusual charges......... -- -- 4,594 -- 1,016 -- --
Depreciation and
amortization........... 10,164 11,470 9,158 9,504 27,642 11,775 17,830
-------- -------- -------- -------- --------- --------- ---------
Income from operations.. 10,917 10,071 1,874 10,771 31,843 9,492 20,540
Interest expense........ (12,047) (13,240) (11,992) (13,039) (28,946) (12,851) (18,873)
Income (loss) before
income taxes and other
items.................. (181) (3,639) (10,778) (975) 4,673 (2,585) 1,795
Income (loss) before
other items............ 191 (3,285) (8,114) (975) 4,673 (1,669) 1,077
Extraordinary loss...... (671) -- -- -- (7,998) (6,800) (3,557)
Net income (loss)....... $ (480) $ (4,245) $ (8,114) $ (975) $ (3,325) $ (8,469) $ (2,480)
Net loss applicable to
common share holders... $ (510) $ (4,245) $(10,768) $ (6,279) $ (6,267) $ (10,055) $ (3,926)
Earnings (Loss) Per
Share Before
Extraordinary Loss:
Basic.................. $ 0.03 $ (0.64) $ (1.89) $ (1.08) $ 0.18 $ (0.36) $ (0.03)
Diluted................ $ 0.03 $ (0.64) $ (1.89) $ (1.08) $ 0.16 $ (0.36) $ (0.03)
Weighted-Average Number
of Shares Outstanding:
Basic.................. 5,100 5,100 5,688 5,815 9,732 8,937 11,857
Diluted................ 5,100 5,100 5,688 5,815 11,012 8,937 11,857
Other Financial Data:
EBITDA.................. $ 21,081 $ 21,541 $ 15,626 $ 20,275 $ 60,501 $ 21,267 $ 38,370
Net cash provided by
(used in):
Operating activities... $ (4,120) $ 11,903 $ 5,415 $ 7,338 $ 48,032 $ 17,652 $ 13,405
Investing activities... (10,612) (15,281) (7,204) (25,079) (286,493) (163,153) (151,288)
Financing activities... 25,955 (950) (3,872) 15,750 269,518 170,698 128,478
Capital expenditures.... 9,862 32,250 11,134 16,577 48,356 20,462 26,507
Store Operating Data:
Number of stores (end of
period)................ 406 403 379 390 954 883 1,149
Average sales per store:
Merchandise sales (in
thousands)............ $ 460.4 $ 462.7 $ 481.1 $ 525.8 $ 533.3 $ 304.2 $ 304.3
Gasoline gallons (in
thousands)............ 423.7 440.3 450.0 501.2 603.9 329.2 397.5
Comparable store sales
growth:
Merchandise............ 1.3% (0.8)% 2.8% 8.5% 5.3% 4.4% 11.4%
Gasoline gallons....... 2.8% 0.5% (4.3)% 7.2% 4.8% 5.8% 6.8%
Operating Data:
Merchandise gross
margin................. 34.9% 34.9% 33.0% 34.4% 34.0% 34.5% 32.6%
Gasoline gallons sold
(in millions).......... 158.5 160.3 160.7 179.4 466.8 189.3 365.3
Average retail gasoline
price per gallon....... $ 1.10 $ 1.17 $ 1.20 $ 1.23 $ 1.09 $ 1.14 $ 0.99
Average gasoline gross
profit per gallon...... $ 0.136 $ 0.162 $ 0.156 $ 0.128 $ 0.134 $ 0.134 $ 0.127
Store expenses as a
percentage of sales.... 14.4% 14.8% 15.0% 14.1% 14.2% 14.9% 14.1%
General and
administrative expenses
as a percentage of
sales.................. 4.9% 4.8% 4.6% 3.9% 3.3% 3.7% 3.3%
Operating income as a
percentage of sales.... 3.0% 2.7% 0.5% 2.5% 3.2% 2.3% 3.0%
Balance Sheet Data (end
of period):
Working capital
(deficiency)........... $ 6,652 $ (761) $ (6,513) $ (8,245) $ (8,983) $ 862 $ (34,836)
Total assets............ 124,015 127,720 120,880 142,799 554,828 397,995 722,930
Total debt and capital
lease obligations...... 102,382 101,798 101,431 101,302 340,683 271,473 472,446
Shareholders' equity
(deficit).............. (12,087) (16,332) (27,547) (17,873) 39,304 10,517 36,446
</TABLE>
25
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma consolidated financial data have been
derived by the application of pro forma adjustments to the historical
financial statements of The Pantry for the periods indicated. The adjustments
are described in the accompanying notes. The unaudited pro forma financial
data give effect to the following:
The Initial Public Offering of our Common Stock:
The net proceeds from the sale of 6,250,000 shares of our common stock
at a price of $13.00 per share are $74.6 million, after deducting the
underwriting discount and estimated offering expenses payable by us. The pro
forma financial data assumes the net proceeds of the offering are used to
repay indebtedness under our bank credit facility of $19.0 million, to redeem
our outstanding preferred stock of $17.5 million and pay accrued dividends of
$5.8 million, with the remaining $32.2 million available to make acquisitions
during the nine months following the offering.
Fiscal 1998 Acquisitions:
<TABLE>
<CAPTION>
Number
of
Date Acquired Company Trade Name Locations Stores
---------------- ------------------------------ ---------- ----------------------- ------
<C> <C> <C> <S> <C>
July 15, 1998 Stallings Oil Company, Inc. Zip Mart Central North Carolina, 42
Virginia
July 2, 1998 Quick Stop Food Mart, Inc. Quick Stop Southeast North
Carolina, Coastal South
Carolina 75
May 2, 1998 United Fuels Corporation, Inc. Sprint Gainesville, Florida 10
March 19, 1998 Wooten Oil Company, Inc. Kwik Mart Eastern North Carolina 23
October 23, 1997 Lil' Champ Food Stores, Inc. Lil' Champ Northeast Florida 440(a)
</TABLE>
- --------
(a) Net of the disposition of 48 convenience stores located throughout eastern
Georgia.
The approximate cost of the 1998 acquisitions and the sources of funding
are as follows:
<TABLE>
<CAPTION>
Company Acquisition Cost Funding Sources
------------------- ---------------- --------------------------------------
(in thousands)
<C> <C> <S>
Stallings Oil $29,300 Proceeds of $25.0 million from our
1998 bank credit facility and cash on
hand
Quick Stop 56,000 Proceeds of $25.0 million from the
sale of 43,478 shares of our common
stock to existing shareholders, $25.0
million from our 1998 bank credit
facility and cash on hand
United Fuels 18,300 Proceeds of $19.0 million from our
1998 bank credit facility
Wooten Oil 9,000 Proceeds of $9.0 million from our 1998
bank credit facility
Lil' Champ 136,400 Proceeds from the issuance of $200.0
million of senior subordinated notes
</TABLE>
26
<PAGE>
Fiscal 1998 Financing Transactions:
. October 23, 1997--we issued $200.0 million of senior subordinated
notes at an interest rate of 10.25%
. October 23, 1997--we repurchased $51.0 million of senior notes with
an interest rate of 12.5% and paid related costs including a 10%
repurchase premium, consent fee, accrued interest and other expenses.
This issuance of new debt and retirement of existing debt, which
results in an annual reduction in interest costs of approximately
$1.148 million, was an integral part of our plan to acquire Lil'
Champ.
. March 19, 1998 through July 15, 1998--we borrowed $78.0 million under
our bank credit facility
Fiscal 1999 Acquisitions:
<TABLE>
<CAPTION>
Number
of
Date Acquired Company Trade Name Locations Stores
----------------- -------------------------- ------------ ------------------------ ------
<C> <C> <C> <S> <C>
February 25, 1999 Taylor Oil Company ETNA North Carolina, Virginia 60
January 28, 1999 Miller Enterprises, Inc. Handy Way North-central Florida 121
and affiliates (a)
November 5, 1998 Express Stop, Inc. Express Stop Southeast North
Carolina, Eastern
South Carolina 22
October 22, 1998 A.G. Lee Oil Company, Inc. Dash-N East-central North
Carolina 10
</TABLE>
- --------
(a) Including real estate assets of Miller Brothers and Circle Investments,
Ltd. consisting of land and buildings leased to and used in the
convenience store operations of Miller Enterprises, Inc.
The approximate cost of the 1999 acquisitions and the sources of funding
are as follows:
<TABLE>
<CAPTION>
Company Acquisition Cost Funding Sources
--------------------------------- ---------------- -------------------------
(in thousands)
<C> <C> <S>
Taylor Oil $22,850 Proceeds of $19.0 million
from our 1999 bank credit
facility and cash on hand
Miller Enterprises and affiliates 95,100 Proceeds of $95.0 million
from our 1999 bank credit
facility and cash on hand
Express Stop 21,800 Proceeds of $16.0 million
from our 1998 bank credit
facility and cash on hand
A.G. Lee Oil 3,750 Cash on hand
</TABLE>
Fiscal 1999 Financing Transactions:
. January 28, 1999--we entered into a new bank credit facility and used
the proceeds of $245.0 million plus cash on hand to:
. repay $94.0 million of existing debt under our 1998 bank credit
facility
. redeem $49.0 million of outstanding senior notes and pay $2.0
million of related premium costs
. finance $95.0 million of the Miller Enterprises and affiliates
acquisition price and
. pay related fees and accrued and unpaid interest
27
<PAGE>
. The 1999 bank credit facility repaid and replaced the 1998 bank
credit facility and is comprised of $80.0 million Tranche A and
$160.0 million Tranche B term loans, a $45.0 million revolving credit
facility and a $50.0 million acquisition facility
. February 25, 1999--we borrowed $19.0 million on our 1999 revolving
credit facility and used the proceeds plus cash on hand to finance
the purchase price of the Taylor Oil acquisition
Pro Forma Adjustments:
The unaudited pro forma balance sheet gives effect to the offering of our
common stock and the repayment of $19.0 million of our long-term debt. The
fiscal 1998 and 1999 transactions are reflected in our historical unaudited
balance sheet as of March 25, 1999.
The unaudited pro forma statement of operations for the six months ended
March 25, 1999 gives effect to the fiscal 1999 acquisitions and the fiscal 1999
financing transactions as if such events occurred at the beginning of fiscal
1998. The fiscal 1998 acquisitions and fiscal 1998 financing transactions are
included in our historical results of operations for the six-month period. The
periods for which the fiscal 1999 acquisitions have been included in the pro
forma statement of operations are as follows:
. Taylor Oil--the five-month period from October 1, 1998 through
February 24, 1999
. Miller Enterprises--the four-month period from October 1, 1998
through January 27, 1999
. Express Stop--the one-month period from October 1, 1998 through
October 31, 1998
. A.G. Lee Oil--the one-month period from October 1, 1998 through
October 22, 1998
The unaudited pro forma statement of operations for the year ended
September 24, 1998 gives effect to the 1998 acquisitions and disposition, the
1998 financing transactions, the fiscal 1999 acquisitions and the 1999
financing transactions as if such events occurred at the beginning of fiscal
1998. The periods for which the fiscal 1998 and 1999 acquisitions have been
included in the pro forma statement of operations are as follows:
1998 Acquisitions and Disposition:
. Stallings Oil--the nine-month period from October 1, 1997 through
June 30, 1998
. Quick Stop--the nine-month period from October 1, 1997 through June
30, 1998
. United Fuels--the six-month period from October 1, 1997 through March
31, 1998
. Wooten Oil--the five-month period from October 1, 1997 through
February 28, 1998
. Lil' Champ--the one-month period from September 28, 1997 through
October 23, 1997
. Lil' Champ disposition--the disposition of 48 convenience stores
located throughout eastern Georgia for the eleven-month period from
October 25, 1997 through August 31, 1998
1999 Acquisitions:
. Taylor Oil--the twelve-month period from January 1, 1998 through
December 31, 1998
. Miller Enterprises--the twelve-month period from October 1, 1997
through September 30, 1998
28
<PAGE>
. Express Stop--the twelve-month period from October 1, 1997 through
September 30, 1998
. A.G. Lee Oil--the twelve-month period from October 1, 1997 through
September 30, 1998
In connection with the Stallings Oil and Express Stop acquisitions, we
did not acquire all operations of these entities. The operations not acquired
related primarily to a truckstop owned, operated and retained by Stallings Oil
and equity in earnings of affiliates of Express Stop, Inc.
The unaudited pro forma financial data are provided for informational
purposes only and do not represent our results of operations or financial
position had the transactions occurred on such dates, nor are they indicative
of our results of operations or financial position as of any future date or
period.
The unaudited pro forma financial data and accompanying notes should be
read in conjunction with the financial statements and accompanying notes
thereto and the other financial information included elsewhere in this
prospectus. The financial statements of the following immaterial acquired
entities were not audited or reviewed by independent public accountants. The
information relating to these immaterial acquired entities is generally based
on internal financial statements prepared by the entity:
. Wooten Oil
. United Fuels
. A.G. Lee Oil
29
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET DATA
March 25, 1999
<TABLE>
<CAPTION>
The Pantry
March 25, IPO Total
1999 Adjustments Pro Forma
---------- ----------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.... $ 24,999 $32,225(b) $ 57,224
Receivables, net............. 14,829 -- 14,829
Inventories.................. 61,378 -- 61,378
Income taxes receivable...... 4,581 -- 4,581
Prepaid expenses............. 2,634 -- 2,634
Property held for sale....... 82 -- 82
Deferred income taxes........ 4,133 -- 4,133
-------- ------- --------
Total current assets....... 112,636 32,225 144,861
-------- ------- --------
Property and equipment, net.... 405,727 -- 405,727
Other assets:
Goodwill, net................ 169,431(a) -- 169,431
Deferred lease cost, net..... 247 -- 247
Deferred financing cost,
net......................... 13,130 -- 13,130
Environmental receivables,
net......................... 12,732 -- 12,732
Other........................ 9,027 -- 9,027
-------- ------- --------
Total other assets......... 204,567 -- 204,567
-------- ------- --------
Total assets............. $722,930 $32,225 $755,155
======== ======= ========
</TABLE>
See Notes to Unaudited Pro Forma Balance Sheet Data
30
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET DATA
March 25, 1999
<TABLE>
<CAPTION>
The Pantry
March 25, IPO Total
1999 Adjustments Pro Forma
---------- ----------- ---------
(dollars in thousands)
<S> <C> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term debt...... $ 5,431 $ -- $ 5,431
Current maturities of capital lease
obligations.............................. 1,240 -- 1,240
Accounts payable.......................... 74,245 -- 74,245
Accrued expenses.......................... 66,556 -- 66,556
-------- -------- --------
Total current liabilities................ 147,472 -- 147,472
-------- -------- --------
Senior subordinated notes................. 200,000 -- 200,000
1999 bank credit facility................. 252,629 (19,000)(b) 233,629
Other long-term debt...................... 1,648 -- 1,648
-------- -------- --------
Total long-term debt..................... 454,277 (19,000) 435,277
-------- -------- --------
Other non-current liabilities:
Environmental reserve..................... 17,185 -- 17,185
Capital lease obligations................. 11,498 -- 11,498
Employment obligations.................... 749 -- 749
Accrued dividends on preferred stock...... 5,837 (5,837)(b) --
Deferred income taxes..................... 23,414 -- 23,414
Other non-current liabilities............. 26,052 -- 26,052
-------- -------- --------
Total other non-current liabilities...... 84,735 (5,837) 78,898
-------- -------- --------
Shareholders' equity:
Preferred stock, par value $.01 per share;
150,000 shares authorized, actual;
5,000,000 authorized, as adjusted; 17,500
Series B shares issued and outstanding,
actual; no shares issued and outstanding,
pro forma................................ -- -- --
Common stock, par value $.01 per share;
300,000 shares authorized, actual
(50,000,000 after stock split);
50,000,000 shares authorized, pro forma;
11,861,478 shares issued and outstanding,
actual; 18,111,478 shares issued and
outstanding, as adjusted................. 119 62 (b) 181
Additional paid-in capital................ 70,727 74,500 (b) 127,727
(17,500)(b)
Shareholder loans......................... (937) -- (937)
Retained deficit.......................... (33,463) -- (33,463)
-------- -------- --------
Total shareholders' equity............... 36,446 57,062 93,508
-------- -------- --------
Total liabilities and shareholders'
equity.................................. $722,930 $ 32,225 $755,155
======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Balance Sheet Data
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET DATA
(dollars in thousands except per share amounts)
(a) The 1998 and 1999 acquisitions have been accounted for using the purchase
method of accounting. Purchase price allocations for the Lil' Champ
acquisition, the Wooten Oil acquisition and the United Fuels acquisition
have been finalized. Purchase price allocations for all other 1998 and 1999
acquisitions have not been finalized and are based on available
information, internal estimates and assumptions we believe are reasonable.
For each acquisition, the purchase price will be allocated to the tangible
and intangible assets acquired and liabilities assumed based upon their
respective fair values at the time the acquisitions were consummated,
pending completion of appraisals of property and equipment acquired. The
excess of the purchase price over the historical basis of the net assets
acquired has been allocated to the net assets acquired based on preliminary
estimates. The actual allocation of the purchase cost, however, and the
resulting effect on income from operations may differ significantly from the
pro forma amounts included herein pending the completion of appraisals and
other purchase price adjustments.
The purchase price of the Miller Enterprises and affiliates acquisition is
subject to working capital and capital expenditure adjustments pending the
completion of a closing balance sheet audit of Miller Enterprises as of
January 27, 1999.
In the Express Stop acquisition, $2,500 of the purchase price was subject to
an escrow agreement until March 1999, and was to be forfeited upon the
occurrence of specific events or conditions relating to the operations of
video poker machines in South Carolina. The events or conditions specified
in the purchase agreement did not occur, and the $2,500 held in escrow was
paid to Express Stop in March 1999.
(b) Reflects net proceeds of $74,562 from the offering of 6,250,000 shares of
our common stock at the offering price of $13.00 per share. Also reflects
the application of such proceeds to repay outstanding indebtedness under
our bank credit facility of $19,000 and redeem preferred stock of $17,500
and pay accrued dividends of $5,837. The remaining proceeds of $32,225 from
the offering will be invested in short-term investments pending use for
acquisitions. If such amount has not been used for acquisitions within nine
months of the offering, this amount will be used to repay term loan debt
under the 1999 bank credit facility.
32
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
Six Months Ended March 25, 1999
<TABLE>
<CAPTION>
Historical
--------------------------
Six Months
Ended Acquisition
March 25, Fiscal and
1999 1999 Financing IPO Total
The Pantry Acquisitions(a) Adjustments Subtotal Adjustments Pro Forma
---------- --------------- ----------- -------- ----------- ---------
(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales...... $303,962 $ 49,122 $ -- $353,084 $-- $353,084
Gasoline sales......... 360,917 80,645 -- 441,562 -- 441,562
Commissions............ 10,520 757 -- 11,277 -- 11,277
-------- -------- ------- -------- ---- --------
Total revenue......... 675,399 130,524 -- 805,923 -- 805,923
-------- -------- ------- -------- ---- --------
Cost of Sales:
Merchandise............ 204,825 29,666 -- 234,491 -- 234,491
Gasoline............... 314,633 70,450 -- 385,083 -- 385,083
-------- -------- ------- -------- ---- --------
Total cost of sales... 519,458 100,116 -- 619,574 -- 619,574
-------- -------- ------- -------- ---- --------
Gross profit............ 155,941 30,408 -- 186,349 -- 186,349
-------- -------- ------- -------- ---- --------
Store operating
expenses............... 95,215 23,397 (1,507)(c) 118,323 -- 118,323
1,218 (d)
General and
administrative
expenses............... 22,356 2,631 -- 24,987 -- 24,987
Merger integration
costs.................. -- 695 -- 695 -- 695
Stock compensation
charge................. -- 2,029(b) -- 2,029 -- 2,029
Impairment of long-lived
assets................. -- 47 -- 47 -- 47
Depreciation and
amortization........... 17,830 2,036 497 (e) 20,412 -- 20,412
271 (f)
(222)(g)
-------- -------- ------- -------- ---- --------
Total operating........ 135,401 30,835 257 166,493 -- 166,493
-------- -------- ------- -------- ---- --------
Income from operations.. 20,540 (427) (257) 19,856 -- 19,856
-------- -------- ------- -------- ---- --------
Other Income (Expense):
Interest............... (18,873) (131) (2,743)(h) (21,747) 784 (l) (20,963)
Miscellaneous.......... 128 25 (13)(i) 140 -- 140 (m)
-------- -------- ------- -------- ---- --------
Total other........... (18,745) (106) (2,756) (21,607) 784 (20,823)
-------- -------- ------- -------- ---- --------
Income (loss) before
income taxes........... 1,795 (533) (3,013) (1,751) 784 (967)
Income tax expense
(benefit).............. 718 (508) (911)(j) (701) 314(j) (387)
-------- -------- ------- -------- ---- --------
Net income (loss) before
extraordinary loss..... $ 1,077 $ (25) $(2,102)(k) $ (1,050) $470 $ (580)
======== ======== ======= ======== ==== ========
Earnings (Loss) Per
Share Before
Extraordinary Loss (k):
Basic.................. $ (0.03) $ (0.03)
======== ========
Diluted................ $ (0.03) $ (0.03)
======== ========
Weighted-Average Number
of Shares Outstanding
(k):
Basic.................. 11,857 18,107
======== ========
Diluted................ 11,857 18,107
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations Data
33
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
Year Ended September 24, 1998
<TABLE>
<CAPTION>
Historical
------------------------------------------------------------
Year Ended 1998
September 24, Acquisitions Fiscal Acquisition and
1998 and 1999 Financing IPO Total
The Pantry Disposition(n) Acquisitions(o) Adjustments Subtotal Adjustments Pro Forma
------------- -------------- --------------- --------------- --------- ----------- ----------
(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales...... $460,798 $ 75,593 $156,227 $ (402)(i) $ 692,216 $ -- $ 692,216
Gasoline sales......... 509,958 181,814 267,481 (15,823)(i) 943,430 -- 943,430
Commissions............ 14,128 3,633 5,217 (467)(i) 22,511 -- 22,511
-------- -------- -------- -------- --------- ------ ----------
Total revenues....... 984,884 261,040 428,925 (16,692) 1,658,157 -- 1,658,157
-------- -------- -------- -------- --------- ------ ----------
Cost of Sales:
Merchandise............ 303,968 54,219 103,097 (207)(i) 461,077 -- 461,077
Gasoline............... 447,565 161,074 237,327 (13,004)(i) 832,962 -- 832,962
-------- -------- -------- -------- --------- ------ ----------
Total cost of sales.. 751,533 215,293 340,424 (13,211) 1,294,039 -- 1,294,039
-------- -------- -------- -------- --------- ------ ----------
Gross profit............ 233,351 45,747 88,501 (3,481) 364,118 -- 364,118
-------- -------- -------- -------- --------- ------ ----------
Store operating
expenses............... 140,089 27,164 60,021 (3,015)(i) 222,560 -- 222,560
(4,424)(c)
2,725 (d)
General and
administrative
expenses............... 32,761 7,506 11,909 (356)(i) 51,778 -- 51,778
(42)(p)
Merger integration
costs.................. 1,016 -- 261 -- 1,277 -- 1,277
Impairment of long-lived
assets................. -- -- 188 -- 188 -- 188
Depreciation and
amortization........... 27,642 5,189 5,517 (169)(i) 41,259 -- 41,259
3,160 (e)
371 (f)
(451)(g)
-------- -------- -------- -------- --------- ------ ----------
Total operating
expense................ 201,508 39,859 77,896 (2,201) 317,062 -- 317,062
-------- -------- -------- -------- --------- ------ ----------
Income from operations.. 31,843 5,888 10,605 (1,280) 47,056 -- 47,056
-------- -------- -------- -------- --------- ------ ----------
Other Income (Expense):
Interest............... (28,946) (1,687) (430) (12,483)(h) (43,546) 1,568 (l) (41,978)
Miscellaneous.......... 1,776 137 627 (193)(i) 2,347 -- 2,347(m)
-------- -------- -------- -------- --------- ------ ----------
Total other ......... (27,170) (1,550) 197 (12,676) (41,199) 1,568 (39,631)
-------- -------- -------- -------- --------- ------ ----------
Income (loss) before
income taxes........... 4,673 4,338 10,802 (13,956) 5,857 1,568 7,425
Income tax expense...... -- 364 915 1,064 (j) 2,343 627 (j) 2,970
-------- -------- -------- -------- --------- ------ ----------
Net income (loss) before
extraordinary item..... $ 4,673 $ 3,974 $ 9,887 $(15,020)(k) $ 3,514 $ 941 $ 4,455
======== ======== ======== ======== ========= ====== ==========
Earnings Per Share
Before Extraordinary
Loss (k):
Basic.................. $ 0.18 $ 0.28
======== ==========
Diluted................ $ 0.16 $ 0.26
======== ==========
Weighted-Average Number
of Shares Outstanding
(k):
Basic.................. 9,732 15,982
======== ==========
Diluted................ 11,012 17,262
======== ==========
</TABLE>
See Notes to Unaudited Pro Forma Statement of Operations Data
34
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
(dollars in thousands)
(a) The fiscal 1999 acquisitions included in the unaudited pro forma statement
of operations for the six months ended March 25, 1999 consist of the
historical financial statements of the following entities:
<TABLE>
<CAPTION>
One-month Four-month Five-month
period period period
October 1, October 1, October 1,
1998 1998 1998
through through through
October January 27, February
31, 1998 1999 24, 1999
---------- ----------- ---------- Total
Express Miller Taylor Other 1999 Fiscal 1999
Stop Enterprises Oil Acquisitions Acquisitions
---------- ----------- ---------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales...... $1,698 $ 36,072 $10,737 $ 615 $49,122
Gasoline sales......... 2,407 45,191 32,012 1,035 80,645
Commissions............ 191 404 104 58 757
------ -------- ------- ------ -------
Total revenue......... 4,296 81,667 42,853 1,708 130,524
------ -------- ------- ------ -------
Cost of Sales:
Merchandise............ 1,232 20,736 7,237 461 29,666
Gasoline............... 2,184 39,608 27,701 957 70,450
------ -------- ------- ------ -------
Total cost of sales... 3,416 60,344 34,938 1,418 100,116
------ -------- ------- ------ -------
Gross profit............ 880 21,323 7,915 290 30,408
------ -------- ------- ------ -------
Store operating
expenses............... 433 17,961 4,754 249 23,397
General and
administrative
expenses............... 105 1,503 1,015 8 2,631
Merger integration
costs.................. -- 695 -- -- 695
Stock compensation
charge................. -- 2,029 -- -- 2,029
Impairment of long-lived
assets................. -- -- 47 -- 47
Depreciation and
amortization........... 61 1,281 685 9 2,036
------ -------- ------- ------ -------
Total operating
expense.............. 599 23,469 6,501 266 30,835
------ -------- ------- ------ -------
Income (loss) from
operations............. 281 (2,146) 1,414 24 (427)
------ -------- ------- ------ -------
Other Income (Expense):
Interest............... (5) (126) -- -- (131)
Miscellaneous.......... 13 2 -- 10 25
------ -------- ------- ------ -------
Total other........... 8 (124) -- 10 (106)
------ -------- ------- ------ -------
Income (loss) before
income taxes........... 289 (2,270) 1,414 34 (533)
Income tax expense
(benefit).............. -- (508) -- -- (508)
------ -------- ------- ------ -------
Net income (loss) before
extraordinary item..... $ 289 $ (1,762) $ 1,414 $ 34 $ (25)
====== ======== ======= ====== =======
</TABLE>
(b) On January 26, 1999, in anticipation of its acquisition by The Pantry,
Miller Enterprises redeemed 18,502 shares of its restricted stock. In
connection with this redemption of stock, Miller Enterprises recognized a
charge to compensation expense of $2,029 for the period October 1, 1998
through January 27, 1999. This non-recurring charge is not reflective of
The Pantry's continuing operations after the Miller acquisition and would
not have been incurred by The Pantry had it owned Miller Enterprises as of
the beginning of fiscal 1998.
(c) Historically, Miller Enterprises incurred rental expense related to stores
leased from its affiliates. These stores were acquired by us in connection
with the Miller Enterprises acquisition and all leases with Miller
Enterprises affiliates were terminated. As a result, rental expenses of
$1,507 for the six months ended March 25, 1999 and $4,424 for the year
ended September 24, 1998 have been eliminated.
35
<PAGE>
(d) Reflects an increase in store rental expense of $1,218 for Taylor Oil for
the six months ended March 25, 1999 and $288 for Quick Stop and $2,437 for
Taylor Oil for the year ended September 24, 1998 in connection with an
obligation to lease stores from the former owners of Quick Stop and Taylor
Oil at current market values at the dates of acquisition. The rent
increases were effective concurrent with the Quick Stop acquisition, which
occurred on July 2, 1998, and the Taylor Oil acquisition, which occurred
on February 25, 1999.
(e) The 1998 and 1999 acquisitions have been accounted for using the purchase
method of accounting. Purchase price allocations for the Lil' Champ
acquisition, the Wooten Oil acquisition and the United Fuels acquisition
have been finalized. Purchase price allocations for all other 1998 and
1999 acquisitions have not been finalized and are based on available
information, internal estimates and assumptions we believe are reasonable.
For each acquisition, the purchase price will be allocated to the tangible
and intangible assets acquired and liabilities assumed based upon their
respective fair values at the time the acquisitions were consummated,
pending completion of appraisals of property and equipment acquired. The
excess of the purchase price over the historical basis of the net assets
acquired has been allocated to the net assets acquired based on preliminary
estimates. The actual allocation of the purchase cost, however, and the
resulting effect on income from operations may differ significantly from
the pro forma amounts included herein pending the completion of appraisals
and other purchase price adjustments.
The purchase price of the Miller Enterprises and affiliates acquisition is
subject to working capital and capital expenditure adjustments pending the
completion of a closing balance sheet audit of Miller Enterprises as of
January 27, 1999.
In the Express Stop acquisition, $2,500 of the purchase price was subject
to an escrow agreement until March 1999, and was to be forfeited upon the
occurrence of specific events or conditions relating to the operations of
video poker machines in South Carolina. The events or conditions specified
in the purchase agreement did not occur, and the $2,500 million held in
escrow was paid to Express Stop in March 1999.
The following table summarizes the additional amortization expense to be
incurred in connection with the various 1998 and 1999 transactions
described above:
<TABLE>
<CAPTION>
Estimated Six Months Ended Year Ended
Recorded Useful Life March 25, September 24,
Acquisitions Goodwill (in years) 1999 1998
------------ -------- ----------- ---------------- -------------
<S> <C> <C> <C> <C>
1998 acquisitions:
Lil' Champ............. $ 42,622 30 $-- $ 118
Wooten Oil............. 126 30 -- --
United Fuels........... 7,386 30 -- 123
Quick Stop............. 35,928 30 -- 898
Stallings Oil.......... 15,505 30 -- 388
1999 acquisitions:
A.G. Lee Oil........... 355 30 12
Express Stop........... 12,163 30 34 405
Miller Enterprises and
affiliates............ 25,000 30 278 833
Taylor Oil............. 13,300 30 185 443
-------- ---- ------
$152,385 497 3,220
========
Less historical recorded
predecessor amounts.... -- 60
---- ------
Adjustment.............. $497 $3,160
==== ======
</TABLE>
36
<PAGE>
(f) Reflects additional depreciation expense in connection with the various
1998 and 1999 acquisition and financing transactions as follows:
<TABLE>
<CAPTION>
Recorded
Fair Value of
Property and Estimated Six Months Ended Year Ended
Equipment Useful Life March 25, September 24,
Acquisitions Acquired (in years) 1999 1998
------------ ------------- ----------- ---------------- -------------
<S> <C> <C> <C> <C>
1998 acquisitions:
Lil' Champ............. 155,382 10-35 $ -- $ 985
Wooten Oil............. 7,600 10 -- 317
United Fuels........... 15,400 10 -- 770
Quick Stop............. 15,000 10-35 -- 1,125
Stallings Oil.......... 10,313 10-35 -- 773
Georgia stores
disposition........... -- -- (516)
1999 acquisitions:
A.G. Lee Oil........... 2,500 10 63 250
Express Stop........... 7,095 10 118 711
Miller Enterprises and
affiliates............ 79,335 10-35 1,928 5,958
Taylor Oil............. 4,750 10 198 475
-------- ------ -------
$297,375 2,307 10,848
======== ------ -------
Less historical recorded
amounts................ 2,036 10,477
------ -------
Adjustment.............. $ 271 $ 371
====== =======
</TABLE>
As noted in note (i), The Pantry did not acquire a truckstop owned,
operated, and retained by Stallings Oil. Included in the historical
financial statements of Stallings Oil for the nine months ended June 30,
1998 is $169 of depreciation expense related to the truckstop, which as been
eliminated.
(g) Reflects additional amortization of deferred financing costs resulting from
entering into our 1999 bank credit facility and the removal of deferred
financing costs associated with the repayment of our 1998 bank credit
facility and the repurchase of our senior notes as follows:
<TABLE>
<CAPTION>
Straight-
Financing line Six Months
Costs Amortization Ended Year Ended
Incurred Period March 25, September 24,
Transaction (Written-off) (in years) 1999 1998
----------- ------------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Issuance of $200 million
senior subordinated
notes and 1998 bank
credit facility........ $14,044 7 $ -- $ 167
Repurchase of $51
million of senior
notes.................. (2,006) 7 -- (24)
Entering into 1999 bank
credit facility........ 3,210 6 178 535
Repurchase of $49
million of outstanding
senior notes and
repayment of 1998 bank
credit facility........ (3,972) 7 (400) (1,129)
----- -------
Adjustment.............. $(222) $ (451)
===== =======
</TABLE>
Deferred financing costs relating to the issuance of our $200 million senior
subordinated notes and our 1998 credit facility are amortized using the
straight line method over the terms of the instruments because the
instruments either require interim payments of interest only or require
interim interest payments computed using variable interest rates which are
periodically revised based on current market conditions. For purposes of the
unaudited pro forma financial statements, deferred financing costs related
to the 1999 credit facility are amortized using the straight line method,
which approximates the results that would be computed using the effective
interest method.
37
<PAGE>
(h) Reflects additional interest expense in connection with the various 1998
and 1999 financing and acquisitions transactions as follows:
<TABLE>
<CAPTION>
Principal Interest Six Months Ended Year Ended
Borrowed Rate March 25, September 24,
Acquisition/Financing (Retired) (per annum) 1999 1998
--------------------- --------- ----------- ---------------- -------------
<S> <C> <C> <C> <C>
Issuance of senior
subordinated notes..... $200,000 10.25% $ -- $ 1,708
Redemption of senior
notes in Lil' Champ
acquisition............ (51,000) 12.50 -- (531)
1998 acquisitions....... 78,000 8.25 -- 4,187
1999 acquisitions and
proceeds to redeem
outstanding senior
notes ................. 186,000 8.25 4,916 15,361
Redemption of senior
notes from proceeds of
1999 bank credit
facility............... (49,000) 12.50 (2,042) (6,125)
------- -------
Subtotal............... 2,874 14,600
Less historical recorded
amounts related to
indebtedness not
assumed................ 131 2,117
------- -------
Adjustment.............. $ 2,743 $12,483
======= =======
</TABLE>
In connection with the 1998 and 1999 acquisitions, The Pantry did not
assume debt obligations of the acquired entities totaling approximately
$54,700 and having interest rates ranging from 5.75% to 8.75%.
The interest rates disclosed above are based on the current weighted-
average interest rates for which The Pantry has an obligation. Assuming a
0.125% increase or decrease in the variable rate bank credit facility,
interest expense, net of taxes, would increase or decrease by $90 for the
six months ended March 25, 1999 and $179 for the year ended September 24,
1998.
(i) Reflects the elimination of operations not acquired. These operations
relate to a truckstop owned, operated, and retained by Stalling Oil and
equity in earnings of affiliates of Express Stop which were not acquired by
The Pantry.
<TABLE>
<CAPTION>
Six Months Year Ended
Ended March 25, September 24,
1999 1998
------------------- -----------------
Decrease in expenses (decrease in income)
<S> <C> <C>
Fiscal 1998 Acquisitions:
Merchandise sales......... $ -- $ (402)
Gasoline sales............ -- (15,823)
Commissions............... -- (467)
Merchandise cost of
sales.................... -- 207
Gasoline cost of sales.... -- 13,004
Store operating expenses.. -- 3,015
General and administrative
expenses................. -- 356
Depreciation and
amortization............. -- 169
Fiscal 1999 Acquisitions:
Miscellaneous income...... (13) (193)
</TABLE>
(j) Adjusts income tax expense for an assumed tax rate of 40% for each of the
periods presented.
(k) For each period presented, net income (loss) excludes an extraordinary loss
of $3,557 related to the redemption of $48,995 of senior notes and the
amendment of our bank credit facility. In
38
<PAGE>
addition, net income (loss) before extraordinary items for the year ended
September 24, 1998 excludes an extraordinary loss of $7,998 incurred related
to the costs of the redemption of $51,000 of senior notes.
In addition, for all periods presented, basic and diluted weighted average
shares outstanding have been increased by 6,250 shares to arrive at pro
forma weighted average shares outstanding as if the offering of 6,250 shares
of our common stock had occurred at the beginning of fiscal 1998.
(l) Reflects the application of net proceeds of approximately $19,000 to repay
outstanding indebtedness at the weighted-average rate of 8.25%.
(m) Does not reflect interest income of $709 for the six months ended March 25,
1999 and $1,418 for the year ended September 24, 1998 from investment of
the remaining offering proceeds of $32,225 at an assumed interest rate of
4.4%.
(n) The fiscal 1998 acquisitions and disposition included in the unaudited pro
forma statement of operations for the year ended September 24, 1998 consist
of the historical financial statements of the following entities:
<TABLE>
<CAPTION>
One-month Eleven-month
period Nine-month Nine-month period
September 28, period period October 1, 1997
1997 through October 1, 1997 October 1, 1997 through
October 23, through through August 31, 1998
1997 June 30, 1998 June 30, 1998 Lil' Champ Total 1998
------------- --------------- --------------- Other 1998 Disposition Acquisitions/
Lil' Champ Quick Stop Stallings Oil Acquisitions (48 Stores) Disposition
------------- --------------- --------------- ------------ --------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales...... $17,752 $ 45,623 $ 20,029 $ 7,265 $(15,076) $ 75,593
Gasoline sales......... 21,397 69,277 88,452 16,525 (13,837) 181,814
Commissions............ 570 2,278 1,806 379 (1,400) 3,633
------- -------- -------- ------- -------- --------
Total revenue......... 39,719 117,178 110,287 24,169 (30,313) 261,040
------- -------- -------- ------- -------- --------
Cost of Sales:
Merchandise............ 11,421 34,108 14,357 5,018 (10,685) 54,219
Gasoline............... 18,682 62,691 78,289 13,535 (12,123) 161,074
------- -------- -------- ------- -------- --------
Total cost of sales... 30,103 96,799 92,646 18,553 (22,808) 215,293
------- -------- -------- ------- -------- --------
Gross profit............ 9,616 20,379 17,641 5,616 (7,505) 45,747
------- -------- -------- ------- -------- --------
Store operating
expenses............... 5,957 12,029 12,784 2,429 (6,035) 27,164
General and
administrative
expenses............... 1,698 2,771 1,334 1,703 -- 7,506
Depreciation and
amortization........... 952 2,233 2,029 491 (516) 5,189
------- -------- -------- ------- -------- --------
Total operating
expense.............. 8,607 17,033 16,147 4,623 (6,551) 39,859
------- -------- -------- ------- -------- --------
Income from operations.. 1,009 3,346 1,494 993 (954) 5,888
------- -------- -------- ------- -------- --------
Other Income (Expense):
Interest............... (121) (497) (1,055) (14) -- (1,687)
Miscellaneous.......... -- 137 -- -- -- 137
------- -------- -------- ------- -------- --------
Total other expense... (121) (360) (1,055) (14) -- (1,550)
------- -------- -------- ------- -------- --------
Income before income
taxes.................. 888 2,986 439 979 (954) 4,338
Income tax expense
(benefit).............. 364 -- -- -- -- 364
------- -------- -------- ------- -------- --------
Net income before
extraordinary item..... $ 524 $ 2,986 $ 439 $ 979 $ (954) $ 3,974
======= ======== ======== ======= ======== ========
</TABLE>
39
<PAGE>
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 $2,500 from the
disposition, which approximated the carrying value of the assets.
Accordingly, no gain or loss was recorded on the disposition.
(o) The fiscal 1999 acquisitions included in the unaudited pro forma statement
of operations for the year ended September 24, 1998 consist of the
historical financial statements of the following entities:
<TABLE>
<CAPTION>
Twelve-month Twelve-month Twelve-month
period period period
October October January
1, 1997 1, 1997 1, 1998
through through through
September September December 31,
30, 1998 30, 1998 1998
------------ ------------ ------------
Total
Miller Other 1999 Fiscal 1999
Express Stop Enterprises Taylor Oil Acquisitions Acquisitions
------------ ------------ ------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales...... $20,720 $100,338 $ 25,587 $ 9,582 $156,227
Gasoline sales......... 27,736 139,734 83,054 16,957 267,481
Commissions............ 2,209 1,988 267 753 5,217
------- -------- -------- ------- --------
Total revenue......... 50,665 242,060 108,908 27,292 428,925
------- -------- -------- ------- --------
Cost of Sales:
Merchandise............ 15,747 63,387 17,022 6,941 103,097
Gasoline............... 24,765 124,258 72,856 15,448 237,327
------- -------- -------- ------- --------
Total cost of sales... 40,512 187,645 89,878 22,389 340,424
------- -------- -------- ------- --------
Gross profit............ 10,153 54,415 19,030 4,903 88,501
------- -------- -------- ------- --------
Store operating
expenses............... 5,284 40,173 11,135 3,429 60,021
General and
administrative
expenses............... 968 8,442 1,926 573 11,909
Merger integration
costs.................. -- 261 -- -- 261
Impairment of long-lived
assets................. -- -- 188 -- 188
Depreciation and
amortization........... 788 3,214 1,400 115 5,517
------- -------- -------- ------- --------
Total operating
expense.............. 7,040 52,090 14,649 4,117 77,896
------- -------- -------- ------- --------
Income from operations.. 3,113 2,325 4,381 786 10,605
------- -------- -------- ------- --------
Other Income (Expense):
Interest............... (116) (305) -- (9) (430)
Miscellaneous.......... 181 356 -- 90 627
------- -------- -------- ------- --------
Total other .......... 65 51 -- 81 197
------- -------- -------- ------- --------
Income (loss) before
income taxes........... 3,178 2,376 4,381 867 10,802
Income tax expense
(benefit).............. -- 915 -- -- 915
------- -------- -------- ------- --------
Net income (loss) before
extraordinary item..... $ 3,178 $ 1,461 $ 4,381 $ 867 $ 9,887
======= ======== ======== ======= ========
</TABLE>
(p) Historically, Lil' Champ paid Docks U.S.A., Inc., Lil' Champ's parent
company, service agreement fees. The service agreement was terminated
concurrent with the acquisition of Lil' Champ. Consequently, $42 of service
agreement fees have been eliminated for the year ended September 24, 1998.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Pantry is a leading convenience store operator in the southeastern
United States. We are the third largest independently operated convenience
store chain in the country and the fourteenth largest chain including stores
owned by major oil companies and independent refiners. Our stores offer a broad
selection of merchandise and gasoline as well as ancillary services designed to
appeal to the convenience needs of our customers.
Since the arrival of our current management team in fiscal 1996, we have
experienced compound annual revenue growth of 60.0% and compound annual growth
in operating income of 312.2% through a combination of management initiatives
and strategic acquisitions including:
. enhancing our merchandising to increase same store merchandise sales
growth and margins
. improving our gasoline offering in order to increase customer traffic
and same store gasoline volume growth
. reducing expenses through strengthened vendor relationships and
tightened expense controls
. increasing expenditures for facilities improvement and store
automation
. growing through acquisitions and new store development
As a result, we have experienced increases in total revenue, same store
merchandise sales and gasoline volume growth and income from operations.
Additionally, we have expanded the geographic scope of our operations which we
believe will result in less seasonality from period to period. We intend to
continue our acquisition strategy and, accordingly, future results may not be
necessarily comparable to historic results.
We believe that there is significant opportunity to continue to increase
profitability at our existing and new stores. We continue to focus on same
store sales and profit growth through upgraded facilities, improved technology,
new service offerings, competitive merchandise and gasoline prices and cost
savings initiatives. We are upgrading our management information systems and
continue to remodel our stores. Finally, we continue to seek acquisitions and
believe that there is a large number of attractive acquisition opportunities in
our markets.
We believe that our arrangements with vendors, including McLane, have
enabled us to decrease the operating expenses of acquired companies after we
complete an acquisition. We purchase over 50% of our general merchandise,
including most tobacco products and grocery items, from a single wholesale
grocer, McLane. In addition, McLane supplies health and beauty aids, toys and
seasonal items to all of our stores. We have a contract with McLane until 2003.
Although we believe there are adequate alternative supply sources, a change of
suppliers, especially McLane, could have a material adverse affect on our cost
of goods and results of operations.
Acquisition History
Our acquisition strategy focuses on acquiring convenience stores within
or contiguous to our existing market areas. We believe acquiring locations with
demonstrated revenue volumes involves lower risk and is an economically
attractive alternative to traditional site selection and new store development.
41
<PAGE>
The table below provides information concerning the eleven largest
acquisitions we have completed since fiscal 1996:
<TABLE>
<CAPTION>
Number of
Date Acquired Company Trade Name Locations Stores
----------------- ------------------------------ ------------ -------------------------------- ---------
<C> <C> <S> <C> <C>
February 25, 1999 Taylor Oil Company ETNA North Carolina, Virginia 60
January 28, 1999 Miller Enterprises, Inc. Handy Way North-central Florida 121
November 5, 1998 Express Stop, Inc. Express Stop Southeast North Carolina, 22
Eastern South Carolina
October 22, 1998 A.G. Oil Company, Inc. Dash-N East-central North Carolina 10
July 15, 1998 Stallings Oil Company, Inc. Zip Mart Central North Carolina, Virginia 42
July 2, 1998 Quick Stop Food Mart, Inc. Quick Stop Southeast North Carolina, 75
Coastal South Carolina
May 2, 1998 United Fuels Corporation, Inc. Sprint Gainesville, Florida 10
March 19, 1998 Wooten Oil Company, Inc. Kwik Mart Eastern North Carolina 23
October 23, 1997 Lil' Champ Food Stores, Inc. Lil' Champ Northeast Florida 440(a)
June 12, 1997 Carolina Ice Company, Inc. Freshway Eastern North Carolina 15
April 17, 1997 Gregorie Oil Co., Inc. Gregorie Oil Charleston, South Carolina 15
</TABLE>
- --------
(a) Net of the disposition of 48 convenience stores located throughout eastern
Georgia.
We seek to improve the productivity and profitability of acquired stores
by implementing our merchandising and gasoline initiatives, eliminating
duplicative costs, reducing overhead and centralizing functions such as
purchasing and information technology. For example, at Lil' Champ, we have,
among other things, expanded the merchandise offered at each store, upgraded
store and gasoline facilities and centralized merchandise purchasing. These
improvements have contributed to an increase in same store EBITDA of 30.3% and
a decrease in same store operating expenses of 6.6% at Lil' Champ stores during
the twelve month period following the Lil' Champ acquisition. We believe it
takes six to twelve months to fully integrate and achieve operational and
financial improvements at acquired locations. There can be no assurance,
however, that revenue increases or cost savings can be achieved with respect to
any acquisition.
42
<PAGE>
Quarterly Results of Operations
The following table presents the unaudited quarterly net sales, gross
profit, operating income, net loss and EBITDA for each of our fiscal quarters
in fiscal 1997, 1998 and 1999. In the opinion of our management, this quarterly
information has been prepared on the same basis as the audited consolidated
financial statements appearing elsewhere in this prospectus and includes all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the unaudited quarterly results set forth herein.
<TABLE>
<CAPTION>
1997 1998
------------------------------------- -------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- ------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue... $100,331 $95,910 $111,032 $120,120 $195,171 $220,670 $254,577 $314,466
Gross profit.... 22,200 21,291 25,314 28,474 45,365 53,287 60,365 74,334
Income from
operations..... 1,346 484 3,808 5,133 4,877 4,615 10,159 12,192
Net income
(loss)......... (1,383) (1,761) 833 1,336 (6,889)(a) (1,580) 2,509(a) 2,635(a)
Earnings (loss)
per share
before extraordinary
loss:
Basic........... $ (0.28) $ (0.34) $ (0.27) $ (0.19) $ (0.12) $ (0.23) $ 0.16 $ 0.30
Diluted......... $ (0.28) $ (0.34) $ (0.27) $ (0.19) $ (0.12) $ (0.23) $ 0.14 $ 0.27
EBITDA.......... $ 3,609 $ 2,719 $ 6,118 $ 7,829 $ 10,028 $ 11,239 $ 16,909 $ 22,325
EBITDA
margin(c)...... 3.6% 2.8% 5.5% 6.5% 5.1% 5.1% 6.6% 7.1%
Cash flows
provided by
(used in):
Operating
activities..... (5,147) 3,753 3,319 5,413 5,064 12,588 9,458 20,922
Investing
activities..... (1,077) (2,280) (19,229) (2,493) (139,103) (24,050) (34,990) (88,350)
Financing
activities..... 5,400 10,501 5,556 (5,707) 162,514 8,184 18,438 80,382
<CAPTION>
1997 1998
------------------------------------- -------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- ------- -------- -------- -------- -------- -------- --------
(percent of annual total)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue... 23.5% 22.4% 26.0% 28.1% 19.8% 22.4% 25.8% 32.0%
Gross profit.... 22.8% 21.9% 26.0% 29.3% 19.4% 22.8% 25.9% 31.9%
Income from
operations..... 12.5% 4.5% 35.3% 47.7% 15.3% 14.5% 31.9% 38.3%
EBITDA.......... 17.8% 13.4% 30.2% 38.6% 16.6% 18.6% 27.9% 36.9%
<CAPTION>
1999
----------------------
Q1 Q2
--------- ------------
<S> <C> <C>
Total revenue... $315,607 $359,792
Gross profit.... 72,380 83,561
Income from
operations..... 10,493 10,047
Net income
(loss)......... 1,065 (3,545)(b)
Earnings (loss)
per share
before extraordinary
loss:
Basic........... $ 0.03 $ (0.06)
Diluted......... $ 0.03 $ (0.06)
EBITDA.......... $ 18,683 $ 19,687
EBITDA
margin(c)...... 5.9% 5.5%
Cash flows
provided by
(used in):
Operating
activities..... (3,510) 16,915
Investing
activities..... (34,508) (116,780)
Financing
activities..... 18,683 109,795
Total revenue...
Gross profit....
Income from
operations.....
EBITDA..........
</TABLE>
- -------
(a) Includes extraordinary loss of $6,800, net of a tax benefit, in Q1 related
to the repayment of $51 million of our senior notes. The estimated tax
benefit related to this extraordinary loss was increased by $289 in Q3 and
reduced by $1,487 in Q4. These adjustments were made to reflect changes in
expected effective income tax rates. Also included in Q4 is a charge of
$1,016 relating to our formal plan to integrate the acquired businesses of
Lil' Champ with our operations.
(b) Includes an extraordinary loss of $3,557 in Q2 in connection with the
issuance of our 1999 bank credit facility and the retirement of $49.0
million of our outstanding senior notes.
(c) EBITDA margin represents EBITDA, as defined, as a percentage of total
revenue.
(d) EBITDA represents income from operations before depreciation, amortization
and extraordinary and unusual items. 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.
43
<PAGE>
Results of Operations
The following table sets forth our results in absolute dollars and as a
percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
------------------------------ ---------------------
Sept. Sept. Sept. March 26, March 25,
26, 1996 25, 1997 24, 1998 1998 1999
-------- -------- -------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales..... $188,091 $202,440 $460,798 $193,765 $303,962
Gasoline sales........ 192,737 220,166 509,958 215,718 360,917
Commissions........... 3,979 4,787 14,128 6,358 10,520
-------- -------- -------- -------- --------
Total revenue........... $384,807 $427,393 $984,884 $415,841 $675,399
======== ======== ======== ======== ========
Gross profit............ $ 91,218 $ 97,279 $233,351 $ 98,652 $155,941
Total operating
expenses............... 80,186 77,004 173,866 77,385 117,571
Depreciation and
amortization........... 9,158 9,504 27,642 11,775 17,830
-------- -------- -------- -------- --------
Income from operations.. $ 1,874 $ 10,771 $ 31,843 $ 9,492 $ 20,540
======== ======== ======== ======== ========
Net income (loss)....... $ (8,114) $ (975) $ (3,325) $ (8,469) $ (2,480)
======== ======== ======== ======== ========
<CAPTION>
Fiscal Year Ended Six Months Ended
------------------------------ ---------------------
Sept. Sept. Sept. March 26, March 25,
26, 1996 25, 1997 24, 1998 1998 1999
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenue:
Merchandise sales..... 48.9 % 47.4 % 46.8 % 46.6 % 45.0 %
Gasoline sales........ 50.1 51.5 51.8 51.9 53.4
Commissions........... 1.0 1.1 1.4 1.5 1.6
-------- -------- -------- -------- --------
Total revenue........... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
======== ======== ======== ======== ========
Gross profit............ 23.7 % 22.7 % 23.7 % 23.7 % 23.1 %
Total operating
expenses............... 20.8 18.0 17.7 18.6 17.4
Depreciation and
amortization........... 2.4 2.2 2.8 2.8 2.6
-------- -------- -------- -------- --------
Income from operations.. 0.5 % 2.5 % 3.2 % 2.3 % 3.0 %
======== ======== ======== ======== ========
</TABLE>
The Lil' Champ acquisition and other acquisitions have had a significant
impact on our financial condition and results of operations since their
respective transaction dates. Due to the method of accounting for fiscal 1998
acquisitions, the consolidated statements of operations for the fiscal year
ended September 24, 1998 and the six months ended March 26, 1998 include
results from operations for each of the acquisitions from the date of each
acquisition only. Due to the method of accounting for fiscal 1999 acquisitions,
the consolidated statements of operations for the six months ended March 25,
1999 include the results of operations for each of the fiscal 1999 acquisitions
from the date of each acquisition only. Moreover, the consolidated balance
sheet as of September 24, 1998 and the consolidated statements of operations
for fiscal years ended September 25, 1997 and September 26, 1996 do not include
the assets, liabilities, and results of operations relating to acquisitions
completed after the last day of each fiscal period. As a result, comparisons to
prior operating results and prior balance sheets are impacted materially.
44
<PAGE>
Six Months Ended March 25, 1999 Compared to the Six Months Ended March 26, 1998
Total Revenue. Total revenue for the six months ended March 25, 1999 was
$675.4 million compared to $415.8 million during the six months ended March 26,
1998, an increase of $259.6 million or 62.4%. The increase in total revenue is
primarily attributable to the revenue from stores acquired or opened since
March 26, 1998 of $213.0 million, as well as an additional month of Lil' Champ
revenue of $38.0 million and same store merchandise sales growth of 11.4% (or
$10.9 million). Our total revenue increase was partially offset by a lower
average retail gasoline price of $0.99 for the six months ended March 25, 1999
compared to $1.14 for the six months ended March 26, 1998.
Merchandise Revenue. Merchandise revenue for the six months ended March
25, 1999 was $304.0 million compared to $193.8 million during the six months
ended March 26, 1998, an increase of $110.2 million or 56.9%. The increase in
merchandise revenue is primarily attributable to the revenue from stores
acquired or opened since March 26, 1998 of $77.5 million, as well as an
additional month of Lil' Champ merchandise revenue of $17.3 million and same
store merchandise sales growth of $10.9 million. Same store merchandise revenue
for the six months ended March 25, 1999 increased 11.4% over the six months
ended March 26, 1998. The increase in same store merchandise revenue is
primarily attributable to increased customer traffic, higher average
transaction size and general economic and market conditions. The increases in
store traffic and average transaction size are primarily attributable to
focused store merchandising, more competitive gasoline pricing, enhanced store
appearance and increased in-store promotional activity.
Gasoline Revenue and Gallons. Gasoline revenue for the six months ended
March 25, 1999 was $360.9 million compared to $215.7 million during the six
months ended March 26, 1998, an increase of $145.2 million or 67.3%. The
increase in gasoline revenue is primarily attributable to the revenue from
stores acquired or opened since March 26, 1998 of $132.5 million, as well as an
additional month of Lil' Champ gasoline revenue of $20.1 million. Gasoline
revenue growth was partially offset by a $0.15 or 13.3% decrease in average
gasoline retail prices compared to the six months ended March 26, 1998. The
revenue impact of the average retail price decline was approximately $54.8
million.
In the six months ended March 25, 1999, gasoline gallons sold were
365.3 million compared to 189.3 million during the six months ended March 26,
1998, an increase of 176.0 million gallons or 93.0%. The increase is primarily
attributable to the gasoline gallons sold by stores acquired or opened since
March 26, 1998 of 136.9 million, as well as an additional month of Lil' Champ
gasoline gallons of 18.5 million and same store gallon growth of 6.3 million.
Same store gasoline gallon sales for the six months ended March 25, 1999
increased 6.8% over the six months ended March 26, 1998. The same store gallon
increase is primarily attributable to increased customer traffic resulting from
more competitive gasoline pricing, rebranding and promotional activity,
gasoline equipment upgrades, enhanced store appearance and general economic and
market conditions.
Commission Revenue. Commission revenue for the six months ended March 25,
1999 was $10.5 million compared to $6.4 million during the six months ended
March 26, 1998, an increase of $4.1 million or 64.1%. The increase in
commission revenue is primarily attributable to the revenue from stores
acquired or opened since March 26, 1998 of $3.0 million, as well as an
additional month of Lil' Champ lottery commissions of $0.6 million. Commission
revenue includes lottery commissions, video gaming income, money order
commissions, telephone income and revenue from other ancillary product and
service offerings.
45
<PAGE>
Total Gross Profit. Total gross profit for the six months ended March 25,
1999 was $155.9 million compared to $98.7 million for the six months ended
March 26, 1998, an increase of $57.2 million or 58.0%. The increase in gross
profit is primarily attributable to the profits from stores acquired or opened
since March 26, 1998 of $43.7 million, as well as an additional month of Lil'
Champ gross profit of approximately $8.7 million and same store gross profit
increases of approximately $3.6 million. The total gross profit increases were
achieved despite a decrease in total gross margin to 23.1% for the six months
ended March 25, 1999 from 23.7% for the six months ended March 26, 1998.
Merchandise Gross Profit and Margin. Merchandise gross profit was $99.1
million for the six months ended March 25, 1999 compared to $66.9 million for
the six months ended March 26, 1998, an increase of $32.2 million or 48.1%.
This increase is primarily attributable to the profits from stores acquired or
opened since March 26, 1998 of $24.5 million, as well as an additional month of
Lil' Champ merchandise gross profit of $5.9 million and same store profit
increases of $1.7 million. The decline in merchandise gross margin to 32.6% for
the six months ended March 25, 1999 from 34.5% for the six months ended March
26, 1998 is attributable to the addition of stores acquired or opened since
March 26, 1998 which, on average reported merchandise margins of 31.6% for the
six months ended March 25, 1999 and the impact of product cost increases in our
tobacco category.
Gasoline Gross Profit and Per Gallon Margin. Gasoline gross profit was
$46.3 million for the six months ended March 25, 1999 compared to $25.4 million
for the six months ended March 26, 1998, an increase of $20.9 million or 82.3%.
This increase is primarily attributable to the profits from stores acquired or
opened since March 26, 1998 of $16.2 million, as well as an additional month of
Lil' Champ gasoline gross profit of $2.2 million and same store profit
increases of $0.9 million. The gasoline gross profit per gallon was $0.127 for
the six months ended March 25, 1999 compared to $0.134 for the six months ended
March 26, 1998, a 5.2% decrease in gasoline margin per gallon.
Store Operating and General and Administrative Expenses. Store operating
expenses for the six months ended March 25, 1999 were $95.2 million compared to
$61.9 million for the six months ended March 26, 1998, an increase of $33.3
million or 53.8%. The increase in store operating expenses is primarily
attributable to the personnel and lease expenses associated with the stores
acquired or opened since March 26, 1998 of $25.8 million, as well as an
additional month of Lil' Champ store operating expenses of $5.1 million. As a
percentage of total revenue, store operating expenses decreased to 14.3% in the
six months ended March 25, 1999 from 14.9% in the six months ended March 26,
1998.
General and administrative expenses for the six months ended March 25,
1999 were $22.4 million compared to $15.5 million during the six months ended
March 26, 1998, an increase of $6.9 million or 44.5%. The increase in general
and administrative expenses is attributable to increased administrative
expenses associated with the stores acquired or opened since March 26, 1998 of
$5.4 million, as well as an additional month of Lil' Champ general and
administrative expenses of $1.0 million. As a percentage of total revenue,
general and administrative expenses decreased to 3.3% in the six months ended
March 25, 1999 from 3.7% in the six months ended March 26, 1998.
Income from Operations. Income from operations was $20.5 million for the
six months ended March 25, 1999 compared to $9.5 million during the six months
ended March 26, 1998, an increase of $11.0 million or 115.8%. The increase in
operating income was partially offset by a $6.1 million increase in
depreciation and amortization. The increase in depreciation and amortization
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expense is primarily attributed to an additional amount of Lil' Champ
depreciation and amortization expense of $1.2 million, the depreciation and
amortization of goodwill expense associated with other businesses acquired, as
well as increases in depreciation associated with other capital improvements
and the amortization of deferred financing costs. As a percentage of total
revenue, income from operations increased to 3.0% in the six months ended March
25, 1999 from 2.3% in the six months ended March 26, 1998.
EBITDA. EBITDA represents income from operations before depreciation,
amortization and extraordinary and unusual items. EBITDA for the six months
ended March 25, 1999 was $38.4 million compared to $21.3 million for the six
months ended March 26, 1998, an increase of $17.1 million or 80.3%. The
increase is attributable to the items discussed above.
EBITDA is not a measure of performance under generally accepted
accounting principles, and should not be considered as a substitute for net
income, cash flows from operating activities and other income or cash flow
statement data prepared in accordance with generally accepted accounting
principles, or as a measure of profitability or liquidity. We have included
information concerning EBITDA as one measure of our cash flow and historical
ability to service debt and because we believe investors find this information
useful. EBITDA as defined may not be comparable to similarly-titled measures
reported by other companies.
Interest Expense. Interest expense is primarily interest on our senior
subordinated notes, borrowings under our bank credit facility and our
previously outstanding senior notes. Interest expense for the six months ended
March 25, 1999 was $18.9 million compared to $12.9 million for the six months
ended March 26, 1998, an increase of $6.0 million or 46.5%. The increase in
interest expense is attributable to an additional month of interest on the
senior subordinated notes of $1.6 million and interest on borrowings under our
bank credit facility of $5.9 million. The interest expense increase is
partially offset by:
. the interest savings of $0.1 million associated with the October 23,
1997 redemption and refinancing of $51.0 million of our 12% senior
notes with proceeds from our senior subordinated notes
. the interest savings of approximately $0.3 million associated with
the January 28, 1999 redemption and refinancing of the remaining
$49.0 million of our 12% senior notes; the $49.0 million in principal
was refinanced with proceeds from our bank credit facility at a
floating interest rate currently set at 8.3%
Income Tax Benefit (Expense). The income tax expense for the six months
ended March 25, 1999 was $0.7 million compared to income tax benefit of $0.9
million for the six months ended March 26, 1998. This increase was primarily
attributable to the increase in income before income taxes. Income tax benefit
(expense) is recorded net of a change in valuation allowance to reduce federal
and state deferred tax assets to a net amount which we believe more likely than
not will be realized based on estimates of future earnings and the expected
timing of temporary difference reversals.
Extraordinary Item. In the six months ended March 25, 1999, we recognized
an extraordinary loss, net of taxes, of approximately $3.6 million in
connection with the January 28, 1999 redemption of the remaining $49.0 million
in outstanding principal amount of our senior notes and the restructuring of
our bank credit facility. The loss was the sum, net of taxes, of a $1.2 million
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call premium and the write-off of deferred financing costs associated with the
senior notes and the bank credit facility of $2.4 million.
In the six months ended March 26, 1998, we recognized an extraordinary
loss, net of taxes, of approximately $6.8 million in connection with the
October 23, 1997 redemption of $51.0 million in principal amount of our
outstanding senior notes and related consents obtained from the holders of the
senior notes to amendments and waivers to covenants contained in the indenture.
The senior notes indenture contained covenants including restrictions on The
Pantry's ability to incur additional debt and to make acquisitions. The loss
was the sum, net of taxes, of the premium paid for the early redemption of
$51.0 million in principal amount of the senior notes, the respective portion
of the consent fees paid, and the write-off of a respective portion of the
deferred financing cost associated with the senior notes set forth below.
Net Loss. The net loss for the six months ended March 25, 1999 was $2.5
million compared to a net loss of $8.5 million for the six months ended March
26, 1998. In the six months ended March 25, 1999 and March 26, 1998, we
recognized extraordinary losses as discussed above. The Pantry's income before
extraordinary loss was $1.1 million for the six months ended March 25, 1999
compared to a loss of $1.7 million during the six months ended March 26, 1998,
an increase of $2.8 million.
Fiscal 1998 Compared to Fiscal 1997
Total Revenue. Total revenue for fiscal 1998 was $984.9 million compared
to $427.4 million for fiscal 1997, an increase of $557.5 million or 130.4%. The
increase in total revenue is primarily attributable to Lil' Champ revenue of
$451.4 million for the eleven month period ended September 24, 1998, the
revenue from stores acquired or opened in fiscal 1998 of $92.2 million and same
store merchandise sales growth of 5.3% (or $9.7 million).
Merchandise Revenue. Merchandise revenue for fiscal 1998 was $460.8
million compared to $202.4 million for fiscal 1997, an increase of $258.4
million or 127.7%. The increase in merchandise revenue is primarily
attributable to Lil' Champ merchandise revenue of $212.2 million for the eleven
month period ended September 24, 1998, the revenue from stores acquired or
opened in fiscal 1998 of $30.5 million 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. 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, our average retail price of gasoline was $0.14 or 11.4%
lower than in fiscal 1997. The decrease in average retail price is primarily
attributable to lower wholesale gasoline pricing.
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In fiscal 1998, total gasoline gallons were 466.8 million gallons
compared to 179.4 million gallons in fiscal 1997, an increase of 287.4 million
gallons or 160.2%. 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 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 our other primary markets.
This increase occurred in spite of decreases in retail gasoline prices to $1.09
in fiscal 1998 from $1.23 in fiscal 1997.
Store Operating and General and Administrative Expenses. Store operating
expenses for fiscal 1998 were $140.1 million compared to $60.2 million for
fiscal 1997, an increase of $79.9 million or 132.7%. The increase in store
expenses is primarily attributable to Lil' Champ expenses of $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 revenue. As a percentage of total
revenue, general and administrative expenses decreased to 3.3% in fiscal 1998
from 3.9% in fiscal 1997.
Merger Integration Costs. In connection with the Lil' Champ acquisition,
we incurred merger integration costs of approximately $1.0 million related to
the combination of our existing business with the acquired business of Lil'
Champ. These costs include $0.3 million related to the
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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.
EBITDA. EBITDA for fiscal 1998 was $60.5 million compared to $20.3
million for fiscal 1997, an increase of $40.2 million or 198.0%. The increase
is primarily attributable to Lil' Champ EBITDA of $31.4 million for the eleven
month period ended September 24, 1998 and the items discussed above. Excluding
Lil' Champ, EBITDA increased 43.3% in fiscal 1998 compared to fiscal 1997.
Interest Expense. Interest expense in fiscal 1998 was $28.9 million
compared to $13.0 million for fiscal 1997, an increase of $15.9 million or
122.3%. This increase is primarily attributable to interest on our senior notes
of $6.5 million, our 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 our senior notes.
Income Tax Benefit (Expense). We did not record an income tax benefit for
fiscal 1998 or fiscal 1997. Income tax benefit (expense) is recorded net of a
valuation allowance to provide for operating loss carryforwards and available
tax credits based on estimated future earnings and for temporary differences
based on expected timing of reversals. In fiscal 1998, the valuation allowance
increased $620,000, which resulted primarily from the allowance for 1998
federal net operating loss benefits, offset by a $1.2 million allowance
adjustment related to 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. We recognized an extraordinary loss, net of taxes, of
approximately $8.0 million in fiscal 1998 in connection with the redemption of
a portion of our senior notes and related consent solicitation. The
extraordinary item relates to the purchase of $51.0 million in principal amount
of senior notes and includes the tender offer costs of $5.1 million, the
consent solicitation costs of $0.9 million, and the write-off of a respective
portion of recorded deferred financing costs of $2.0 million. The extraordinary
item also reflects an income tax benefit of approximately $1.2 million.
Net Loss. Net loss for fiscal 1998 was $3.3 million compared to $1.0
million for fiscal 1997, an increase of $2.3 million or 230.0%. The increase is
primarily attributable to the extraordinary loss, net of taxes, of $8.0 million
in connection with the redemption of our senior notes and related consent fees.
The Pantry's income before extraordinary loss was $4.7 million for fiscal 1998
compared to a loss of $1.0 million during fiscal 1997, an increase of $5.7
million. The income before extraordinary loss for fiscal 1998 represents an
increase of $12.8 million over fiscal year 1996.
Fiscal 1997 Compared to Fiscal 1996
Total Revenue. Total revenue for fiscal 1997 was $427.4 million compared
to $384.8 million for fiscal 1996, an increase of $42.6 million or 11.1%. This
increase is attributable to significant revenue increases in merchandise 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
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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%.
Our 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 our pricing practices and less favorable conditions in the wholesale
and retail gasoline markets.
Store Operating and General and Administrative Expenses. Store operating
expenses in fiscal 1997 were $60.2 million compared to $57.8 million in fiscal
1996, an increase of $2.4 million, or 4.2%, but decreased as a percentage of
merchandise sales. Store expenses increased due to increases in store personnel
related expenses of $1.0 million, real estate lease expense of $0.8 million and
equipment rental expense of $0.5 million. The increase in store personnel
related expenses is attributable to increased customer traffic and transaction
volume. The increase in real estate leases is attributable to the consummation
of several sale/leaseback transactions. The increase in equipment rental
expense is primarily attributable to our roll-out of a frozen drink program to
a majority of stores. As a percentage of total revenue, store operating
expenses decreased to 14.1% in fiscal 1997 from 15.0% in fiscal 1996.
General and administrative expenses for fiscal 1997 were $16.8 million
compared to $17.8 million in fiscal 1996, a decrease of $1.0 million, or 6.0%.
The decrease in both total dollar terms and as a percentage of merchandise
sales is attributable to improved fiscal management of major expense
categories. As a percentage of total revenue, general and administrative
expenses decreased to 3.9% in fiscal 1997 from 4.6% in fiscal 1996.
Restructuring Charges. As a result of the change in ownership that
occurred during fiscal 1996, The Pantry restructured its corporate offices.
These charges included $0.8 million for involuntary termination benefits paid
to 51 employees and $0.8 million for the termination of the
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former chairman and chief executive officer's employment agreement, including
related expenses. These amounts were expended during 1996. 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 our senior notes from 12% to 12
1/2% and a nonrecurring decrease of $0.6 million related to an interest accrual
that was reversed in fiscal 1996 and did not occur in fiscal 1997. The accrual
had been recorded related to a potential income tax issue that was resolved in
our favor in fiscal 1996. For the twelve months ended December 26, 1997, the
Pantry's consolidated fixed charge coverage ratio fell below 1.63 to 1, as
required in the senior notes indenture, resulting in an increase in the
interest rate on the senior notes from 12% to 12 1/2%. On June 26, 1998, the
Pantry exceeded the coverage ratio requirement and the interest rate was
changed back to 12%.
Income Tax Benefit (Expense). Our income tax benefit decreased in fiscal
1997 due to a $9.8 million decrease in pre-tax loss compared to the prior year
and the computation of our tax liability for fiscal 1997. Additionally, no
income tax benefit was recorded in fiscal 1997, which was principally
attributable to an increase in the valuation allowance to provide for operating
loss carryforwards and available tax credits based on estimated future earnings
and for temporary differences based on expected timing of reversals. In 1997,
the valuation allowance increased $325,000.
Net Loss. Net loss for fiscal 1997 was $1.0 million compared to $8.1
million for fiscal 1996, a decrease of $7.1 million or 87.7%. The decrease is
attributable to the items discussed above, as well as nonrecurring
restructuring charges of $1.6 million and charges for impairment of long-lived
assets of $3.0 million in fiscal 1996 not present in fiscal 1997. The Pantry's
loss before extraordinary loss was $1.0 million for fiscal 1997 compared to a
loss of $8.1 million during fiscal 1996, an improvement of $7.1 million.
Liquidity and Capital Resources
Cash Flows from Operations. Due to the nature of our business,
substantially all sales are for cash, and cash provided by operations is our
primary source of liquidity. Capital expenditures, acquisitions and interest
expense represent our primary uses of funds. We rely primarily upon cash
provided by operating activities, supplemented as necessary from time to time
by borrowings under our bank credit facility, sale-leaseback transactions,
asset dispositions and equity investments to finance our operations, pay
interest, and fund capital expenditures and acquisitions. Cash provided by
operating activities was $5.4 million in fiscal 1996, $7.3 million in fiscal
1997 and $48.0 million in fiscal 1998. Cash provided by operating activities
decreased from $17.7 million for the six months
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ended March 26, 1998 to $13.4 million for the six months ended March 25, 1999,
due to increases in inventory and receivables and a decrease in accrued
interest. We had $25.0 million of cash and cash equivalents on hand at March
25, 1999.
1998 Acquisitions and Disposition. In fiscal 1998 we 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 our senior
subordinated notes, borrowings under our bank credit facility, equity
investments by existing shareholders and management and cash on hand. In
connection with the Lil' Champ acquisition we sold 48 Lil' Champ convenience
stores, representing all of our convenience store operations and idle property
in Georgia. The sale was completed September 1, 1998. As required by SFAS No.
121, these assets were measured at fair value less costs to sell during the
allocation period following the consummation date of the acquisition.
Accordingly, no gain or loss was recorded on disposition.
1999 Acquisitions. To date in fiscal 1999, we have acquired a total of
214 convenience stores in five transactions for approximately $145.2 million.
These acquisitions were funded with borrowings under our bank credit facility
and cash on hand.
Capital Expenditures. Capital expenditures (excluding all acquisitions)
for fiscal 1998 were $48.4 million. Capital expenditures (excluding all
acquisitions) were approximately $20.5 million in the six months ended March
26, 1998 and approximately $23.2 million in the six months ended March 25,
1999. Capital expenditures are primarily expenditures for existing store
improvements, store equipment, new store development, information systems and
expenditures to comply with regulatory statutes, including those related to
environmental matters.
We finance our capital expenditures and new store development through
cash flow from operations, a sale-leaseback program or similar lease activity,
vendor reimbursements and asset dispositions. Our sale-leaseback program
includes the packaging of our owned convenience store real estate, both land
and buildings, for sale to investors in return for their agreement to leaseback
the property to The Pantry under long-term leases. Generally, the leases are
operating leases at market rates with terms of twenty years with four five-year
renewal options. The lease payment is based on market rates ranging from 10.5%
to 11.5% applied to the cost of each respective property. We retain ownership
of all personal property and gasoline marketing equipment. Our bank credit
facility limits or caps the proceeds of sale-leasebacks that The Pantry can use
to fund its operations or capital expenditures. Vendor reimbursements primarily
relate to oil company payments to either enter into long term supply agreements
or to upgrade gasoline marketing equipment, including canopies, gasoline
dispensers and signs. Under our sale-leaseback program The Pantry received $1.5
million during the six months ended March 25, 1999 and $4.8 million during
fiscal 1998.
In fiscal 1998, we received approximately $20.7 million in sale-leaseback
proceeds, asset dispositions and vendor reimbursements for capital
improvements. As a result, net capital expenditures, excluding all
acquisitions, for fiscal 1998 were $27.7 million. In the six months ended March
25, 1999, we received approximately $4.5 million from sale-leaseback proceeds,
asset dispositions, and vendor reimbursements for capital improvements. Net
capital expenditures, excluding all acquisitions, for the six months ended
March 25, 1999 were $18.7 million. We anticipate net capital expenditures for
fiscal 1999 will be approximately $45.0 million, of which $23.2 million has
been expended to date.
Long-term Debt. At April 30, 1999, our long-term debt consisted primarily
of $200.0 million of senior subordinated notes and $258.0 million outstanding
under our bank credit facility. We are currently in compliance with our debt
covenants.
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In January 1999, we restructured and expanded our bank credit facility in
connection with the Handy Way acquisition and the redemption of our senior
notes. Our current bank credit facility consists of:
. a $45.0 million revolving credit facility available for working
capital financing, general corporate purposes and issuing commercial
and standby letters of credit
. a $79.1 million Tranche A term loan facility and a $159.9 million
Tranche B term loan facility, both of which are borrowed
. a $50.0 million acquisition term facility which is available through
January 31, 2001 to finance acquisitions of related businesses, $19.0
million of which was drawn in connection with the ETNA acquisition
and will be repaid with the proceeds of this offering
As of April 30, 1999, we had $15.7 million in letters of credit
outstanding and $29.3 million available for borrowing or additional letters of
credit under the revolving credit facility and $31.0 million available for
borrowing under the acquisition term facility.
Our lenders have agreed, subject to completion of the offering, to amend
the bank credit facility to:
. permit the use of offering proceeds to redeem preferred stock and pay
the accrued dividends on such stock
. permit us to use up to $50.5 of offering proceeds for acquisitions
during the nine month period after the offering; any of the $50.5
million of offering proceeds that has not been used for acquisitions
prior to the end of the nine months must be used to reduce the term
loans under our bank credit facility
. permit reborrowing of the $19.0 million repaid on the acquisition
term facility
. permit the authorization of preferred stock
. amend the debt to pro forma EBITDA ratio to 4.75 to 1.00 in fiscal
1999 and 2000, 4:25 to 1:00 in fiscal 2001, 4:00 to 1:00 in fiscal
2002, 3:50 to 1:00 in fiscal 2003 and 3:25 to 1:00 in fiscal 2004 and
thereafter
. increase our maximum permitted capital expenditures to $46.0 million
for fiscal 1999 and $40.0 million in fiscal 2000 and thereafter
On January 31, 2001, all amounts then outstanding under the acquisition
term loan facility convert into a three year term loan. The Tranche A and
acquisition term loan facilities mature in January 2004, and the Tranche B term
loan facility matures in January 2006. The Tranche A and Tranche B term loan
facilities require quarterly payments of principal beginning in April 1999,
with annual payments of principal totaling approximately $2.6 million in fiscal
1999, $10.3 million in fiscal 2000, $17.6 million in fiscal 2001, $20.6 million
in fiscal 2002, $23.9 million in fiscal 2003, $45.1 million in fiscal 2004,
$76.0 million in fiscal 2005, and $44.0 million in fiscal 2006. The acquisition
term facility requires quarterly payments of principal beginning in April 2001
in an amount equal to 8.33%, or 8.37% with respect to the installment payable
in January 2004, of the aggregate acquisition term loans outstanding at January
31, 2001.
We are also required to pay down our bank credit facility as follows:
. with net proceeds from asset sales, subject to exceptions for sale-
leaseback transactions
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. with 50% of the proceeds from the issuance of any of our equity
securities other than this offering and sales of our equity
securities to our management employees
. with all of the proceeds from the issuance of new debt other than
debt of the types permitted under our bank credit facility
. with 50% of our excess cash flow
The loans under our bank credit facility are secured by a first priority
security interest in most of our tangible and intangible assets including the
stock of our subsidiaries whether we own these assets now or acquire them in
the future. In addition, all of our subsidiaries except PH Holding and its
subsidiaries guaranteed our obligations under the bank credit facility and
these guarantees are secured by a first priority security interest in most of
the tangible and intangible assets of each of the guarantors.
The interest rates we pay on borrowings under our bank credit facility
are variable and are based, at our option, on either a Eurodollar rate plus a
percentage or a base rate plus a percentage. If we choose the Eurodollar base
rate, we pay 3.0% per year in addition to the Eurodollar base rate for our
revolving credit facility, our acquisition term loan facility, and our Tranche
A term loan facility. For our Tranche B term loan facility, we pay 3.5% per
year in addition to the Eurodollar base rate. If we opt for the base rate, we
pay 1.5% per year in addition to the base rate for our revolving credit
facility, our acquisition term loan facility, and our Tranche A term loan
facility. For our Tranche B term loan facility, we pay 2.0% per year in
addition to the base rate. On March 2, 1999, we entered into an interest rate
swap arrangement to reduce our exposure to interest rate fluctuations with
respect to $45.0 million of borrowings under our Tranche A and Tranche B term
loan facilities. The interest rate swap arrangement fixes the interest rate on
these borrowings at 8.62% for the Tranche A facility and 9.12% for the Tranche
B facility for approximately two years.
The bank credit facility contains covenants restricting our ability to,
among other things:
. declare dividends or redeem or repurchase capital stock, except that
we may repurchase common stock owned by our employees upon their
termination in an amount not to exceed $0.5 million
. prepay, redeem or purchase debt
. incur liens, except liens incurred under the bank credit facility
itself, liens arising from acquisitions or capital leases otherwise
allowed under the bank credit facility and liens to secure
indebtedness, so long as the amount does not exceed $3.0 million
. make loans and investments, except that
. we may make additional investments in PH Holding and its
subsidiaries, so long as the amount of these investments does not
exceed $4.5 million
. we may make loans to our employees, so long as the amount of the
loans does not exceed a total of $1.0 million, so they can
purchase our common stock and
. we may make other investments in a total amount of $1.0 million
. engage in mergers, acquisitions or asset sales, except that
. we may sell assets with a fair market value that does not exceed
$10.0 million and we may engage in sale/leaseback transactions
otherwise permitted by the bank credit facility, in either case so
long as we receive cash consideration for the fair market value of
the assets and we use the proceeds to prepay our indebtedness
under the bank credit facility
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. we may make acquisitions so long as the consideration we pay does
not exceed $50.0 million, including any assumption of debt
. we may transfer properties or assets in transactions where 80% of
the consideration we receive consists of assets we will use in our
business, so long as the fair market value of the assets we
transfer does not exceed $20.0 million in any one year
. engage in transactions with affiliates
Our bank credit facility also provides that our revenues and assets
related to gaming may not exceed 4% of our total revenues. Also, our bank
credit facility limits our capital expenditures to $46.0 million in fiscal 1999
and $34.0 million each year thereafter. It also prohibits us from incurring
debt, other than under the bank credit facility itself, except for:
. up to $3.0 million for contingent obligations
. up to $30.0 million for capital leases used or debt incurred to
acquire, construct or improve our business assets
. intercompany debt
. $0.7 million of pre-existing debt
. up to $200.0 million of debt under our senior subordinated notes
. up to $50.0 million for other similar subordinated debt we may wish
to incur in the future
. up to $5.0 million in any type of debt
Our bank credit facility requires us to remain in compliance with various
financial ratios. Our EBITDA for any consecutive four-quarter period must be at
least $82.0 million in fiscal 1999, increasing each year to $100.0 million in
fiscal 2004. Our debt to pro forma EBITDA ratio must not exceed 5 to 1 in
fiscal 1999, decreasing each year to 3.25 to 1 in fiscal 2004. Our ratio of
EBITDA plus rental payments, to interest expense plus rental payments, must be
at least 1.5 to 1 in fiscal 1999, increasing each year to 2 to 1 in fiscal
2004.
We also have outstanding $200.0 million of 10 1/4% senior subordinated
notes due 2007. Interest on the senior subordinated notes is due on October 15
and April 15 of each year. The senior subordinated notes are unconditionally
guaranteed, on an unsecured basis, as to the payment of principal, premium, if
any, and interest, jointly and severally, by our subsidiaries, except for
PH Holding and its subsidiaries. The senior subordinated notes contain
covenants that, among other things, restrict our ability and any restricted
subsidiary's ability to:
. pay dividends or make distributions, except
. in amounts not in excess of a percentage of our net income or
proceeds of debt or equity issuances
. in amounts not in excess of $5.0 million
. issue stock of subsidiaries
. make investments in non affiliated entities, except
. employee loans of up to $3.0 million
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. repurchase stock, except
. common stock owned by employees in amounts not in excess of $2.0
million
. with the proceeds from debt or equity issuances
. incur liens not securing debt permitted under the senior subordinated
notes
. enter into transactions with affiliates
. enter into sale-leaseback transactions
. engage in mergers or consolidations
We can incur debt under the senior subordinated notes if our ratio of pro
forma EBITDA to fixed charges, after giving effect to such incurrence, is at
least 2 to 1. Even if we don't meet this ratio we can incur:
. 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
. capital leases or acquisition debt in amounts not to exceed in the
aggregate 10% of our tangible assets at time of incurrence
. intercompany debt
. pre-existing debt
. up to $15.0 million in any type of debt
. debt for refinancing of the above described debt
Our senior subordinated notes also place conditions on the terms of asset sales
or transfers and require us either to reinvest the proceeds of an asset sale or
transfer, or, if we do not reinvest those proceeds, to pay down our bank credit
facility or other senior debt or to offer to redeem our senior subordinated
notes with any asset sale proceeds not so used. Up to 35% of the senior
subordinated notes may be redeemed prior to October 15, 2000 at a redemption
price of 110.25% plus accrued interest with the net proceeds of one or more
public equity offerings. All of the senior subordinated notes may be redeemed
after October 15, 2002 at a redemption price which begins at 105.125% and
decreases to 100.0% after October 2005.
Restrictive covenants in our debt agreements may restrict our ability to
implement our acquisition strategy. See "Risk Factors--Restrictive Covenants in
our debt agreements may restrict our ability to implement our growth strategy,
respond to changes in industry conditions, secure additional financing and
engage in acquisitions."
On January 28, 1999, we redeemed all remaining $49.0 million of our
senior notes at 104% of their principal amount plus accrued and unpaid
interest. These payments were financed with proceeds from the bank credit
facility. We recognized an extraordinary loss, net of taxes, of approximately
$3.6 million resulting from the refinancing of our debt. This loss included the
payment of the call premium, fees paid in connection with the amendment of our
bank credit facility and the write-off of deferred financing costs.
Pro forma for the offering and the application of the net proceeds, our
long-term debt will consist of $200.0 million of senior subordinated notes and
approximately $239.0 million outstanding under our bank credit facility.
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Cash Flows From Financing Activities. During fiscal 1998, we financed the
Lil' Champ acquisition purchase price of $136.4 million, the refinancing of
existing Lil' Champ debt of $10.7 million, the repurchase of $51.0 million of
the senior notes, the total purchase price of all acquisitions and all related
fees and expenses with the proceeds from the offering of the senior
subordinated notes of $200.0 million, proceeds from our bank credit facility of
$78.0 million, cash on hand and the net proceeds of approximately $57.0 million
from the sale of common stock to our existing stockholders and management.
During the six months ended March 25, 1999, we financed our 1999
acquisitions and the redemption of $49.0 million of senior notes and the
related fees and expenses with proceeds from our bank credit facility, cash on
hand and the net proceeds of approximately $1.1 million from the sale of common
stock to employees under our stock subscription plan.
Cash Requirements. We believe that cash on hand, together with the
proceeds of this offering, cash flow anticipated to be generated from
operations, short-term borrowing for seasonal working capital needs and
permitted borrowings under our credit facilities will be sufficient to enable
us to satisfy anticipated cash requirements for operating, investing and
financing activities, including debt service, for the next twelve to sixteen
months. To continue our acquisition strategy after that time, we will have to
obtain additional debt or equity financing. There can be no assurance that such
financing will be available on favorable terms, or at all.
Shareholders' Equity. As of March 25, 1999, our shareholders' equity
totaled $36.4 million. The $2.9 million decrease in shareholders' equity
compared to shareholders' equity at September 24, 1998 is attributed to our net
loss of $2.5 million and dividends and interest on the Series B preferred stock
of $1.5 million. The decrease was partially offset by the net proceeds of
approximately $1.1 million from the sale of common stock to employees under our
stock subscription plan.
Additional paid-in-capital is impacted by the accounting treatment
applied to the 1987 leveraged buyout of the outstanding common stock of our
predecessor which resulted in a debit to equity of $17.1 million. This debit
had the effect, among others, of offsetting $7.0 million of equity capital
invested by our former shareholders.
The accumulated deficit as of March 25, 1999 includes the cumulative
effect of the accrued dividends on previously outstanding preferred stock of
$5.0 million, the accrued dividends on the series B preferred stock of $5.8
million, the net cost of equity transactions and the cumulative results of
operations, which include extraordinary losses and cumulative effect of
accounting changes, interest expense of $17.2 million on previously outstanding
subordinated debentures and preferred stock obligations. This interest and the
related subordinated debt and these dividends and the related preferred stock
were paid or redeemed in full with a portion of the proceeds from the fiscal
1994 sale of the senior notes.
Environmental Considerations
We are required by federal and state regulations to maintain evidence of
financial responsibility for taking corrective action and compensating third
parties in the event of a release from our underground storage tank systems. In
order to comply with this requirement, as of April 30, 1999, we maintain surety
bonds in the aggregate amount of approximately $900,000 in favor of state
environmental enforcement agencies in the states of North Carolina, South
Carolina and Virginia and
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a letter of credit in the aggregate amount of approximately $1.1 million issued
by a commercial bank in favor of state environmental enforcement agencies in
the states of Florida, Tennessee, Indiana and Kentucky and rely on
reimbursements from applicable state trust funds. In Florida, we also meet such
financial responsibility requirements through private commercial liability
insurance.
All states in which we operate or have operated underground storage tank
systems have established trust funds for the sharing, recovering, and
reimbursing of cleanup costs and liabilities incurred as a result of releases
from underground storage tank systems. These trust funds, which essentially
provide insurance coverage for the cleanup of environmental damages caused by
the operation of underground storage tank systems, are funded by an underground
storage tank registration fee and a tax on the wholesale purchase of motor
fuels within each state. We have paid underground storage tank registration
fees and gasoline taxes to each state where we operate to participate in these
programs and have filed claims and received reimbursement in North Carolina,
South Carolina, Kentucky, Indiana, Georgia, Florida and Tennessee. The coverage
afforded by each state fund varies but generally provides from $150,000 to $1.0
million per site or occurrence for the cleanup of environmental contamination,
and most provide coverage for third party liabilities.
Costs for which we do not receive reimbursement include but are not
limited to the per-site deductible; costs incurred in connection with releases
occurring or reported to trust funds prior to their inception; removal and
disposal of underground storage tank systems; and costs incurred in connection
with sites otherwise ineligible for reimbursement from the trust funds. The
trust funds require us to pay deductibles ranging from $10,000 to $100,000 per
occurrence depending on the upgrade status of our underground storage tank
system, the date the release is discovered/reported and the type of cost for
which reimbursement is sought. The Florida trust fund will not cover releases
first reported after December 31, 1998. We meet Florida financial
responsibility requirements for remediation and third party claims arising out
of releases reported after December 31, 1998 through a combination of private
insurance and a letter of credit. In addition to up to $4.5 million that we may
expend for remediation, The Pantry estimates that up to $12.7 million may be
expended for remediation on our behalf by state trust funds established in our
operating areas and other responsible third parties including insurers. To the
extent such third parties do not pay for remediation as we anticipate, we will
be obligated to make such payments, which could materially adversely affect our
financial condition and results of operations. Reimbursement from state trust
funds will be dependent upon the maintenance and continued solvency of the
various funds.
Environmental reserves of $17.2 million as of March 25, 1999 represent
estimates for future expenditures for remediation, tank removal and litigation
associated with 207 known contaminated sites as a result of releases, e.g.,
overfills, spills and underground storage tank releases, and are based on
current regulations, historical results and other factors. Although we can make
no assurances, we anticipate that we will be reimbursed for a portion of these
expenditures from state insurance funds and private insurance. As of March 25,
1999, amounts which are probable of reimbursement (based on our experience)
from those sources total $12.7 million and are recorded as long-term
environmental receivables. These receivables are expected to be collected
within a period of twelve to eighteen months after the reimbursement claim has
been submitted. In Florida, remediation of such contamination reported before
January 1, 1999 will be performed by the state and we expect that substantially
all of the costs will be paid by the state trust fund. We will perform
remediation in other states through independent contractor firms that we have
engaged. We do have locations where the applicable trust fund does not cover a
deductible or has a co-pay which may be less than the cost of such remediation.
Although we are not aware of releases or contamination at other locations where
we currently operate or have operated stores, any such releases or
contamination could require
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substantial remediation expenditures, some or all of which may not be eligible
for reimbursement from state trust funds.
We have reserved $500,000 to cover third party claims for environmental
conditions at adjacent real properties that are not covered by state trust
funds or by private insurance. This reserve is based on management's best
estimate of losses that may be incurred over the next several years based on,
among other things, the average remediation cost for contaminated sites and our
historical claims experience.
Several of our locations identified as contaminated are being cleaned up
by third parties who have assumed responsibility for such clean up matters.
Additionally, we are awaiting closure notices on several other locations which
will release us from responsibility related to known contamination at those
sites. These sites continue to be included in our 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. We use a combination of hardware devices run by computer programs
at our support centers and retail locations to process transactions and other
data which are essential to our business operations. The Year 2000 issue and
its impact on data integrity could result in system interruptions,
miscalculations or failures causing disruption of operations.
The following discussion about the implementation of our Year 2000
program, the costs expected to be associated with the program and the results
we expect to achieve constitute forward-looking information. As noted below,
there are many uncertainties involved with the Year 2000 issue, including the
extent to which we will be able to adequately provide for contingencies that
may arise, as well as the broader scope of the Year 2000 issue as it may affect
third parties and our trading partners. Accordingly, the costs and results of
our Year 2000 program and the extent of any impact on our results of operations
could vary materially from that stated herein.
We completed 90% of our assessment phase of Year 2000 vulnerability early
in fiscal 1998, after a formal third-party assessment was completed in November
1997. Assessment activities found that 30% of our systems would require
remediation and 20% of our systems were planned for replacement or would be
best served if replaced. Based on this third-party assessment, internal
assessment and project results as of March 25, 1999, we believe all system
modifications, hardware and software replacements or upgrades and related
testing will be completed by September 1999. In order to meet this date, we
have engaged outside consultants and contractors to assist in the overall
project and remediation effort.
We have tested, modified or replaced, or plan to modify or replace our
existing systems and related hardware which did not properly interpret dates
beyond December 31, 1999 to ensure Year 2000 compliance. We have assessed
software and technology infrastructures, embedded systems such as microchips in
point-of-sale systems, fuel consoles and office equipment, and building
facilities such as telephone-related systems, HVAC and security. Our testing
methodology 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
equipment. To date 20% of our applications requiring remediation have been
tested and 75% of the systems being replaced have been implemented and are in
use.
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We have initiated communications with our vendors, suppliers and
financial institutions to determine the extent to which we are vulnerable to
those third parties' failure to be Year 2000 compliant. To date, 80% of those
surveyed have responded. The replies indicate that all anticipate they will be
Year 2000 compliant before the end of the calendar year. Specifically, our
grocery wholesaler, McLane, has stated in their "Year 2000 Readiness
Disclosure" that they are "committed to identifying and correcting all business
critical Year 2000 problems by June 1, 1999." Based on these communications and
presently available information, we do not anticipate any material effects
related to vendor, supplier, third-party credit card processing company or
financial institution compliance. Additionally, due to the nature of our
business, Year 2000 compliance with respect to our customers is not relevant.
Noncompliance by vendors, suppliers, credit card processing companies and
financial institutions utilized by us could result in a material adverse effect
on our financial condition and results of operations. 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, we determine a third party's level of compliance will have an
adverse effect on The Pantry, we will seek an alternate third party to provide
similar products or services. We believe that the worst case scenario in the
event of a Year 2000 related failure would be delays in the receipt of payment
from credit card processing companies and a return to manual accounting
processing at our individual stores.
In addition, we have reviewed the assets acquired since our original
assessment for Year 2000 compliance. This includes the acquisition of other
companies, as well as procurement and service arrangements. We believe that our
recently acquired assets will be Year 2000 compliant by September 1999. The
assessments have been conducted through the due diligence process, vendor
compliance communications and requests for disclosure statements as part of
contract negotiations. In most instances with the acquisition of other
companies, the systems and suppliers of these companies are the same as those
used in our existing operations.
State of Readiness as of April 22, 1999
<TABLE>
<CAPTION>
Estimated Estimated
Phase Percent Complete Completion Date(a)
- -------------------------------------------- ---------------- ------------------
<S> <C> <C>
Awareness................................... 95% December 1999
Assessment.................................. 90% June 1999
Remediation................................. 55% September 1999
Replacement................................. 75% September 1999
Testing..................................... 35% September 1999
Contingency Planning........................ 5% September 1999
</TABLE>
- --------
(a) Indicates work should be substantially completed. We will continue to
reevaluate awareness, assess acquired assets and update contingency plans
as needed.
We do not believe either the direct or indirect costs of Year 2000
compliance will be material to our operations or operating results. Our
expenditures, which will be funded through operating cash flow, consist
primarily of internal costs and expenses associated with third-party
contractors. To date, our spending with contractors and consultants has been
$75,000. We anticipate spending for the remainder of the fiscal year to be
approximately $300,000.
While we believe our planning efforts are adequate to address our Year
2000 concerns, there can be no assurances that the systems of other companies
on which our systems and operations rely will be converted on a timely basis
and will not have a material impact on us. We are in the process
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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 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 derivative instruments embedded in other contracts and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Statement of Financial Accounting Standards
No. 133 is effective for the first fiscal quarter of fiscal 2000; earlier
application is encouraged. As of March 25, 1999, we have not determined the
effect of Statement of Financial Accounting Standards No. 133 on our
consolidated financial statements.
Inflation
General inflation has not had a significant impact on The Pantry over the
past three years. As reported by the Bureau of Labor Statistics for the six
months ended March 25, 1999, the consumer price index increased less than one
percent. For the same period, the producer price index, a measure of wholesale
cost inflation decreased approximately one percent. We do not expect general
inflation to have a significant impact on our results of operations or
financial condition in the foreseeable future.
As reported by the Bureau of Labor Statistics for the six months ended
March 25, 1999, the consumer price index for the category labeled "cigarettes"
increased approximately 19.3%. For the same period, the producer price index
for the category labeled "cigarettes" increased 30.9%. On November 23, 1998,
major cigarette manufacturers that supply The Pantry increased prices by $0.45
per pack. During the first fiscal quarter 1999, the cigarette cost increase was
directly offset by cigarette manufacturer support, including cigarette rebates
and other incentives. Since December 24, 1998, these increases have been passed
on in higher retail prices throughout the chain. Because we expect to pass
cigarette cost increases on to our customers through higher retail prices,
these cost increases are expected to reduce our gross margin percentage for the
cigarette category, but are not expected to have a material impact on the
cigarette category gross profit dollars. Although it is too early to determine
the potential impact on cigarette unit volume, management believes it can pass
along these and other cost increases to our customers over the long term and,
therefore, does not expect cigarette inflation to have a significant impact on
our results of operations or financial condition in the foreseeable future.
Quantitative and Qualitative Disclosures about Market Risk
Quantitative Disclosures. We are exposed to market risks inherent in our
financial instruments. These instruments arise from transactions entered into
in the normal course of business and, in some cases, relate to our acquisitions
of related businesses. We are subject to interest rate risk on our existing
long-term debt and any future financing requirements. Our fixed rate debt
consists primarily of outstanding balances on our senior subordinated notes and
our variable rate debt relates to borrowings under our bank credit facility.
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The following tables presents the future principal cash flows and
weighted-average interest rates expected on our existing long-term debt
instruments. Fair values have been determined based on quoted market prices as
of April 30, 1999.
<TABLE>
<CAPTION>
Expected Maturity Date (as of September 24, 1998)
-------------------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000 Fiscal 2001 Fiscal 2002 Fiscal 2003 Thereafter Total Fair Value
----------- ----------- ----------- ----------- ----------- ---------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt.......... $ 67 $ 39 $49,038 $ 47 $78,049 $200,074 $327,314 $336,814
Weighted average
interest rate.......... 10.06% 10.06% 9.76% 9.72% 10.19% 10.25% 10.06%
</TABLE>
On January 28, 1999, we refinanced our senior notes and outstanding
borrowings under our previous bank credit facility with proceeds from new term
loan facilities under our amended bank credit facility. On January 28, 1999 and
in connection with the Handy Way acquisition and debt refinancing, we borrowed
approximately $97.0 million under the term loan facilities and $5.0 million
under the revolving credit facility. The term loan facilities requires
quarterly principal and interest payments with interest based on a spread over
LIBOR, a variable interest rate. This refinancing and the additional borrowings
increased our annual principal and interest requirements. However, the lower
borrowing rates under our term loan facilities reduced our weighted average
interest rate.
On March 2, 1999, we entered into an interest rate swap arrangement with
respect to $45.0 million of borrowings under our outstanding Tranche A and
Tranche B term loan facilities. The interest rate swap arrangement fixes the
interest rate on these borrowings at 8.62% for the Tranche A facility and 9.12%
for the Tranche B facility for approximately two years.
The following table presents the future principal cash flows and
weighted-average interest rates expected on our existing long-term debt
instruments. Fair values have been determined based on quoted market prices as
of April 30, 1999.
<TABLE>
<CAPTION>
Expected Maturity Date (as of March 25, 1999)
-------------------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000 Fiscal 2001 Fiscal 2002 Fiscal 2003 Thereafter Total Fair Value
----------- ----------- ----------- ----------- ----------- ---------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt.......... $2,896 $10,686 $17,939 $20,943 $37,931 $369,313 $459,708 $469,208
Weighted average
interest rate.......... 9.08% 9.10% 9.14% 9.20% 9.27% 9.38% 9.07%
</TABLE>
The following table presents the future principal cash flows and weighted
average interest rates assuming completion of the offering and application of
offering proceeds to repay $19.0 million outstanding under the bank credit
facility.
<TABLE>
<CAPTION>
Expected Maturity Date (as of March 25, 1999 pro forma for the offering)
-------------------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000 Fiscal 2001 Fiscal 2002 Fiscal 2003 Thereafter Total Fair Value
----------- ----------- ----------- ----------- ----------- ---------- -------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt.......... $2,896 $10,686 $17,939 $20,943 $18,931 $369,313 $440,708 $450,208
Weighted average
interest rate.......... 9.13% 9.15% 9.20% 9.27% 9.34% 9.38% 9.12%
</TABLE>
Qualitative Disclosures. Our primary exposure relates to:
. interest rate risk on long-term and short-term borrowings
. our ability to pay or refinance long-term borrowings at maturity at
market rates
. the impact of interest rate movements on our ability to meet interest
expense requirements and exceed financial covenants
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. the impact of interest rate movements on our ability to obtain
adequate financing to fund future acquisitions
We manage interest rate risk on our outstanding long-term and short-term
debt through our use of fixed and variable rate debt. The interest rate swap
mentioned above will reduce our exposure to short-term interest rate
fluctuations. While we can not predict or manage our ability to refinance
existing debt or the impact interest rate movements will have on our existing
debt, management evaluates our financial position on an ongoing basis.
Forward-Looking Statements
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements, which are subject to numerous
risks, uncertainties, and assumptions about The Pantry, include, among other
things:
. our anticipated acquisition and growth strategies, including our
strategy to double our store base
. anticipated trends in our businesses
. future expenditures for capital projects including the cost of
environmental compliance
. our ability to pass along cigarette price increases to our customers
without a decrease in cigarette sales
. our ability to successfully deal with Year 2000 issues that may arise
in our or third party operations
. our ability to control costs, including our ability to achieve cost
savings in connection with our acquisitions
These forward-looking statements are subject to numerous risks and
uncertainties, including risks related to our dependance on gasoline and
tobacco sales, our acquisition strategy, our rapid growth since 1996, our
dependence on one principal wholesaler, the intense competition in the
convenience store and retail gasoline industries, our dependence on favorable
weather conditions in spring and summer months, the concentration of our stores
in the southeastern United States, our history of losses, extensive
environmental regulation of our business, governmental regulation, control of
The Pantry by one principal stockholder, our dependence on senior management,
the failure of The Pantry and others to be year 2000 compliant and other risk
factors identified in this prospectus under the caption "Risk Factors." As a
result of these risks actual results may differ from these forward looking
statements included in this prospectus.
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INDUSTRY OVERVIEW
The United States convenience store industry is large and growing. In
1997 over 95,700 convenience stores operating throughout the United States
generated sales of $156.2 billion. The convenience store industry is larger in
size than many other retail sectors, including the home improvement, drug store
and department store sectors, which had 1997 sales of approximately $150
billion, $100 billion, and $76 billion, respectively. Over the last ten years,
industry sales have grown at a 6.4% compound annual growth rate, outpacing the
3.1% compound annual growth rate in the consumer price index. We believe the
convenience store industry exhibits several characteristics that have
historically tended to insulate it from seasonality and global and domestic
economic trends. These characteristics include:
. a high percentage of sales from necessity items, including gasoline,
consumables and food
. a small average transaction size
. the industry's convenience format
The convenience store business consists of two primary categories:
merchandise, with 1997 sales of $72.4 billion, and gasoline, with 1997 sales of
$83.8 billion. The trend to combine gasoline, a key necessity item, with
merchandise-selling stores has played an important role in the growth of the
industry. Major merchandise categories include cigarettes, beer, packaged
beverages, food service and candy. Average merchandise margins have remained
relatively stable over the last five years, but have increased approximately 2%
as a percentage of merchandise revenue. The convenience store industry has
steadily increased its market share of gasoline sales from 29.3% in 1988 to
56.3% in 1997. This trend can be attributed to an increase in the number of
convenience stores selling gasoline, consumer preferences and a decrease in the
number of gasoline service stations. Gasoline margins have remained relatively
stable over the past three years despite fluctuations in retail gas prices.
Other sources of revenue at convenience stores include lottery commissions,
money order commissions, and public telephone income.
The convenience store industry provides opportunities for a large, well-
managed operator to realize cost savings and operating efficiencies and
increase sales and profitability due to the industry's high degree of
fragmentation, lack of merchandising focus and insufficient capital investment.
. Highly Fragmented Industry. The convenience store industry is highly
fragmented. The five largest operators represent approximately 20% of
the total store base and the 50 largest operators represent
approximately 50% of the total store base. Industry participants have
historically consisted of oil and gas operators, smaller independent
chains, "mom-and-pop" stores and sole proprietorships. Several
factors will continue to drive consolidation in the industry. These
factors include:
. independent operators' desire for liquidity
. oil and gas operators' divestiture of assets as a result of oil
industry consolidation
. noncompetitiveness of small operators as other industry
participants become larger and efficiently spread costs over a
greater store base
. increasing environmental regulations that have resulted in higher
capital costs
. higher new-store development costs
65
<PAGE>
. Lack of Merchandising Focus. The background of many convenience store
operators has been in the gasoline business, with little focus on
merchandising. Major oil companies control nine of the ten largest
convenience store operators and are focused primarily on gasoline
sales. Smaller independent chains and "mom-and-pop" operators
generally lack sophisticated merchandising capabilities due to their
limited size, capital constraints and technological limitations.
These smaller chains and operators are further constrained by low
sales volume, which limits their ability to obtain discounts, vendor-
paid store fixtures and promotional displays and vendor advice on
merchandising trends.
. Insufficient Capital Investment. Many convenience store operators
have made only limited capital investments in facility improvements
and technological advances. Such improvements and innovations, which
can increase sales and profits, include:
. Attractive Well-Lit Facilities. Improvements to signage, lighting,
canopies, paint, in-store restrooms, interior decor and fixtures
and overall exterior appearance enhance store visibility and
create a greater sense of security, which attract customers.
. Pay-at-the-Pump Credit Card Readers. Pay-at-the pump credit card
readers enable the customer to refuel and pay automatically at the
pump. We believe that pay-at-the-pump credit card readers improve
customer traffic because of increased safety and convenience and
increase both gasoline and merchandise sales. While pay-at-the-
pump credit card readers have gained popularity with customers,
they were installed at only 37% of convenience stores by 1997.
. Multi-Product Dispensers. Multi-product dispensers allow customers
to access all fuel options at one pump, and consequently increase
traffic throughput and gasoline volume potential. We also believe
that convenience stores with multi-product dispensers typically
sell a higher percentage of higher grade, higher margin gasoline
than other convenience stores.
. Technology and Store Automation. These systems can improve an
operator's ability to 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, field personnel and headquarters.
The current industry environment has created growth opportunities for a
large industry player with an experienced management team, strong merchandise
focus and access to capital. Since the arrival of the current management team
in 1996, we have capitalized on these opportunities and have grown from 379
stores in fiscal 1996 to 1,149 stores as of March 25, 1999 and from $384.8
million in total revenue in fiscal 1996 to $1.7 billion in total pro forma
revenue for fiscal 1998.
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<PAGE>
BUSINESS
The Pantry is a leading convenience store operator in the southeastern
United States. We are the third largest independently operated convenience
store chain in the country and the fourteenth largest chain including stores
owned by major oil companies and independent refiners.
Our stores are generally situated in suburban areas of rapidly growing
markets, coastal/resort areas and smaller towns. Over 90% of our stores are
located in northern and central Florida, North Carolina and South Carolina,
which are among the fastest growing states in terms of population, employment
and gross state product. We believe that we have the number one market share in
each of our principal regions based on number of stores. On a pro forma basis
for fiscal 1998 we generated total revenue of $1.7 billion, EBITDA of $89.8
million and net income of $4.5 million before an extraordinary charge of
approximately $11.6 million, $3.6 million of which was recorded in the second
quarter of fiscal 1999. In fiscal 1998 we generated cash from operations of
$48.0 million, used cash in investing activities of $286.5 million and
generated cash from financing activities of $269.5 million.
Approximately 34% of our stores are located in Raleigh, Charlotte,
Jacksonville and Orlando, which are four of the ten fastest growing major
metropolitan areas in the United States, as determined by 1997 Census Bureau
estimates. Approximately 42% of our stores are strategically located in
coastal/resort areas such as Jacksonville, Orlando/Disney World, Myrtle Beach,
Charleston, St. Augustine, Hilton Head and the North Carolina Outer Banks.
These locations attract a large number of tourists who are prone to exhibit
liberal spending habits, tend to be less price sensitive than the local
populations and value convenience shopping. Furthermore, these locations
generally benefit from limited competition from large convenience store chains
and oil company owned and operated stores.
Operating Strategy
In February 1996, Freeman Spogli recruited our current management team
headed by Peter Sodini, an experienced food retailing executive. Mr. Sodini and
his team, with an average of 32 years of food retailing experience, implemented
a five-pronged operating strategy. This strategy includes:
. enhancing our merchandising to increase same store merchandise sales
growth and margins
. improving our gasoline offering in order to increase customer traffic
and same store gasoline volume growth
. reducing expenses through strengthened vendor relationships and
tightened expense controls
. increasing expenditures for facilities improvement and store
automation
. growing through acquisitions and new store development
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<PAGE>
These initiatives contributed to the following financial results:
<TABLE>
<CAPTION>
Fiscal Year Ended Compound
------------------------------ Annual
Sept. 26, Sept. 25, Sept. 24, Growth
1996 1997 1998 Rate
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Total revenue (in millions)........... $384.8 $427.4 $ 984.9 60.0%
EBITDA (in millions).................. $ 15.6 $ 20.3 $ 60.5 96.9%
Income from operations (in millions).. $ 1.9 $ 10.8 $ 31.8 312.2%
Net income (loss) (in millions)....... $ (8.1) $ (1.0) $ (3.3) --
EBITDA margin......................... 4.1% 4.7% 6.1% --
Operating margin...................... 0.5% 2.5% 3.2% --
Net cash provided by (used in):
Operating activities (in millions).. $ 5.4 $ 7.3 $ 48.0 --
Investing activities (in millions).. $ (7.2) $(25.1) $(286.5) --
Financing activities (in millions).. $ (3.9) $ 15.8 $ 269.5 --
Average merchandise sales per store
(in thousands)....................... $481.1 $525.8 $ 533.3 5.3%
Average gallons sold per store (in
thousands)........................... 450.0 501.2 603.9 15.8%
Same store merchandise sales growth... 2.8% 8.5% 5.3% --
Same store gasoline gallon growth..... (4.3)% 7.2% 4.8% --
Number of stores (end of period)...... 379 390 954 --
</TABLE>
We have achieved these results through implementation of the following
operating strategies:
Focus on Merchandise. Since 1996, we have increased same store
merchandise sales growth and gross profit dollars by focusing on four key
areas:
. increasing the merchandise SKU count in stores from 3,900 to 4,750
currently
. keeping fully stocked positions of and prominently displaying brand
name, high demand items that customers expect to find in our stores
. adding impulse items that carry higher than average margins
. improving promotional displays, signage and overall store
presentation
We seek to increase customer traffic by providing a greater product
selection than our competitors. Our stores now offer a broader, more locally
defined variety of nationally branded and regionally branded products than is
typically provided by other convenience stores. Our broad product selection is
complemented by a breadth of ancillary products and services such as ATMs,
lottery tickets, video games, public telephones and money orders, which serve
to attract additional customers into our stores and increase gross profit
dollars.
We also seek to attract customers by consistently stocking brand name,
high volume items such as cigarettes, beer, soft drinks and coffee at
competitive prices. Another important component of our merchandising strategy
is to attract the customer to the store with these high demand items, and then
offer a broad assortment of high margin, impulse items to increase gross profit
dollars. Finally, we are able to improve customer traffic through promotional
displays and improved signage that enhance the presentation of our product
offerings. Since the implementation of our merchandising strategy, same store
merchandise sales have improved from 2.8% in fiscal 1996 to 8.5% in fiscal
1997, 5.3% in fiscal 1998 and 11.4% for the first six months of 1999. Average
merchandise gross profit dollars per store have improved from $158,300 in
fiscal 1996 to $181,900 in fiscal 1998.
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<PAGE>
Improve Gasoline Offering. We believe that gasoline is an essential
product offering and have implemented a number of initiatives that have
increased gasoline volume and gasoline gross profit dollars. These initiatives
involve increasing the competitiveness of our gasoline pricing while
maintaining acceptable profit margins and upgrading gasoline facilities and
equipment. We believe that an attractive gasoline offering increases customer
traffic which positively impacts both gasoline volume and merchandise sales.
We have increased the competitiveness of our gasoline pricing by closely
monitoring gasoline prices across markets and competitors in each market and
giving pricing authority to our regional managers. This permits regional
managers to react more quickly to any changes in their respective markets. We
monitor the gasoline pricing of each of our competitors on a daily basis and
are able to reprice any market or location almost immediately.
We also improve sales and customer traffic by upgrading gasoline
facilities and equipment. Our upgrading program typically includes improving
exterior signage, canopies and lighting, and installing multi-purpose
dispensers and pay-at-the-pump credit card readers. We have funded these
improvements in part by concentrating our gasoline purchases with a more narrow
group of suppliers, including BP-Amoco, Chevron, Shell and Texaco. We have also
entered into supply agreements that provide volume rebates and vendor
allowances for advertising, remodeling and gasoline facility and equipment
upgrades. We also seek to improve our gasoline offering by adjusting our mix of
locations selling branded and unbranded gasoline based on customer demand.
These initiatives have contributed to increases in same store gallon growth
from -4.3% in fiscal 1996 to 7.2% in fiscal 1997, 4.8% in fiscal 1998 and 6.8%
for the six months ended March 25, 1999.
Reduce Expenses Through Strengthened Vendor Relationships and Tightened
Expense Controls. We have developed strong relationships with our merchandise
and gasoline suppliers. We represent an attractive distribution channel to
suppliers because of our geographically concentrated store base and our
demonstrated ability to increase merchandise sales and gasoline volumes. Since
the arrival of our current management team, we have renegotiated purchasing
terms with each of our major vendors to obtain greater allowances for retail
displays, marketing and other promotional rebates. The Pantry selected McLane
as its primary wholesale supplier in 1996 and through ongoing negotiations has
continued to benefit from improved terms and service as its volume of purchases
has increased. Our contract with McLane extends until 2003. We have also
reduced gasoline purchasing costs and received allowances for facility and
gasoline equipment upgrades by concentrating gasoline purchases among a select
group of suppliers. Our gasoline supply agreements range from seven to thirteen
years. As we continue to grow and expand our store base, we should enhance our
ability to obtain increasingly favorable terms from our key suppliers. Average
gross profit per store has increased 15.8% from $233,294 in fiscal 1996 to
$270,082 in fiscal 1998.
Since 1996, we have also adhered to a disciplined cost-savings program
that has allowed us to reduce operating expenses without sacrificing customer
service. We have eliminated redundant overhead expenses, renegotiated supply
and service agreements, improved employee retention, implemented inventory
shrink reduction procedures, reduced insurance and workers compensation costs
and outsourced functions such as payroll, maintenance and inventory-taking to
third parties. As a result of these initiatives, total operating expenses as a
percentage of total revenue have declined from 23.2% in fiscal 1996 to 20.5% in
fiscal 1998.
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<PAGE>
Increase Capital Expenditures. Since fiscal 1996, we have implemented a
capital expenditure program focused on:
. store facility and gasoline equipment upgrades
. technology and store automation improvements
. environmental regulatory compliance
Our store remodel program, which includes both major and minor projects,
focuses on improvements to interior fixtures and equipment for self-service
food and beverages, interior lighting, in-store restrooms for customers,
exterior lighting and signage, canopies, pavement and landscape and gasoline
equipment upgrades, including the installation of pay-at-the-pump credit card
readers and multi-product dispensers. Based on data from 105 of our stores that
have been remodeled, average merchandise sales increased 10.1%, gasoline
gallons increased 17.9% and EBITDA increased 37.1% during the twelve months
following remodeling. We have remodeled more than 200 stores since fiscal 1996,
and currently approximately 49% of our stores that sell gasoline have pay-at-
the-pump credit card readers and approximately 77% have multi-product
dispensers. The total cost of these remodels and upgrades was $42.7 million,
$11.2 million which was reimbursed by our gasoline suppliers.
We are currently upgrading our management information systems, including
store, corporate accounting and management reporting systems. We have recently
begun implementation of a leading convenience store software package that has
been used successfully in our Handy Way stores. Implementation of this system
into all of our individual stores will take place in phases through fiscal
2000. We spent $1.8 million on management information system upgrades in fiscal
1998.
The gasoline dispensing business is subject to strict environmental
regulations. We must adhere to various federal, state and local environmental
laws and regulations governing underground petroleum storage tanks. We have
invested approximately $12.8 million since fiscal 1995 to comply with
environmental requirements and do not expect any further significant
unreimbursable environmental expenditures relating to existing locations.
Currently, all our locations that sell gasoline are in material compliance with
EPA requirements and regulations.
Grow Through Acquisitions and New Store Development. Beginning in fiscal
1997, the new management team implemented a disciplined and ongoing acquisition
program. From April 1997 through February 1999, we acquired 890 convenience
stores in 11 major and numerous smaller transactions. Acquired stores are
rapidly integrated into our operations with minimal disruption. We have
increased same store EBITDA at our Lil' Champ stores by 30.3% during the twelve
month period following the Lil' Champ Acquisition and believe there are
opportunities to continue to improve results at these and other acquired
locations. Our acquisition strategy is complemented by a new store development
program in select markets. In addition, we continuously evaluate store
performance trends to determine whether any particular store should be closed
or sold.
Growth Strategy
We believe that there is significant opportunity to continue to increase
sales, productivity and profitability through both the continued implementation
of our operating strategy at existing and newly acquired stores and our
strategy to double our store base in existing markets and expand into
contiguous markets. Specific elements of our growth strategy include the
following:
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<PAGE>
Improve Same Store Merchandise Sales and Gasoline Volume Growth. We
focus on continuous improvement of same store sales and profit growth at
existing and newly acquired stores through:
. key merchandising initiatives
. competitive gasoline prices
. upgraded facilities
. new service offerings
. improved technology
. improved customer service
. targeted cost savings initiatives
Our merchandise and gasoline gallon sales also benefit from the location
of our operations, which are largely in some of the fastest growing
demographic markets in the United States. We continue to add new services to
our stores to increase traffic and margins, including ATMs, lottery tickets,
video games, public telephones and money orders. We also plan to remodel
approximately 100 additional stores annually and to continue to refine our
balance of branded and unbranded gasoline sales to increase our market share
in areas where we operate. In addition, since April 1997 we have acquired a
total of 890 stores. We have implemented our operating strategy in these
stores and expect continued improvement in merchandise sales and gasoline
gallon sales.
Invest in Technology and Store Automation. Over the next two years, we
will invest over $25 million on new technology at the gasoline pump, in the
store and in our corporate offices. Our investments in gasoline dispensing
technology are targeted at making fueling faster and increasing overall
customer traffic at our stores. Our store and corporate technology investments
include point of sale systems, computer hardware and computer software
programs that provide us with better management information and the ability to
communicate on-line with our individual stores and field personnel. We expect
this technology to be fully implemented by the end of fiscal 2000. This
information will allow us to track product movement data by location and
better control inventory and expenses at the store level. We believe these
investments will increase transaction speed at the pump and in the store and
improve customer transaction information, which will allow us to continuously
adjust the merchandise mix and gross margin and to monitor inventory levels at
each of our stores.
Pursue Acquisitions and New Store Growth. We believe that growth through
acquisition is currently more economically attractive than growth through new
store development because:
. acquired stores provide an instant installed base of revenue and cash
flow
. we are able to grow more rapidly, thus providing increased benefits of
larger size
. we are able to enter new markets without adding merchandise square
footage or additional gasoline outlets to these markets
. acquisitions provide access to established high quality locations and
to markets that restrict new store development through stringent
environmental and zoning regulations
. acquiring stores is a lower cost alternative to developing new stores
With over 20,000 convenience stores operating in our existing markets,
we believe there are enough attractive acquisition opportunities to double our
store base in existing markets and expand
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<PAGE>
into contiguous markets. We also believe that the creation of a public market
for our common stock through this offering will enable us to offer our common
stock as consideration for acquisitions and will further enhance our ability
to make acquisitions on favorable terms. In addition, the consolidation trend
among oil companies continues to result in divestitures of additional oil
company owned and operated convenience stores. In evaluating potential
acquisition candidates, we consider a number of factors, including:
. strategic fit and desirability of location
. price
. ability to improve productivity and profitability of a location
through the implementation of our operating strategy
. financial impact
Our strategy is to continue to realize growth and cost savings from
acquisitions through:
. remerchandising acquired stores with more SKUs and branded merchandise
. upgrading store facilities and gasoline equipment
. changing selected sites to branded gasoline suppliers
. negotiating better terms with our suppliers
. spreading costs over a greater store base, eliminate duplicative
overhead and centralize functions such as purchasing, accounting,
payroll and other administrative functions
These initiatives provide for significant improvement in the performance
of newly acquired stores and typically yield results within the first six to
twelve months following the acquisition. For example, in the twelve month
period following the acquisition of Lil' Champ, we were able to increase same
store gross profit by 2.7%, decrease same store operating expenses by 6.6% and
increase EBITDA by 30.3%. Since the beginning of fiscal 1999, we have acquired
214 stores, which are at various stages of integration and implementation of
the key initiatives of our operating strategy. We believe that our strategy
should result in significant improvements in the performance of these stores.
Our acquisition strategy is complemented by a new store development
program in existing and contiguous markets. In opening new stores, we have
focused on selecting store sites on highly traveled roads in coastal/resort
and suburban markets or near highway exit and entrance ramps that provide
convenient access to store locations. We opened seven new stores in fiscal
1998 and expect to open eight to ten new stores annually.
We are not currently party to any definitive agreements relating to
future acquisitions. However, we are continually investigating and evaluating
acquisition candidates. Some of these candidates may be material.
Acquisitions involve risks that could cause our actual growth or
operating results to differ adversely from our expectations or the
expectations of securities analysts. In addition, restrictive covenants in our
debt agreements may restrict our ability to implement our acquisition
strategy. See "Risk Factors--Our growth and operating results could suffer if
we are unable to identify and acquire suitable companies, discover undisclosed
liabilities, obtain financing and integrate acquired stores" and "--
Restrictive covenants in our debt agreements may restrict our ability to
implement our growth strategy, respond to changes in industry conditions,
secure additional financing and engage in acquisitions."
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<PAGE>
Our Operations
We operate our stores under a variety of names, including The Pantry in
North Carolina, South Carolina, Indiana, Tennessee and Kentucky, and Lil' Champ
and Handy Way in Florida. We also operate under the names Kwik Mart, Sprint,
Quick Stop, Zip Mart, Dash-N, Express Stop and ETNA.
Merchandise Sales
For the year ended September 24, 1998, our merchandise sales, including
commissions from services, were 48.2% of total revenue. The following table
highlights information with respect to our merchandise sales for the last two
fiscal years and for the six months ended March 26, 1998 and March 25, 1999:
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
------------------- -------------------
Sept. 25, Sept. 24, March 26, March 25,
1997 1998 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Merchandise sales (in millions)..... $202.4 $460.8 $193.8 $304.0
Average merchandise sales per store
(in thousands)..................... $525.8 $533.3 $304.2 $304.3
Comparable store merchandise sales.. 8.5% 5.3% 4.4% 11.4%
Merchandise gross margins (after
purchase rebates, mark-downs,
inventory spoilage and inventory
shrinkage)......................... 34.4% 34.0% 34.5% 32.6%
</TABLE>
Our stores generally carry approximately 4,750 SKUs and offer a full line
of convenience products. These products include:
<TABLE>
<S> <C>
. tobacco products . snack foods
. beer . dairy products
. soft drinks . canned goods and groceries
. newspapers and magazines . health and beauty aids
. self-service fast foods, including fountain . other immediate consumables
beverages and coffee
</TABLE>
We have developed an in-house food service program featuring breakfast
biscuits, fried chicken, deli and other hot food offerings. We also operate
approximately 142 locations offering quick service restaurants inside our
stores with nationally branded food franchises such as Subway, Church's, Taco
Bell and Hardee's. Our merchandise mix is influenced by the mix of the stores
we acquire.
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<PAGE>
The Pantry does not record merchandise sales by detailed categories.
However, based upon our merchandise purchases, we estimate merchandise sales by
category for the last two years are as follows:
Percentage of Merchandise Purchases
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------
Sept. 25, 1997 Sept. 24, 1998
-------------- --------------
<S> <C> <C>
Tobacco products.............................. 26.6% 27.6%
Beer.......................................... 15.1 17.2
Packaged beverages............................ 17.0 16.0
Self-service fast foods and beverages......... 7.1 6.5
General merchandise/health and beauty care.... 6.3 6.4
Candy......................................... 5.0 4.6
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
----- -----
Total....................................... 100.0% 100.0%
===== =====
</TABLE>
We purchase over 50% of our general merchandise, including most tobacco
products and grocery items, from a single wholesale grocer, McLane. In
addition, McLane supplies health and beauty aids, toys and seasonal items to
all our stores. Our arrangement with McLane is governed by a distribution
service agreement, pursuant to which we purchase all of our requirements of
wholesale food, non-food and general merchandise products. The products are
purchased at McLane's cost plus an agreed upon percentage, reduced by any
promotional allowances offered by manufacturers and volume rebates offered by
McLane. In addition, we receive per store annual service allowances from McLane
which are amortized over the remaining term of the agreement, which is four
years. McLane may terminate the agreement upon a default in payment or if we
become insolvent. However, adequate alternative sources are available to
purchase this merchandise should a change from the current wholesaler become
necessary or desirable. We purchase the balance of our merchandise from a
variety of other distributors under contracts with terms of up to four years.
With a number of these vendors we do not have contracts.
Cigarette prices have increased 15.4% during fiscal 1998 and 19.3% for
the six months ended March 25, 1999. The most recent increase occurred on
November 23, 1998, when major cigarette manufacturers increased prices by $0.45
per pack. However, during December 1998, major cigarette manufacturers offered
a rebate to retailers of $0.45 per pack to offset the November 1998 price
increase. We passed along this rebate to our customers. Major cigarette
manufacturers offered no rebate in January 1999, a $0.30 per pack rebate in
February 1999, a $0.55 per pack rebate for March 1999, no rebate in April 1999
and a $0.35 per pack rebate in May 1999. We cannot assure you that major
cigarette manufacturers will continue to offer these rebates or that any
resulting increase in prices to our customers will not have a material adverse
effect on our cigarette sales and gross profit dollars. Despite increases in
price, which have been passed on for the most part to our customers, we have
increased cigarette unit sales and gross profit dollars. We believe that
convenience stores in general, and The Pantry in particular, will benefit as
customers shift their cigarette buying patterns from less frequent carton
purchases to more frequent pack purchases and as other retailers stop selling
cigarettes. We expect that cigarette cost increases will reduce our gross
margin percentage for
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<PAGE>
the cigarette category, but will not have a material impact on the cigarette
category gross profit dollars. Although it is too early to determine the
potential impact on cigarette unit volume, we believe we can continue to pass
along cost increases to our customers over the long term and, therefore, we do
not expect cigarette inflation to have a significant impact on our results of
operations or financial condition in the foreseeable future.
Our commission revenue is derived from ATMs, lottery ticket sales, video
gaming, money orders, public telephones and other ancillary product and service
offerings. This category is an important aspect of our merchandise operations
because it attracts new customers and provides additional services for existing
customers.
Gasoline Operations
For the year ended September 24, 1998, our revenue from sales of gasoline
were 51.8% of total revenue. The following table highlights information
regarding our gasoline operations for the last two fiscal years and the six
months ended March 26, 1998 and March 25, 1999:
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
------------------- -------------------
Sept. 25, Sept. 24, March 26, March 25,
1997 1998 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Gasoline sales (in millions).......... $220.2 $510.0 $215.7 $360.9
Gasoline gallons sold (in millions)... 179.4 466.8 189.3 365.3
Average gallons sold per store (in
thousands)........................... 501.2 603.9 329.2 397.5
Average retail price per gallon....... $ 1.23 $ 1.09 $ 1.14 $ 0.99
Average gross profit per gallon....... $0.128 $0.134 $0.134 $0.127
Locations selling gasoline............ 364 884 789 1,068
Number of company-owned branded
locations............................ 300 667 505 768
Number of company-owned unbranded
locations............................ 35 192 258 278
Number of third-party locations
(branded and unbranded).............. 29 25 26 22
Number of locations with pay-at-the-
pump credit card readers............. 125 379 208 525
Number of locations with multi-product
dispensers........................... 142 697 465 817
</TABLE>
The increase in gross profit per gallon in fiscal 1998 was primarily due
to the addition of Lil' Champ and the relatively higher gasoline margins in
Florida. Although gasoline gross margins in any particular location or market
may vary from time to time, since fiscal 1997 our gross margins on a
consolidated basis have been relatively stable due to our size and geographic
diversity. Historically, we have not entered into gasoline futures contracts
which may lock in gasoline prices for a period of time or reduce the volatility
in our gasoline costs.
Of the 1,068 stores that sold gasoline as of March 25, 1999, 778 or
72.8%, including third-party locations selling under these brands, were branded
under the Ashland, BP-Amoco, Chevron, Citgo, Exxon, Mobil, Shell or Texaco
brand names. We operate a mix of branded and unbranded locations and evaluate
our gasoline offerings on a local market level.
As of March 25, 1999, we owned the gasoline operations at 1,046 locations
and at 22 locations had gasoline operations that were operated under third-
party arrangements. At company-operated locations, we own the gasoline storage
tanks, pumping equipment and canopies and retain 100% of the gross profit
received from gasoline sales. In fiscal 1998, these locations accounted for
approximately 98% of total gallons sold by us. Under third-party arrangements,
an independent gasoline distributor owns and maintains the gasoline storage
tanks and pumping
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<PAGE>
equipment at the site, prices the gasoline and pays us approximately 50% of the
gross profit. In fiscal 1998, third-party locations accounted for approximately
2% of the total gallons sold by us. We have been phasing out third-party
arrangements because our company-operated locations are more profitable.
We purchase our gasoline from major oil companies and independent
refiners. As of March 25, 1999, 72.8% of our locations selling fuel sell under
a major oil company brand name. Our arrangements with major oil companies are
governed by supply agreements pursuant to which we purchase gasoline and diesel
fuel for our branded locations. The fuel is purchased at the stated rack price,
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 Pantry,
based on volume of purchases and vendor allowances. We purchase the balance of
our gasoline from a variety of independent fuel distributors. There are
20 gasoline terminals in our operating areas, enabling us to choose from more
than one distribution point for most of our stores. Our inventories of both
branded and unbranded gasoline turn approximately every nine days.
Store Locations
As of March 25, 1999, we operated 1,149 convenience stores located
primarily in suburban areas of rapidly growing markets, coastal/resort areas
and smaller towns. Approximately 34% of our stores are located in Raleigh,
Charlotte, Jacksonville and Orlando, which are four of the ten fastest growing
metropolitan areas in the United States. Approximately 42% of our stores are
strategically located in coastal/resort areas such as Jacksonville,
Orlando/Disney World, Myrtle Beach, Charleston, St. Augustine, Hilton Head and
the North Carolina Outer Banks. Substantially all of our stores are free
standing structures averaging approximately 2,400 square feet and provide ample
customer parking. The following table shows the geographic distribution by
state of our stores as of March 25, 1999:
<TABLE>
<CAPTION>
Number of Percent of
Stores Total Stores
--------- ------------
<S> <C> <C>
Florida............................................ 548 47.7%
North Carolina..................................... 338 29.4
South Carolina..................................... 161 14.0
Kentucky........................................... 45 3.9
Indiana............................................ 20 1.7
Tennessee.......................................... 19 1.7
Virginia........................................... 18 1.6
----- -----
Total.............................................. 1,149 100.0%
===== =====
</TABLE>
Since fiscal 1996, we have developed a limited number of new stores and
closed or sold a substantial number of underperforming stores. Beginning in
1997, we turned our attention from developing new stores to commencing our
acquisition program. The following table summarizes these activities:
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months
--------------------------------------- Ended
Sept. 28, Sept. 26, Sept. 25, Sept. 24, March 25,
1995 1996 1997 1998 1999
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Number of stores at
beginning of period.... 406 403 379 390 954
Acquired or opened...... 10 4 36 653 216
Closed or sold.......... (13) (28) (25) (89) (21)
--- --- --- --- -----
Number of stores at end
of period.............. 403 379 390 954 1,149
=== === === === =====
</TABLE>
76
<PAGE>
We continually evaluate the performance of each of our stores to
determine whether any particular store should be closed or sold based on its
sales trends and profitability. In deciding to close or sell an underperforming
store, we consider such factors as store location, gasoline volumes and
margins, merchandise sales and gross profits, lease term, rental rate and other
obligations and the store's contribution to corporate overhead. Although
closing or selling underperforming stores reduces revenue, our operating
results typically improve since these stores were generally unprofitable.
Acquisition Activity and Selection
Since April 1997, we have acquired 890 convenience stores in 11 major and
numerous smaller transactions located in Florida, North Carolina, South
Carolina and Virginia. With these acquisitions, we expanded our geographic
reach within the southeast to Florida and Virginia and enhanced our market
position in North Carolina and South Carolina.
We focus on acquiring chains within our existing and contiguous marketing
areas. In evaluating potential acquisition candidates, we consider a number of
factors including:
. strategic fit and desirability of location
. price
. ability to improve productivity and profitability of a location
through the implementation of our operating strategy
. financial impact
We believe the advantages of these acquired locations include
demonstrated revenue, growth and market characteristics. We also believe the
acquired stores have a lower risk profile and higher average return on
investment than traditional new store development programs.
Site Selection
In opening new stores in recent years, we have focused on selecting store
sites on highly traveled roads in coastal/resort and suburban markets or near
highway exit and entrance ramps that provide convenient access to store
locations. In selecting sites for new stores, we use an evaluation process
designed to enhance our return on investment by focusing on market area
demographics, population density, traffic volume, visibility, ease of access
and economic development in the market area. We also review the location of
competitive stores and customer activity at those stores.
Upgrading Store Facilities and Equipment
We have upgraded the facilities and equipment at many of our existing and
acquired store locations, including gasoline equipment upgrades, at a cost of
approximately $8.7 million in fiscal 1997 and $34.0 million in fiscal 1998.
During this period, $11.2 million was reimbursed through long-term contracts
with our gasoline suppliers. Our store renovation program is an integral part
of our operating strategy. We continually evaluate the performance of
individual stores and periodically upgrade store facilities and equipment based
on sales volumes, the lease term for leased locations and management's
assessment of the potential return on investment.
77
<PAGE>
Typical upgrades for many stores include improvements to interior
fixtures and equipment for self-service food and beverages, interior lighting,
in-store restrooms for customers and exterior lighting and signage. The
upgrading program for our gasoline operations includes multi-product dispensers
and pay-at-the-pump credit card readers to enhance customer convenience and
service and the installation of underground storage tank, leak detection and
other equipment in accordance with applicable EPA regulations. For further
discussion of EPA and other environmental regulations see "--Government
Regulation and Environmental Matters" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Store Operations
Each convenience store is staffed with a manager, an assistant manager
and sales associates who work various shifts to enable most stores to remain
open 24 hours a day, seven days a week. Our field operations organization is
comprised of a network of regional, divisional and district managers who, with
our corporate management, evaluate store operations. District managers
typically oversee from eight to ten stores. We also monitor store conditions,
maintenance and customer service through a regular store visitation program by
district and regional management.
Technology and Store Automation
We utilize information systems and application programs for our core
business systems, such as accounting, financial reporting and payroll. Within
the past two years, we installed newer and more reliable mid-range system
hardware to support these applications and our continued growth. These systems
continue to be enhanced through modification and redesign in order to meet
management reporting requirements and operational needs.
Over the last year, we have expanded our computer system infrastructure
with the addition of new local area network systems, improved end user computer
hardware and software and replacement of older point of sale systems. This has
helped to streamline operations and improve productivity at our corporate
office, among our field management staff and at our stores.
In addition, these new and expanding systems have laid the foundation for
a strategic information systems initiative that will bring a new store and
corporate accounting and management reporting system. We selected and began
implementation of a leading convenience store systems package, Resource
Management Series from Professional Datasolutions, Inc., a wholly-owned
subsidiary of McLane. Handy Way has the Resource Management Series system in
place and has kept pace with upgrades. Handy Way also has a well-developed
system in place that provides centralized management reporting for their food
service operations. We expect to benefit from Handy Way's experience and
knowledge as we implement this technology at The Pantry.
During fiscal 1999, the Resource Management Series will be implemented in
phases. We will continue to accelerate the store level implementation that
began with all of the stores we acquired in 1998. We expect to have the entire
store base fully integrated by the end of fiscal 2000. To complete this
program, we plan to spend $5.8 million in fiscal 1999 and $3.0 million in
fiscal 2000. In addition to facilitating integration of future acquisitions,
these upgrades will enable us to 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.
78
<PAGE>
Competition
The convenience store and retail gasoline industries are highly
competitive. Changes in traffic patterns and the type, number and location of
competing stores can affect the performance of individual stores. Major
competitive factors include, among others, location, ease of access, gasoline
brands, pricing, product and service selections, customer service, store
appearance, cleanliness and safety. In addition, factors such as inflation,
increased labor and benefit costs and the lack of availability of experienced
management and hourly employees may adversely affect the convenience store
industry.
We compete with numerous other convenience stores and supermarkets. In
addition, our stores offering self-service gasoline compete with gasoline
service stations and, more recently, supermarkets. Our stores also compete to
some extent with supermarket chains, drug stores, fast food operations and
other similar retail outlets. In some of our markets, our competitors have been
in existence longer and have greater financial, marketing and other resources
than us.
Trade Names, Service Marks and Trademarks
We have registered or applied for registration of a variety of trade
names, service marks and trademarks for use in our business, including The
Pantry(R), Worth(R), Bean Street Coffee Company(TM), Bean Street Market(TM),
Big Chill(R), ETNA, Handy Way, Lil' Champ(R), Quick Stop, Zip Mart(TM), Express
Stop, Sprint(TM), and Smokers Express(TM). We regard our intellectual property
as being an important factor in the marketing of the company and our
convenience stores. We are not aware of any facts which would negatively impact
our continuing use of any of our trade names, service marks or trademarks.
Government Regulation and Environmental Matters
Many aspects of our operations are subject to regulation under federal,
state and local laws. We are currently in material compliance with all EPA
regulations and requirements that affect our locations that sell gasoline. The
most significant of the regulations that impact all aspects of our operations
are described below.
Storage and Sale of Gasoline
We are subject to various federal, state and local environmental laws.
Federal, state, and local regulatory agencies have adopted regulations
governing underground storage tanks that require us to make expenditures for
compliance. In particular, at the federal level, the Resource Conservation and
Recovery Act of 1976 requires the EPA to establish a comprehensive regulatory
program for the detection, prevention and cleanup of leaking underground
storage tanks.
Federal and state regulations require us to maintain evidence of the
financial responsibility necessary to take corrective action and compensate
third parties in the event of a release from our underground storage tank
systems. In order to comply with the applicable requirements, as of April 30,
1999, we maintain surety bonds in the aggregate amount of approximately
$900,000 in favor of state environmental agencies in North Carolina, South
Carolina and Virginia and a letter of credit in the aggregate amount of
approximately $1.1 million issued by a commercial bank in favor of state
environmental agencies in the states of Florida, Tennessee, Kentucky and
Indiana. We also rely upon the reimbursement provisions of applicable state
trust funds. In Florida, we also meet such financial responsibility
requirements through private commercial liability insurance. We have sold
79
<PAGE>
all of our Georgia stores but have retained responsibility for pre-closing
environmental remediation. The cost of such remediation and third party claims
should be covered by the state trust fund, subject to applicable deductibles
and caps on reimbursement.
Regulations enacted by the EPA in 1988 established requirements for:
. installing underground storage tank systems
. upgrading underground storage tank systems
. taking corrective action in response to releases
. closing underground storage tank systems
. keeping appropriate records
. maintaining evidence of financial responsibility for taking
corrective action and compensating third parties for bodily injury
and property damage resulting from releases
These regulations permit states to develop, administer and enforce their
own regulatory programs, incorporating requirements which are at least as
stringent as the federal standards. The Florida rules for 1998 upgrades are
more stringent than the 1988 EPA regulations. Our facilities in Florida all
meet or exceed such rules. The following is an overview of the requirements
imposed by these regulations:
. Leak Detection. We utilize several approved leak detection methods
for all company-owned underground storage tank systems. Daily and
monthly inventory reconciliations are completed at the store level
and at the corporate support center. The daily and monthly
reconciliation data is also analyzed using statistical inventory
reconciliation which compares the reported volume of gasoline
purchased and sold with the capacity of each underground storage tank
system and highlights discrepancies. We believe we are in material
compliance with the leak detection requirements applicable to our
underground storage tanks.
. Corrosion Protection. The 1988 EPA regulations require that all
underground storage tank systems have corrosion protection by
December 22, 1998. We began installing non-corrosive fiberglass tanks
and piping in 1982. All of the underground storage tank systems at
our stores are in material compliance with these 1988 EPA
regulations.
. Overfill/Spill Prevention. The 1988 EPA regulations require that all
sites have overfill/spill prevention devices by December 22, 1998.
All of the company-owned underground storage tank systems are in
material compliance with these EPA regulations.
State Trust Funds
All states in which we operate underground storage tank systems have
established trust funds for the sharing, recovering and reimbursing of cleanup
costs and liabilities incurred as a result of releases from underground storage
tank systems. These trust funds, which essentially provide insurance coverage
for the cleanup of environmental damages caused by the operation of underground
storage tank systems, are funded by a underground storage tank registration fee
and a tax on the wholesale purchase of motor fuels within each state. We pay
underground storage tank registration fees and gasoline taxes to each state
where we operate to participate in these trust programs and we have filed
claims and received reimbursement in North Carolina, South Carolina, Kentucky,
Indiana, Georgia, Florida and Tennessee. The coverage afforded by each state
fund varies
80
<PAGE>
but generally provides from $150,000 to $1.0 million per site or occurrence for
the cleanup of environmental contamination, and most provide coverage for
third-party liabilities.
Costs for which we do not receive reimbursement include but are not
limited to:
. the per-site deductible
. costs incurred in connection with releases occurring or reported to
trust funds prior to their inception
. removal and disposal of underground storage tank systems
. costs incurred in connection with sites otherwise ineligible for
reimbursement from the trust funds
The trust funds require that we pay deductibles ranging from $10,000 to
$100,000 per occurrence depending on the upgrade status of our underground
storage tank system, the date the release is discovered/reported and the type
of cost for which reimbursement is sought. The Florida trust fund will not
cover releases first reported after December 31, 1998. We have obtained private
coverage for remediation and third party claims arising out of releases
reported after December 31, 1998.
In addition to up to $4.5 million that we may expend for remediation, The
Pantry estimates that up to $12.7 million may be expended for remediation on
our behalf by state trust funds established in our operating areas or other
responsible third parties including insurers. To the extent such third parties
do not pay for remediation as we anticipated, we will be obligated to make such
payments, which could materially adversely affect our financial condition and
results of operations. Reimbursements from state trust funds will be dependent
upon the continued maintenance and viability of the various funds.
The Pantry has been reimbursed, at rates of approximately 97%, for
expenses filed with the state trust funds or other responsible third parties
including insurers in the amounts of $4.2 million during the past three fiscal
years. We anticipate our reimbursement rate to increase as we have entered into
agreements with our primary environmental contractors whereby these contractors
guarantee 100% reimbursement from the state trust funds for the work they
perform. The Pantry maintains a 5% bad debt allowance for environmental
receivables.
Sale of Alcoholic Beverages
In areas where our stores are located, state or local laws limit the
hours of operation for the sale of alcoholic beverages. State and local
regulatory agencies have the authority to approve, revoke, suspend or deny
applications for and renewals of permits and licenses relating to the sale of
alcoholic beverages and to impose various restrictions and sanctions. In many
states, retailers of alcoholic beverages have been held responsible for damages
caused by intoxicated individuals who purchased alcoholic beverages from them.
While the potential exposure to us for damage claims as a seller of alcoholic
beverages is substantial, we have adopted employee training procedures intended
to minimize such exposure. In addition, we maintain general liability insurance
which may mitigate the cost of any liability.
Video Poker Licenses
Stores in South Carolina operating video poker machines are subject to
extensive local and state regulations regarding the operation and ownership of
video poker machines. Furthermore, state and local laws limit the manner in
which video poker machines may be operated. In addition, state
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<PAGE>
and local regulatory agencies have the authority to approve, revoke, suspend or
deny applications for, and renewal of, the applicable licenses for video poker
machines. There are numerous legislative proposals pending in the South
Carolina legislature relating to video gaming, including initiatives to impose
additional significant taxes or regulatory measures as well as initiatives to
ban video gaming. Enactment of some of these initiatives could adversely impact
our results of operations.
Store Operations
Our stores are subject to regulation by federal agencies and to licensing
and regulations by state and local health, sanitation, safety, fire and other
departments relating to the development and operation of convenience stores,
including regulations relating to zoning and building requirements and the
preparation and sale of food. Difficulties in obtaining or failures to obtain
the required licenses or approvals could delay or prevent the development of a
new store in a particular area.
Our operations are also subject to federal and state laws governing such
matters as wage rates, overtime, working conditions and citizenship
requirements. At the federal level, there are proposals under consideration
from time to time to increase minimum wage rates and to introduce a system of
mandated health insurance which could affect our results of operations.
Employees
As of March 31, 1999, we employed 6,701 full-time and 1,548 part-time
employees. We employ fewer part-time employees during the winter months than
during the peak spring and summer seasons. Of our employees, approximately
7,686 are employed in our stores and 563 are corporate and field management
personnel. We have not been adversely impacted by recent increases in the
minimum wage because the majority of our employees are paid more than the
minimum wage. None of our employees are represented by unions. We consider our
employee relations to be good.
Properties
As of March 25, 1999 we owned 378 of our stores and leased the real
property at 771 of our stores. Management believes that none of these leases is
individually material to us. Most of our leases are net leases requiring us to
pay taxes, insurance and maintenance costs. The aggregate rental paid for
fiscal 1998 was $23.6 million. The following table lists the expiration dates
of our leases, including renewal options:
<TABLE>
<CAPTION>
Lease Expiration Number of Stores
---------------- ----------------
<S> <C>
1999-2001............... 46
2002-2008............... 145
2009-2013............... 119
2014-2018............... 72
2019-2023............... 30
2024-2028............... 61
2029 and thereafter..... 298
</TABLE>
Of our leases that expire prior to the end of 2003, management anticipates that
we will be able to negotiate acceptable extensions of the leases for those
locations that it intends to continue operating. Beyond payment of our
contractual lease obligations through the end of term, early termination of
these leases would result in no significant penalty to The Pantry.
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<PAGE>
When appropriate, we have chosen to sell and then lease-back properties.
Factors leading to this decision include alternative desires for use of cash,
beneficial taxation, and minimization of the risks associated with owning the
property, especially changes in valuation due to population shifts,
urbanization, and/or proximity to high volume streets, and the economic terms
of such sale-leaseback transactions.
We own our corporate headquarters, a three-story, 51,000 square foot
office building in Sanford, North Carolina, and a regional operations center in
central Florida. We lease our Lil' Champ corporate headquarters in
Jacksonville, Florida. Management believes that our headquarters facilities are
adequate for our present and foreseeable needs.
All of our real estate, both owned and leased, is pledged as collateral
under our bank credit facility.
Legal Proceedings
We are party to various legal actions which we believe are routine in
nature and incidental to the operation of our business. While the outcome of
such actions cannot be predicted with certainty, we believe that the resolution
of these matters, individually or in the aggregate, will not have a material
adverse impact on our business, financial condition or prospects. We make
routine applications to state trust funds for the sharing, recovering and
reimbursement of cleanup costs and liabilities incurred as a result of releases
from underground storage tank systems. See "--Government Regulation and
Environmental Matters."
83
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following is a list of our directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position with The Pantry
- ---- --- ------------------------
<S> <C> <C>
Peter J. Sodini......... 58 President, Chief Executive Officer and Director
Dennis R. Crook......... 56 Senior Vice President, Administration and Gasoline Marketing
William T. Flyg......... 56 Senior Vice President and Chief Financial Officer
Douglas M. Sweeney...... 60 Senior Vice President, Operations
Daniel J. McCormack..... 56 Vice President, Marketing
William M. Wardlaw...... 52 Director
Charles P. Rullman...... 50 Director
Todd W. Halloran........ 36 Director
Jon D. Ralph............ 34 Director
Christopher C. Behrens.. 38 Director
Peter M. Starrett....... 51 Director
</TABLE>
Peter J. Sodini has served as our President and Chief Executive Officer
since June 1996 and served as our Chief Operating Officer from February 1996
until June 1996. Mr. Sodini has served as a director since November 1995. Mr.
Sodini is a director of Transamerica Income Shares Inc. and Pamida Holding
Corporation. From December 1991 to November 1995, Mr. Sodini was Chief
Executive Officer and a director of Purity Supreme, Inc., a chain of grocery
stores located in New England. Prior to 1991, Mr. Sodini held executive
positions at several supermarket chains including Boys Markets, Inc. and Piggly
Wiggly Southern, Inc.
Dennis R. Crook has served as our Senior Vice President, Administration
and Gasoline Marketing since March 1996. From December 1987 to November 1995,
Mr. Crook was Senior Vice President, Human Resources and Labor Relations of
Purity.
William T. Flyg has served as our Senior Vice President, Finance and
Chief Financial Officer since January 1997. He was employed by Purity as Chief
Financial Officer from January 1992 until Purity was sold in November 1995, at
which time he continued as an employee of Purity until December 1996.
Douglas M. Sweeney has served as our Senior Vice President, Operations
since March 1996. From December 1991 to December 1995, Mr. Sweeney was Senior
Vice President, Operations of Purity.
Daniel J. McCormack has served as our Vice President, Marketing since
March 1996. From 1989 to February 1996, Mr. McCormack was Director of
Purchasing of Purity.
William M. Wardlaw has served as a director since August 1998. Mr.
Wardlaw joined Freeman Spogli in 1988 and became a Principal in 1991. From 1984
to 1988, Mr. Wardlaw was Managing Partner in the Los Angeles law firm of
Riordan & McKinzie. Prior to 1984, he served as a partner in the law firm of
O'Melveny & Myers. Mr. Wardlaw is also a director of AFC Enterprises, Inc.
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<PAGE>
Charles P. Rullman has served as a director since November 1995. Mr.
Rullman joined Freeman Spogli as a Principal in 1995. From 1992 to 1995, Mr.
Rullman was a General Partner of Westar Capital, a private equity investment
firm specializing in middle market transactions. Prior to joining Westar, Mr.
Rullman spent twenty years at Bankers Trust Company and its affiliate BT
Securities Corporation where he was a Managing Director and Partner. Mr.
Rullman is also a director of Hudson Respiratory Care Inc. and River Holding
Corp.
Todd W. Halloran has served as a director since November 1995. Mr.
Halloran joined Freeman Spogli in 1995 and became a Principal in 1998. From
1990 to 1995, Mr. Halloran was a Vice President and Associate at Goldman, Sachs
& Co., where he worked in the Principal Investment Area and the Mergers and
Acquisition Department.
Jon D. Ralph has served as a director since November 1995. Mr. Ralph
joined Freeman Spogli in 1989 and became a Principal in 1998. Prior to joining
Freeman Spogli, Mr. Ralph spent three years at Morgan Stanley & Co. where he
served as an analyst in the Investment Banking Division. Mr. Ralph is also a
director of Envirosource, Inc., Hudson Respiratory Care Inc., River Holding
Corp. and Century Maintenance Supply, Inc.
Christopher C. Behrens has served as a director since February 1996.
Since 1994, he has been a principal of Chase Capital Partners, the private
equity investment affiliate of Chase Manhattan Capital Corporation. From 1990
to 1994, Mr. Behrens was a Vice President in The Chase Manhattan Corporation's
Merchant Banking Group. Mr. Behrens is a director of Portola Packaging and
Patina Oil & Gas, as well as other private companies.
Peter M. Starrett has served as a director since January 1999. Since
August 1998, Mr. Starrett has served as a consultant to Freeman Spogli. Prior
to August 1998, Mr. Starrett was President of Warner Bros. Studio Stores
Worldwide and had been employed by Warner Bros. since May 1990. Mr. Starrett is
also a director of Petco Animal Supplies, Inc., Brylane, Inc., AFC Enterprises,
Inc., Advance Stores Company, Incorporated, Advance Holding Corporation and
Guitar Center, Inc.
Our directors are elected annually and hold office until the next annual
meeting of stockholders and until their successors are duly elected and
qualified. Pursuant to the stockholder's agreement, Chase Capital is entitled
to nominate one director as long as it owns at least 10% of the common stock.
Upon consummation of the offering or soon thereafter, we expect that two
additional directors who are not our affiliates will be appointed to the board
of directors.
Board Committees
The board of directors has authorized the creation of an audit committee
to review the results and scope of the annual audit and the services provided
by our independent accountants. We anticipate that independent directors will
be appointed to the audit committee following consummation of the offering.
We historically have not used a compensation committee. We anticipate
that the board of directors will create a compensation committee in connection
with the offering.
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<PAGE>
Compensation Committee Interlocks and Insider Participation
Our board of directors determines the compensation of executive officers.
During fiscal 1997, Mr. Sodini participated in board of director deliberations
regarding the compensation of our executive officers.
Compensation of Directors
Our directors receive no compensation as directors. Directors are
reimbursed for their reasonable out-of-pocket expenses in attending meetings.
Executive Compensation
The following table summarizes fiscal 1996, 1997 and 1998 compensation
for services in all capacities of our Chief Executive Officer and our four
other most highly compensated executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
--------------------------------- ------------
Other Securities
Name and Principal Fiscal Annual Underlying All Other
Position Year Salary Bonus Compensation(a) Options/SARs Compensation(b)
------------------ ------ -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sodini ........ 1998 $475,000 $250,000 $42,337 266,271 $2,500
President and Chief 1997 305,218 150,000 98,892 -- 2,500
Executive Officer 1996 124,086 50,000 3,392 -- --
Dennis R. Crook......... 1998 175,000 87,000 7,471 60,078 4,253
Senior Vice President, 1997 151,832 70,000 1,025 -- 2,019
Administration and 1996 82,933 20,000 41,250 -- --
Gasoline Marketing
William T. Flyg......... 1998 175,000 75,000 6,041 57,528 --
Senior Vice President, 1997 109,615 54,000 3,076 -- --
Finance and Chief
Financial Officer
Douglas Sweeney......... 1998 180,000 90,000 10,174 71,910 4,651
Senior Vice President, 1997 149,983 72,000 2,593 -- 2,014
Operations 1996 91,334 20,000 1,352 --
Daniel J. McCormack..... 1998 110,000 60,000 10,412 60,078 2,645
Vice President,
Marketing 1997 95,488 45,000 4,269 -- 1,279
1996 45,334 15,000 5,934 -- --
</TABLE>
- --------
(a) Consists primarily of executive medical, moving and relocation
reimbursements.
(b) Consists of matching contributions to our 401(k) Savings Plan. See "--
Benefit Plan" below.
86
<PAGE>
Option Grants
The following table sets forth information with respect to stock options
granted to our Chief Executive Officer and our four other most highly
compensated executive officers during the year ended September 24, 1998:
Options/SAR Grants in Last Fiscal Year
(Individual Grants)
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------------------------------------- Value
at Assumed Annual
Number of % of Total Exercise Rates of Stock Price
Securities Options/SARs Price or Appreciation for
Underlying Granted to Base Option Term
Options/SARs Employees in Price Expiration ---------------------
Name Granted(#) Fiscal Year ($/Share) Date 5%($) 10%($)
---- ------------ ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sodini......... 207,111(a) 35.9 $ 8.82 01/15/08 $2,267,270 $3,950,812
59,160(b) 10.3 11.27 08/31/08 541,276 1,192,053
Dennis R. Crook......... 47,328(a) 8.2 8.82 01/15/08 518,105 902,820
12,750(b) 2.2 11.27 08/31/08 116,654 256,908
William T. Flyg......... 47,328(a) 8.2 8.82 01/15/08 518,105 902,820
10,200(b) 1.8 11.27 08/31/08 93,323 205,526
Douglas Sweeney......... 59,160(a) 10.3 8.82 01/15/08 647,632 1,128,526
12,750(b) 2.2 11.27 08/31/08 116,654 256,908
Daniel J. McCormack..... 47,328(a) 8.2 8.82 01/15/08 518,105 902,820
12,750(b) 2.2 11.27 08/31/08 116,654 256,908
</TABLE>
- --------
(a) This option vests and becomes exercisable in three equal, annual
installments beginning on the first anniversary of the vesting commencement
date and expires to the extent not exercised by January 15, 2008.
(b) This option vests and becomes exercisable in three equal, annual
installments beginning on the first anniversary of the vesting commencement
date and expires to the extent not exercised by August 31, 2008.
Aggregate Option Exercises and Option Values
The following table sets forth information with respect to our Chief
Executive Officer and our four other most highly compensated executive officers
concerning option exercises for the fiscal year ended September 24, 1998 and
exercisable and unexercisable options held as of September 24, 1998:
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
September 24, 1998(#) September 24, 1998($)(a)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sodini......... -- -- 207,111 59,160 $507,422 $ 0
Dennis R. Crook......... -- -- 15,776 44,302 38,651 77,302
William T. Flyg......... -- -- 15,776 41,752 38,651 77,302
Douglas Sweeney......... -- -- 19,720 52,190 48,314 96,628
Daniel J. McCormack..... -- -- 15,776 44,302 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.
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Executive Employment Contracts
On October 1, 1997, we entered into an employment agreement with Mr.
Sodini. The term of this agreement has recently been extended until September
30, 2001. This agreement contains customary employment terms and provides for
an annual base salary of $475,000, subject to annual adjustment by the board of
directors, participation in any of our benefit or bonus programs, participation
in an incentive bonus program which provides for a payout of a minimum of 25%
upon the achievement of goals determined by the board of directors, and other
perquisites. Mr. Sodini's bonus arrangement is not tied to specific objectives.
Principal factors considered by the board of directors are EBITDA improvement,
comparable sales growth, acquisition quality and future outlook.
Pursuant to the terms of the agreement, if Mr. Sodini is terminated by us
prior to a change in control with just cause or upon death or disability, Mr.
Sodini shall be entitled to his then effective compensation and benefits
through the last day of his actual employment by us for termination for just
cause or upon death or his effective date of termination, as determined by the
board of directors for termination upon disability. In addition, if Mr. Sodini
is terminated because of death or disability, we will pay to the estate of Mr.
Sodini or to Mr. Sodini, as the case may be, one year's pay less amounts paid
under any disability plan. If Mr. Sodini is terminated by us prior to a change
in control without cause, Mr. Sodini shall be entitled to severance pay
including regular benefits through the term of the agreement until such time as
he engages in other employment. If Mr. Sodini is terminated by us following a
change in control without cause or Mr. Sodini terminates his employment for
good reason, Mr. Sodini shall 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 us, from competing with us
or soliciting employment from our employees. This offering will not cause a
change of control under Mr. Sodini's contract.
We have severance arrangements with each of Mr. Crook, Mr. Sweeney and
Mr. McCormack that remain in effect so long as each continues to be employed by
us. Pursuant to these arrangements, if the employee is terminated by us prior
to a change of control without cause, he shall be entitled to severance pay for
one year from the termination date. If the employee is terminated by us
following a change of control without cause or if the employee terminates his
employment for good reason, he shall be entitled to severance pay including
regular benefits for a period of two years from the termination date. For
purposes of these severance arrangements, a change of control would occur if
Freeman Spogli and Chase Capital no longer had voting control of The Pantry's
board of directors. Good reason includes the reduction in the employee's
compensation or benefits, the inability of the employee to discharge his duties
effectively or moving the employee's employment base outside of North Carolina.
This offering will not cause a change of control under these arrangements.
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Benefit Plan
We sponsor a 401(k) employee retirement savings plan with Diversified
Investment Advisors for eligible employees. Employees must be at least nineteen
years of age and have one year of service working at least 1,000 hours to be
eligible to participate in the 401(k) plan. Employees may contribute up to 15%
of their annual compensation and contributions are matched by us on the basis
of 50% of the first 5% contributed. Matching contribution expense was $330,000
in fiscal 1996, $305,000 in fiscal 1997 and $396,000 in fiscal 1998.
Stock Option Plans
We adopted a stock option plan in January 1998. The 1998 stock option
plan provides for the grant of incentive stock options and nonqualified stock
options, as appropriate, to our officers, employees, consultants and members of
our board of directors. An aggregate of 1,275,000 shares of common stock has
been reserved for issuance under the 1998 stock option plan. As of March 25,
1999, 576,861 options to purchase shares of common stock were outstanding, and
698,139 shares were available for future grant. In granting stock options, the
board of directors considers the individual and collective performance of the
management team. Key items considered are EBITDA improvements, comparable store
sales growth, acquisition results and base store operating efficiency, such as
expense ratios and shrink losses. This offering will not trigger the
termination provisions of the stock option plan.
Prior to the consummation of the offering, we intend to adopt a new 1999
stock option plan providing for the grant of incentive stock options and non-
qualified stock options to our officers, directors, employees and consultants.
An aggregate of 3,825,000 shares of common stock will be reserved for issuance
under the 1999 stock option plan. Effective upon consummation of the offering,
a grant of approximately 200,000 shares will be made to officers and employees.
While all shares have not been allocated, we intend to grant incentive stock
options for 33,800 shares to Mr. Sodini, 13,000 shares to Mr. Crook, 13,000
shares to Mr. Flyg, 13,000 shares to Mr. Sweeney and 13,000 shares to Mr.
McCormack. These options will vest in three annual installments, expire in
seven years and be exercisable at the initial public offering price.
The stock option plans are (or will be) administered by the board of
directors, although the board of directors may designate a committee to
undertake the administration. The stock option plans provide that the
administrator may, among other things, select the participants in the stock
option plans, determine the number of options which may be granted to such
participants, and determine the vesting schedule of the options granted. The
exercise price of options granted under the stock option plans will be
determined by the administrator, although the exercise price of incentive stock
options must be at least equal to the fair market value of our common stock on
the date of grant. The stock option plans will terminate in the event of
acquisitions of The Pantry as set forth in the stock option plans, and in such
event, the administrator may determine whether unvested options will
accelerate. This offering will not cause the stock option plans to be
terminated. The stock option plans will terminate when all shares authorized
thereunder have been issued, unless terminated earlier pursuant to the terms of
the stock option plans or by the board of directors. Freeman Spogli has the
right to require the sale of all shares purchased under the stock option plans
in the event it sells all its holdings of common stock.
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Stock Subscription Plan
We adopted a stock subscription plan in August 1998. This plan permits
our employees, including directors and executive officers, to purchase up to an
aggregate of 158,100 shares of common stock at fair market value. The purchase
price for all common stock purchased under our stock subscription plan was
$11.27 per share and was paid in cash and/or the delivery to us of a secured
promissory note payable to us or one of our subsidiaries. As of March 25, 1999,
we have issued 134,436 shares of common stock to 38 employees under our stock
subscription plan. Freeman Spogli has the right to require the sale of all
shares purchased under the stock subscription plan in the event it sells all
its holdings of common stock. We have the right to repurchase shares purchased
under this plan upon an employee's termination of employment. This right
terminates on the first anniversary of the purchase date.
The following table sets forth for our Chief Executive Officer and our
four other most highly compensated executive officers the number of shares
purchased pursuant to the stock subscription plan and the amount borrowed, if
any, to finance the purchase of such shares:
<TABLE>
<CAPTION>
Number of Amount of
Shares of Purchase Price Interest Rate
Common Stock Subject to Due Date of of
Name Purchased Promissory Note Promissory Note Promissory Note
- ---- ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Peter J. Sodini......... 17,748 $100,100 8/31/2003 8.5%
Dennis R. Crook......... 4,437 50,025 8/31/2003 8.5%
William T. Flyg......... -- -- -- --
Douglas Sweeney......... 8,874 -- -- --
Daniel J. McCormack..... 4,437 50,025 8/31/2003 8.5%
</TABLE>
Key Personnel Life Insurance
We are not the beneficiary of any key personnel life insurance policy on
any of our key management personnel.
Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law, we may
indemnify our directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act. Prior to the
consummation of the offering, our directors and officers have been indemnified
to the full extent permitted by Delaware law under our certificate of
incorporation and bylaws. Upon consummation of the offering our bylaws will
provide that The Pantry may indemnify its directors and officers and we intend
to enter into agreements to indemnify our directors to the full extent
permitted by law. These agreements, among other things, will indemnify our
directors for expenses, including attorneys' fees, judgments, fines and
settlement amounts incurred by such person in any action or proceeding,
including but not limited to any action by or in the right of The Pantry, on
account of services as a director of The Pantry, or as a director or officer of
any other company or enterprise to which the person provides services at our
request. We have also purchased liability insurance covering our directors and
officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors or officers pursuant to the foregoing
provisions, or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim
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for indemnification against such liabilities, other than the payment by The
Pantry of expenses incurred or paid by a director or officer or of The Pantry
in the successful defense of any action, suit or proceeding, is asserted by
such director or officer in connection with the securities being registered,
The Pantry will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
Our certificate of incorporation provides that our directors shall not be
liable for monetary damages for breach of such director's fiduciary duty of
care to us and our stockholders except for liability for breach of the
director's duty of loyalty to us or our stockholders, for acts or omissions not
in good faith or involving intentional misconduct or knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. This provision does not eliminate the duty of care
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware law.
The provision also does not affect a director's responsibilities under any
other law, such as the federal or state securities or environmental laws.
There is no pending litigation or proceeding involving any of our
directors, officers, employees or other agents as to which indemnification is
being sought, nor are we aware of any pending or threatened litigation that may
result in claims for indemnification by any director, officer, employee or
other agent.
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<PAGE>
TRANSACTIONS WITH AFFILIATES
Stock Issuances
In November 1995, Freeman Spogli purchased 2,320,551 shares of our common
stock and 10,374.228 shares of our Series A preferred stock for an aggregate
purchase price of approximately $17.2 million and Chase Capital purchased
698,700 shares of our common stock and 3,123.6 shares of our Series A preferred
stock for an aggregate purchase price of approximately $5.2 million. The
purchase price for the common stock was $2.98 per share and the purchase price
for the Series A preferred stock was $1,000.00 per share. A portion of these
shares were purchased from us and the rest from existing stockholders.
In August 1996, Freeman Spogli and Chase Capital purchased the
outstanding common stock and Series A preferred stock held by other
stockholders. Freeman Spogli purchased 2,152,812 shares of common stock and
9,624.336 shares of Series A preferred stock for an aggregate purchase
price of approximately $16.0 million and Chase Capital purchased 643,416 shares
of common stock and 2,876.448 shares of Series A preferred stock for an
aggregate purchase price of approximately $4.8 million. The purchase price for
the common stock was $2.98 per share and the purchase price for the Series A
preferred stock was $1,000.00 per share.
In December 1996, Freeman Spogli purchased 17,500 shares of our Series B
preferred stock and warrants to purchase 2,346,000 shares of common stock for
approximately $17.5 million. The purchase price for the Series B preferred
stock was $1,000.00 per share and the purchase price for the warrants was
$1.00. The warrants are exercisable at $7.45 per share until December 30, 2006
and contain adjustment provisions in the event we declare dividends or
distributions, make stock splits or engage in mergers, reorganizations or
reclassifications. In connection with this offering, we will repurchase the
Series B preferred stock from Freeman Spogli for $17.5 million, plus
approximately $6.5 million in accrued dividends.
In October 1997, in connection with the Lil' Champ acquisition, Freeman
Spogli purchased 3,030,471 shares of common stock and Chase Capital purchased
596,190 shares of common stock for an aggregate purchase price of approximately
$32.0 million. Peter J. Sodini purchased 45,339 shares of common stock for an
aggregate purchase price of $400,050, payable $185,000 in cash and $215,050 in
the form of a secured promissory note in our favor. The purchase price for the
common stock was $8.82 per share. All of our Series A preferred stock was
contributed back to The Pantry and cancelled at this time.
In July 1998, in connection with the acquisition of Quick Stop and the
acquisition of Stallings, Freeman Spogli purchased 1,845,690 shares of common
stock and Chase Capital purchased 371,688 shares of common stock for an
aggregate purchase price of $25.0 million. The purchase price for the common
stock was $11.27 per share.
In November 1998, Peter Starrett, a director of The Pantry, purchased
22,185 shares of common stock for a purchase price of $250,125. Freeman Spogli
has the right to require the sale of Mr. Starrett's shares in the event it
sells all of its holdings of common stock. In addition, we have the right to
repurchase Mr. Starrett's shares in the event he ceases to serve as a director.
This right terminates on the first anniversary of the purchase date.
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See "Management--Stock Subscription Plan" for a description of loans made
to our Chief Executive Officer and our four other most highly compensated
executive officers for purchases of common stock under our stock subscription
plan.
Payments to Freeman Spogli
Since November 1995, we have paid transaction fees in the amount of $5.5
million to Freeman Spogli in connection with previous investments and
assistance with analyzing acquisition candidates and obtaining financing.
Stockholders' Agreement
We have entered into a stockholders' agreement with Freeman Spogli, Chase
Capital and Peter J. Sodini in which:
. Freeman Spogli has a right of first offer enabling it to purchase
shares held by Chase Capital or Mr. Sodini prior to transfers of
shares of common stock to non-affiliates, other than transfers
pursuant to a registration statement or under Rule 144
. Freeman Spogli has the right to require Chase Capital and 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
. we have agreed to provide financial and other information to Chase
Capital
. we have agreed that all our transactions with affiliates will be on
terms no less favorable to The Pantry than would be obtained in an
arms length transaction and to limit the fees payable to Freeman
Spogli to fees paid in connection with a material acquisition,
merger, divestiture, reorganization or restructuring, provided that
such fees are no more favorable to Freeman Spogli than would be
available from a nationally recognized investment banking firm
There is no termination provision in the stockholders' agreement.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information, as of April 15, 1998, with
respect to the beneficial ownership of capital stock by each person who
beneficially owns more than 5% of such shares, our Chief Executive Officer and
each of our four other most highly compensated executive officers, each of our
directors and all of our executive officers and directors as a group.
<TABLE>
<CAPTION>
Percentage of Percentage of
Shares of Class Shares of Class
Common Stock ----------------- Preferred Stock -----------------
Name and Address of Beneficially Before After Beneficially Before After
Beneficial Owner(1) Owned Offering Offering Owned Offering Offering
------------------- ------------ -------- -------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Freeman Spogli(2)....... 11,695,524(2) 82.3% 57.2% 17,500(3) 100% --
William M.
Wardlaw(2)........... -- -- -- -- -- --
Charles P.
Rullman(2)........... -- -- -- -- -- --
Jon D. Ralph(2)....... -- -- -- -- -- --
Todd W. Halloran(2)... -- -- -- -- -- --
Chase Capital(4)........ 2,030,025 17.1 11.2 -- -- --
Christopher C.
Behrens(4)(5)........ 268,413 2.3 1.5 -- -- --
Peter J. Sodini(6)...... 270,198 2.2 1.5 -- -- --
Dennis R. Crook(7)...... 20,213 * * -- -- --
William T. Flyg(8)...... 15,776 * * -- -- --
Douglas Sweeney(9)...... 28,594 * * -- -- --
Daniel J.
McCormack(10).......... 20,213 * * -- -- --
Peter M. Starrett(11)... 22,185 * * -- -- --
All directors and
executive officers as a
group
(11 individuals)....... 14,371,141 99.2% 69.3% 17,500 100.0% --
</TABLE>
- --------
* Less than 1.0%.
(1) Unless indicated otherwise, the address of the shareholder is c/o The
Pantry, P.O. Box 1410, 1801 Douglas Drive, Sanford, North Carolina 27331.
Unless indicated otherwise, each shareholder has sole voting and
investment power with respect to the shares of common stock beneficially
owned by such shareholder.
(2) Includes 2,346,000 shares issuable on the exercise of currently
exercisable warrants. 7,213,491 shares, 1,845,690 shares and 290,343
shares of common stock are held of record by FS Equity Partners III, L.P.,
FS Equity Partners IV, L.P. and FS Equity Partners International, L.P.,
respectively.
(3) Includes 16,823 and 677 shares of preferred stock are held of record by
FSEP III and FSEP International, respectively. Each share of preferred
stock is entitled to ten votes on all matters on which holders of the
common stock vote. All of the preferred stock will be redeemed with the
proceeds of the offering.
(4) Includes 1,073,703 shares held of record by Chase Manhattan Capital, L.P.
and 956,322 shares held by CB Capital Investors, L.P.
(5) Includes 268,413 shares held of record by Baseball Partners, a New York
general partnership.
(6) Includes 207,111 shares of common stock issuable upon the exercise of
options exercisable within 60 days after April 15, 1999.
(7) Includes 15,776 shares of common stock issuable upon the exercise of
options exercisable within 60 days after April 15, 1999.
(8) Includes 15,776 shares of common stock issuable upon the exercise of
options exercisable within 60 days after April 15, 1999.
(9) Includes 19,720 shares of common stock issuable upon the exercise of
options exercisable within 60 days after April 15, 1999.
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<PAGE>
(10) Includes 15,776 shares of common stock issuable upon the exercise of
options exercisable within 60 days after April 15, 1999.
(11) Mr. Starrett's business address is c/o Freeman Spogli & Co. Incorporated,
11100 Santa Monica Boulevard, Suite 1900, Los Angeles, California 90025.
Information Concerning Our Principal Shareholders
Freeman Spogli
FSEP III and FSEP International.
[GRAPH APPEARS HERE]
. FS Holdings, Inc. has the sole power to vote and dispose of the shares
owned by FSEP III.
. FS International Holdings Limited has the sole power to vote and dispose
of the shares owned by FSEP International.
. Bradford M. Freeman, Ronald P. Spogli, J. Frederick Simmons, John M. Roth
and Messrs. Wardlaw and Rullman are the sole directors, officers and
shareholders of FS Holdings and FS International Holdings and may be
deemed to be the beneficial owners of the shares of the common stock and
rights to acquire the common stock owned by, FSEP III and FSEP
International.
FSEP IV.
[GRAPH APPEARS HERE]
. 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, Simmons, Roth, Wardlaw, Rullman, Halloran and
Ralph 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
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<PAGE>
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.
Chase Capital
[GRAPH APPEARS HERE]
. The general partner of Chase Manhattan Capital is Chase Manhattan Capital
Corporation, a New York corporation.
. The general partner of CB Capital Investors is CB Capital Investors,
Inc., a New York corporation.
. Each of Chase Manhattan Capital Corporation and CB Capital Investors,
Inc. is a wholly owned subsidiary of The Chase Manhattan Bank, which is a
wholly owned subsidiary of The Chase Manhattan Corporation.
. The directors of each of Chase Manhattan Capital Corporation and CB
Capital Investors, Inc. are general partners of Chase Capital Partners,
which is also the limited partner of each of Chase Manhattan Capital and
CB Capital Investors and the investment manager of each of Chase
Manhattan Capital Corporation and CB Capital Investors, Inc.
. The individual general partners of Chase Capital Partners are John R.
Baron, Christopher C. Behrens, Mitchell J. Blutt, Arnold L. Chavkin,
Michael R. Hannon, Donald J. Hofmann, Stephen P. Murray, John M.B.
O'Connor, Brian J. Richmand, Jonas Steinman, Shahan D. Soghikian, Jeffrey
C. Walker and Damion E. Wicker, each of whom is a U.S. citizen, whose
principal occupation is general partner of Chase Capital Partners.
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<PAGE>
. The remaining general partners of Chase Capital Partners 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 Manhattan Capital and CB
Capital Investors may be deemed to be attributable to each of Chase
Manhattan Capital Corporation, CB Capital Investors, Inc., Chase Capital
Partners and each of the general partners of Chase Capital Partners.
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 Manhattan 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 is not readily determinable.
. Mr. Behrens is the managing general partner of Baseball Partners, which
may be deemed to be an affiliate of Chase Capital Partners, Chase
Manhattan Capital and CB Capital Investors. Each of Chase Capital
Partners, Chase Manhattan 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.
The business address of Chase Manhattan Capital, Chase Manhattan Capital
Corporation, CB Capital Investors, Chase Capital Partners and the individual
general partners of Chase Capital Partners is c/o Chase Capital Partners, 380
Madison Avenue, 12th Floor, New York, New York, 10017. The business address of
The Chase Manhattan Bank and The Chase Manhattan Corporation is 270 Park
Avenue, New York, New York 10017. The business address of Mr. Soghiklan is c/o
Chase Capital Partners, 50 California Street, Suite 2940, San Francisco,
California 94111.
Baseball Partners
. Mr. Behrens is the managing general partner of Baseball Partners. Mr.
Behrens disclaims beneficial ownership of the shares held by Baseball
Partners 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.
References to Freeman Spogli in this prospectus mean FSEP III, FSEP
International and FSEP IV.
References to Chase Capital in this prospectus mean Chase Manhattan
Capital, CB Capital Investors and Baseball Partners.
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DESCRIPTION OF CAPITAL STOCK
The following is a summary description of our capital stock.
Authorized Capital Stock
Upon consummation of the offering, our authorized capital stock will
consist of 50,000,000 shares of common stock and 5,000,000 shares of preferred
stock. Of the 50,000,000 shares of common stock authorized, 5,100,000 shares
have been reserved for issuance pursuant to our stock option plans and
2,346,000 have been reserved for issuance pursuant to warrants held by Freeman
Spogli.
Common Stock
Each share of our common stock is entitled to one vote on all matters
submitted to a vote of our stockholders. Subject to preferences that may be
applicable to any then outstanding preferred stock, holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
board of directors out of funds legally available therefor. See "Dividend
Policy."
In the event of a liquidation, dissolution or winding up of The Pantry,
holders of the common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding preferred stock or any class or series of stock ranking prior
to the common stock. There are no preemptive rights or redemption or sinking
fund provisions applicable to the shares of common stock. All outstanding
shares of common stock are, and the common stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
Preferred Stock
We intend to use $24.0 million of the proceeds of the offering to redeem
all shares of Series B preferred stock currently outstanding and pay accrued
dividends. However, the board of directors will have the authority, without
further action by the shareholders, to issue from time to time up to five
million shares of preferred stock in one or more series and to fix the number
of shares, designations, preferences, powers and relative participating,
optional or other special rights and the qualifications or restrictions
thereof. The issuance of preferred stock could decrease the amount of earnings
and assets available for distribution to holders of common stock or affect
adversely the rights and powers, including voting rights, of the holders of
common stock, and may have the effect of delaying, deferring or preventing a
change in control of The Pantry. We have no present plan to issue any shares of
preferred stock.
Common Stock Warrants
We have outstanding warrants to purchase a total of 2,346,000 shares of
common stock at a purchase price of $7.45 per share that will expire December
30, 2006. The warrants contain adjustment provisions in the event we declare
dividends or distributions, make stock splits or engage in mergers,
reorganizations or reclassifications. These warrants are held by Freeman
Spogli.
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Antitakeover Provisions
Charter and Bylaw Provisions. Upon consummation of the offering our
certificate of incorporation and bylaws will contain the following provisions
which may have the effect of preventing or hindering an unsolicited acquisition
or delaying removal of incumbent directors and officers:
. Preferred Stock. As noted above, our board of directors has the
authority to issue preferred stock with rights or preferences that
could impede the success of any attempt to change control of The
Pantry
. Action by Written Consent. Shareholders of The Pantry may not act by
written consent after such time as no person holds more than 25% of
the common stock
. Special Meetings. Special meetings of shareholders may only be called
by the board of directors, the Chairman of the Board or the President
of The Pantry
. Advance Notification. Advance notice is required in the bylaws with
respect to shareholder proposals and the nomination of candidates for
election of directors, other than nominations made by the board of
directors or a committee thereof
. Vacancies. Newly created directorships and vacancies in board seats
may be filled only by the board of directors prior to an annual
meeting of shareholders
. Amendments. Amendments to the provisions described above and to our
bylaws require approval of holders of at least 66% of the outstanding
shares
Delaware Antitakeover Statute. Our certificate of incorporation currently
provides that we are not subject to Section 203 of the Delaware General
Corporation Law. After consummation of the offering our certificate of
incorporation will provide that we will be subject to Section 203 after such
time as no person holds more than 25% of the common stock. Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless:
. prior to such date, the board of directors of the corporation
approves either the business combination or the transaction that
resulted in the stockholder's becoming an interested stockholder;
. upon consummation of the transaction that resulted in the
stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock,
excluding shares held by directors, officers and employee stock
plans; or
. on or after the consummation date the business combination is
approved by the board of directors and by the affirmative vote at an
annual or special meeting of stockholders of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
For purposes of Section 203, a "business combination" includes, among
other things, a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder, and an "interested
stockholder" is generally a person who, together with affiliates and associates
of such person:
. owns 15% or more of the corporation's voting stock; or
. is an affiliate or associate of the corporation and was the owner of
15% or more of the outstanding voting stock of the corporation at any
time within the prior three years.
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Transfer Agent and Registrar
The transfer agent and registrar for the common stock is First Union
National Bank.
Listing
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "PTRY."
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have outstanding 18,111,478
shares of common stock, assuming no exercise of options granted under our stock
option plans or of warrants held by Freeman Spogli. We have reserved 5,100,000
shares of common stock for issuance under our stock option plans, of which
options to purchase 576,861 shares are outstanding. We have also reserved
2,346,000 shares of common stock for issuance upon the exercise of the
warrants.
The shares of common stock sold in the offering will be freely tradable
without restriction or limitation under the Securities Act, except for any
shares held by our "affiliates," as defined under Rule 144 of the Securities
Act. Of our remaining 11,861,478 shares:
. 11,727,042 shares are "restricted securities," as defined under
Rule 144, that we issued and sold in private transactions and that
may be sold publicly only if registered under the Securities Act or
exempt from registration
. 134,436 shares that we sold to our employees in transactions
registered under the Securities Act are freely tradeable
Rule 144
In general, under Rule 144, as currently in effect, a person, including
an "affiliate" of The Pantry, who has beneficially owned "restricted
securities" for at least one year is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of:
. one percent of the then outstanding shares of common stock or
. the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding filing of notice of the sale
with the Securities and Exchange Commission
provided that we satisfy various manner of sale and notice requirements and
make available current public information about The Pantry.
Under Rule 144(k), a holder of "restricted securities" who is not an
"affiliate" of The Pantry who has beneficially owned shares for at least two
years would be entitled to sell shares under Rule 144(k) without regard to the
limitations described above. As defined under Rule 144, an "affiliate" of an
issuer is a person who directly or indirectly through the use of one or more
intermediaries controls, or is controlled by, or is under common control with,
the issuer. Freeman Spogli and Chase Capital (as over 10% shareholders) and our
directors and our executive officers may be considered our affiliates under
this definition.
Lock-Up Agreements
We and our executive officers and directors and all of our existing
stockholders have agreed not to sell or otherwise dispose of any shares of the
common stock for a period of 180 days after the date of this prospectus without
the prior written consent of Merrill Lynch.
Registration Rights Agreement
We have entered into a registration rights agreement with Freeman Spogli,
Chase Capital and Mr. Sodini obligating us:
. on up to three occasions at the request of holders of at least 50% of
the common stock held by the parties to the agreement, to register
the resale of all common stock held by the requesting holders
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. at any time commencing six months after this offering, to register
the resale of shares of common stock having a value of more than $5
million at the request of any party
. at any time, to allow any party to include shares in any registration
of common stock by us
Under the registration rights agreement, Freeman Spogli, Chase Capital
and Mr. Sodini have the right to purchase their pro rata portion of additional
shares issued by us. This right will terminate upon consummation of this
offering.
Registration Statement
We intend to register the shares of common stock issued, issuable or
reserved for issuance under the stock option plans as soon as practicable
following the date of this prospectus. These shares then will be freely
tradable in the open market, subject to the lock-up agreements described above
and, in the case of sales by "affiliates," to the requirements of Rule 144. As
of April 15, 1999, options to purchase approximately 285,991 shares of common
stock were vested, all of which will be subject to the 180-day lock-up period.
See "Management--Stock Option Plans."
Market Price
We cannot estimate the number of shares that may be sold in the future by
our stockholders or the effect that sales of shares by our stockholders will
have on the market price of the common stock. Sales of substantial amounts of
common stock, or the prospect of these sales, could materially adversely affect
the market price of the common stock.
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MATERIAL U.S. TAX CONSIDERATIONS APPLICABLE TO
NON-U.S. HOLDERS OF THE COMMON STOCK
The following discussion summarizes the material U.S. federal income and
estate tax consequences of the acquisition, ownership and disposition of the
common stock held by non-U.S. holders. A "non-U.S. holder" means a beneficial
owner of common stock who is not a U.S. holder. A U.S. holder means a
beneficial owner of common stock who, for U.S. federal income tax purposes, is
. A citizen or resident of the United States;
. A corporation, partnership or other entity created or organized in
the United States or under the laws of the United States or any of
its political subdivisions, other than a partnership treated as
foreign under U.S. Treasury regulations;
. An estate whose income is includable in gross income for United
States federal income tax purposes regardless of its source;
. A trust, if a United States court is able to exercise primary
supervision over the administration of the trust and one or more
United States persons have the authority to control all substantial
decisions of the trust; or
. A person whose worldwide income or gain is subject to U.S. federal
income tax on a net basis.
An individual may, among other ways, be deemed to be a resident of the
United States in any calendar year by virtue of being present in the United
States on at least 31 days in that calendar year and for an aggregate of at
least 183 days during the current calendar year and the two preceding calendar
years. For purposes of this calculation, you would count all of the days
present in the current year, one-third of the days present in the immediately
preceding year and one-sixth of the days present in the second preceding year.
This discussion is based upon the U.S. federal tax law now in effect.
This law could change, possibly retroactively, which could affect the continued
validity of this discussion.
The tax treatment of the holders of the common stock may vary depending
on their particular situation. The rules discussed below do not apply to U.S.
holders acquiring common stock. In addition, this discussion does not consider
special tax rules applicable to non-U.S. holders such as insurance companies,
tax-exempt organizations, financial institutions, subsequent purchasers of our
common stock, U.S. expatriates, traders in securities, and broker-dealers. This
discussion also does not consider the tax consequences for any person who is a
shareholder, partner or beneficiary of a holder of the common stock. Moreover,
the effect of any applicable state, local or foreign taxing jurisdiction is not
discussed.
In general, this discussion assumes that a non-U.S. holder holds the
common stock as a capital asset and not as part of a "hedge," "straddle,"
"conversion transaction," "synthetic security" or other integrated investment.
We urge prospective investors to consult their tax advisors regarding the U.S.
federal tax consequences of acquiring, holding and disposing of our common
stock, as well as any tax consequences that may arise under the laws of any
foreign, state, local or other taxing jurisdiction.
Dividends
As described above, we do not expect to pay dividends. However in the
event we pay dividends to a non-U.S. holder, we will be required to withhold a
U.S. withholding tax at a rate of 30%, or a lower rate under a relevant treaty,
from the gross amount of the dividend, unless the
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dividends are effectively connected with the conduct of a trade or business by
the non-U.S. holder within the United States. Prior to January 1, 2001, for
purposes of determining whether tax is to be withheld at the 30% rate or at a
reduced treaty rate, we ordinarily will presume that dividends paid to an
address in a foreign country are paid to a resident of that country. After
December 31, 2000, non-U.S. holders will have to satisfy certification
requirements in order for us to withhold tax at a reduced treaty rate. Non-U.S.
holders should consult their tax advisors regarding their entitlement to
benefits under a relevant income tax treaty.
Except as otherwise provided under an applicable income tax treaty,
dividends that are effectively connected with the conduct of a trade or
business in the United States are taxed on a net income basis at the rates and
in the manner applicable to United States persons. In such case, we would not
be required to withhold U.S. withholding tax if the holder complies with the
applicable certification and disclosure requirements. In addition, a "branch
profits tax" may be imposed at a 30% rate, or a lower rate as may be specified
by an applicable income tax treaty, on dividends received by a foreign
corporation that are effectively connected with the conduct of a trade or
business in the United States.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be taxed on gain recognized on a
disposition of the common stock unless:
. The gain is effectively connected with a trade or business of the
non-U.S. holder in the United States, or, alternatively, if a tax
treaty applies, is attributable to a permanent establishment
maintained by the non-U.S. holder in the United States. In these
cases, the gain will be taxed on a net income basis at the rates and
in the manner applicable to United States persons and, if the holder
is a foreign corporation, the branch profits tax described above may
also apply;
. In the case of a non-U.S. holder who is an individual and holds the
common stock as a capital asset, the holder is present in the United
States for 183 or more days in the taxable year of the sale and other
requirements are met, unless an applicable tax treaty provides
otherwise; or
. We are or have been a "United States real property holding
corporation" for U.S. federal income tax purposes at any time during
the shorter of the five-year period ending on the date of the
disposition and the period that the common stock was held by the non-
U.S. holder.
In general, we will be treated as a U.S. real property holding
corporation if the fair market value of our U.S. real property interests equals
or exceeds 50% of the total fair market value of our U.S. and non-U.S. real
property interests and our other assets used or held for use in a trade or
business. The determination of the fair market value of our assets and,
therefore, whether we are a U.S. real property holding corporation at any given
time will depend on the particular facts and circumstances applicable at the
time.
Currently, it is our best estimate that the fair market value of our U.S.
real property interests is approximately 50% of the fair market value of our
U.S. and non-U.S. real property interests and our other assets used or held for
use in our trade or business. Therefore, we believe that it is likely that we
currently are a U.S. real property holding corporation. Because the
determination of whether we are a U.S. real property holding corporation is
based on the fair market value of our U.S. real property interests and our
other assets, it is difficult to predict whether we will be a U.S. real
property holding corporation in the future.
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However, even if we are or have been a U.S. real property holding
corporation a "non-5% holder" that is not otherwise taxed under any other
circumstance described above will not be taxed on any gain realized on the
disposition of our common stock if, at any time during the calendar year of the
disposition, our common stock was regularly traded on an established securities
market. A non-5% holder is a non-U.S. holder that did not beneficially own,
directly or indirectly, more than 5% of the total fair market value of our
common stock at any time during the shorter of the five-year period ending on
the date of disposition and the period that the common stock was held by the
non-U.S. holder.
The common stock has been approved for quotation on the Nasdaq National
Market. Although the matter is not free from doubt, our common stock should be
considered to be regularly traded on an established securities market during
the time it is regularly quoted on Nasdaq. If the common stock were not
considered to be regularly quoted on Nasdaq and we are treated as a U.S. real
property holding corporation, then
. a non-5% holder would be taxed on any gain realized on the
disposition of its common stock on a net income basis at the rates
and in the manner applicable to United States persons and,
. the person acquiring the common stock from a non-5% holder generally
would be required to withhold a withholding tax at the rate of 10%
from the gross amount of the proceeds of the disposition. This
withholding tax may be reduced or eliminated by obtaining a
withholding certificate from the Internal Revenue Service in
accordance with applicable U.S. Treasury regulations.
All non-U.S. holders should consult their own tax advisors regarding
application of the foregoing rules to them.
Federal Estate Taxes
Common stock owned or treated as owned by a non-U.S. holder at the time
of death, or common stock of which the non-U.S. holder made lifetime transfers,
will be included in such holder's gross estate for U.S. federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
United States Information Reporting Requirements and Backup Withholding Tax
We must report annually to the Internal Revenue Service and to each non-
U.S. holder the amount of dividends paid to such holder and the tax withheld
from such dividends, regardless of whether any tax was actually withheld.
Copies of the information returns reporting the dividends and withholding may
also be made available to the tax authorities in the country in which the non-
U.S. holder resides under the provisions of an applicable income tax treaty.
United States backup withholding is a withholding tax imposed at the rate
of 31% on payments to persons that fail to furnish information under the United
States information reporting requirements. Additional information reporting
generally will not apply to dividends paid on the common stock before January
1, 2001, that we either
. Were required to withhold a withholding tax from; or
. Paid to an address outside the United States.
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After December 31, 2000, the gross amount of any dividend payment
generally will be reduced for backup withholding unless the non-U.S. holder
provides a Form W-8 or is a corporation or other exempt recipient.
In general, payment of the proceeds of a sale of common stock to or
through a United States office of a broker generally must be reduced for backup
withholding and reported to the Internal Revenue Service unless either
. The non-U.S. holder is a corporation or other exempt recipient; or
. The non-U.S. holder provides a Form W-8.
Payment of the proceeds of a sale of common stock to or through a foreign
office of a foreign broker generally will neither be reduced for backup
withholding nor reported to the Internal Revenue Service unless the foreign
broker is a "U.S. related person." In general, payments of proceeds from the
disposition of common stock to or through a foreign office of a foreign broker
that is a "U.S. related person" will be reported to the Internal Revenue
Service and, after December 31, 2000, may be reduced for backup withholding
unless the broker has documentary evidence in its files that the owner is a
non-U.S. holder.
For this purpose, a "U.S. related person" is:
. A United States person;
. A controlled foreign corporation for U.S. federal income tax
purposes; or
. A foreign person 50% or more of whose gross income is effectively
connected with a United States trade or business,
. After December 31, 2000, a foreign partnership if, at any time during
the taxable year, at least 50% of the interests in the partnership
are owned by United States persons or the partnership is engaged in a
U.S. trade or business.
Prospective investors should consult with their own tax advisors
regarding these rules, and in particular with respect to whether the use of a
particular broker would cause any payment to be reduced for backup withholding
or reported to the Internal Revenue Service.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules may be allowed as a refund or a credit against the
holder's U.S. federal income tax liability, provided the required information
is furnished to the Internal Revenue Service.
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America
Securities LLC and Goldman, Sachs & Co. are acting as representatives of each
of the underwriters named below. The Pantry and the underwriters have entered
into a purchase agreement in connection with this offering. Under this purchase
agreement The Pantry has agreed to sell to the underwriters, and each of the
underwriters has agreed to purchase from The Pantry, the number of shares of
common stock listed opposite its name below.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................... 1,520,000
Banc of America Securities LLC.................................. 1,520,000
Goldman, Sachs & Co. ........................................... 1,520,000
CIBC World Markets Corp. ....................................... 130,000
A.G. Edwards & Sons, Inc. ...................................... 130,000
PaineWebber Incorporated........................................ 130,000
Prudential Securities Incorporated.............................. 130,000
Wasserstein Perella Securities, Inc. ........................... 130,000
Robert W. Baird & Co. Incorporated.............................. 65,000
Branch, Cabell & Co. ........................................... 65,000
First Union Capital Markets Corp. .............................. 65,000
J.J.B. Hilliard, W.L. Lyons, Inc. .............................. 65,000
Hoak Breedlove Wesneski & Co. .................................. 65,000
Ladenburg Thalmann & Co. Inc. .................................. 65,000
McDonald Investments Inc. ...................................... 65,000
NatCity Investments, Inc. ...................................... 65,000
Raymond James & Associates, Inc. ............................... 65,000
The Robinson-Humphrey Company, LLC.............................. 65,000
Scott & Stringfellow, Inc. ..................................... 65,000
Southeast Research Partners, Inc. .............................. 65,000
Sterne, Agee & Leach, Inc. ..................................... 65,000
SunTrust Equitable Securities Corporation....................... 65,000
Wachovia Securities, Inc. ...................................... 65,000
B.C. Ziegler & Company.......................................... 65,000
---------
Total...................................................... 6,250,000
</TABLE>
In the purchase agreement, the underwriters have agreed to purchase all
of the shares of common stock being sold in this offering if any of the shares
of common stock being sold through the purchase agreement are purchased. If an
underwriter defaults and does not purchase common stock, the purchase agreement
provides that the purchase commitments of the nondefaulting underwriters may be
increased or the purchase agreement may be terminated.
The Pantry has agreed to indemnify the underwriters against liabilities,
including liabilities under the Securities Act. The Pantry has also agreed to
contribute to payments the underwriters may be required to make.
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Commissions and Discounts
The representatives have advised The Pantry that the underwriters propose
initially to offer the shares of common stock to the public at the initial
public offering price described on the cover page of this prospectus, and to
dealers at such price less a concession of up to $.52 per share of common
stock. The underwriters may allow, and dealers may reallow, a discount of up to
$.10 per share of common stock to other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The following table shows the per share and total public offering price,
underwriting discount to be paid by The Pantry to the underwriters and the
proceeds before expenses to The Pantry. This information is presented assuming
either no exercise or full exercise by the underwriters of their over-allotment
options.
<TABLE>
<CAPTION>
Per Without
Share Option With Option
----- ------- -----------
<S> <C> <C> <C>
Public offering price....................... $13.00 $81,250,000 $93,437,500
Underwriting discount....................... $.91 $5,687,500 $6,540,625
Proceeds, before expenses, to The Pantry.... $12.09 $75,562,500 $86,896,875
</TABLE>
The expenses of the offering, not including the underwriting discount,
are estimated at $1.0 million and are payable by The Pantry.
The offering is subject to customary closing conditions, including
delivery of legal opinions and certificates. The underwriters reserve the right
to withdraw, cancel or modify offers of the common stock and to reject all or
part of orders.
Over-allotment Options
The Pantry has granted options to the underwriters, exercisable for 30
days after the date of this prospectus, to purchase up to 937,500 additional
shares of common stock at the public offering price described on the cover page
of this prospectus, less the underwriting discount. The underwriters may
exercise these options only to cover over-allotments, if any, made on the sale
of the common stock. To the extent that the underwriters exercise these
options, each underwriter will be obligated, subject to customary closing
conditions, to purchase a number of additional shares of common stock
proportionate to such underwriter's initial amount reflected in the above
table.
Reserved Shares
At the request of The Pantry, the underwriters have reserved for sale, at
the initial public offering price, up to 5% of the shares to be sold to
directors, officers, employees, business associates and related persons of The
Pantry. The number of shares of common stock available for sale to the general
public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares which are not orally confirmed for purchase within
one day of the pricing of the offering will be offered by the underwriters to
the general public on the same terms as the other shares offered to the public.
No Sales of Similar Securities
The Pantry and its executive officers and directors and all existing
shareholders have agreed not to sell or transfer any of their shares of common
stock for 180 days after the date of the
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prospectus unless they first obtain the written consent of Merrill Lynch. In
particular, The Pantry and all of these individuals have agreed that they will
not directly or indirectly
. offer, pledge, sell or contract to sell any of the common stock
. sell any option or contract to purchase the common stock
. purchase any option or contract to sell the common stock
. grant any option, right or warrant for the sale of the common stock
. request or demand that The Pantry file a registration statement related
to the common stock
. enter into any agreement or transaction that transfers all or any part of
the ownership of the common stock
This lockup provision applies to common stock as well as any securities
which are convertible into or exchangeable or exercisable for common stock. The
provision applies to common stock currently held as well as common stock
acquired in the future.
However, a shareholder may without the consent of Merrill Lynch transfer
the common stock to trusts or similar entities for estate planning purposes or
to affiliates as defined in Rule 144 as long as any transferee agrees in
writing to be bound by the terms of the lockup agreement. See "Shares Eligible
for Future Sale."
Nasdaq National Market Listing
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "PTRY."
Initial Public Offering Price
Prior to the offering, there has been no public market for the common
stock of The Pantry. The initial public offering price was determined through
negotiations between The Pantry and the representatives. The factors considered
in determining the initial public offering price, in addition to prevailing
market conditions, are
. price-earnings ratios of publicly traded companies that the
representatives believe to be comparable to The Pantry
. financial information of The Pantry
. the history of, and the prospects for, The Pantry and the industry in
which it competes
. an assessment of its management, its past and present operations, the
prospects for, and timing of, future revenue of The Pantry, and the
present state of its development
An active trading market may not develop for the common stock and the
common stock may not trade in the public market subsequent to the offering at
or above the initial public offering price.
Qualified Independent Underwriter
We will use part of the proceeds of the offering to repay our debt.
Because more than ten percent of the net proceeds of the offering may be paid
to members or affiliates of members of the National Association of Securities
Dealers, Inc. participating in the offering as an underwriter or selling group
member, the offering will be conducted in accordance with NASD Conduct
Rule 2710(c)(8). This rule requires that the public offering price of an equity
security be no higher than the price recommended by a qualified independent
underwriter which has participated in the
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preparation of the registration statement and performed its usual standard of
due diligence. Merrill Lynch, Pierce, Fenner & Smith Incorporated has agreed to
act as qualified independent underwriter with respect to the offering. The
price of the common stock will be no higher than the price recommended by
Merrill Lynch.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters to
bid for and purchase the common stock. As an exception to these rules, the
representatives of the underwriters are permitted to engage in transactions
that stabilize the price of the common stock. Such stabilizing transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common stock.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares of common stock
than are listed on the cover page of this prospectus, the representatives may
reduce that short position by purchasing common stock in the open market. The
representatives may also elect to reduce any short position by exercising all
or part of the over-allotment options described above.
The representatives may also impose a penalty bid on other underwriters
and selling group members. This means that if the representatives purchase
shares of common stock in the open market to reduce the underwriters' short
position or to stabilize the price of the common stock, they may reclaim the
amount of the selling concession from the underwriters and selling group
members who sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of the common stock to the extent
that it discourages resales of the common stock.
Neither The Pantry nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the common stock. In
addition, The Pantry and the underwriters cannot assure you that the
representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
The Pantry by Riordan & McKinzie, a Professional Corporation, Los Angeles,
California and for the Underwriters by Fried, Frank, Harris, Shriver & Jacobson
(a partnership including professional corporations), New York, New York.
Principals and employees of Riordan & McKinzie are limited partners in a
partnership which is a limited partner of a Freeman Spogli investment fund that
owns a majority of The Pantry's equity interests. See "Principal Shareholders."
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EXPERTS
The consolidated financial statements of The Pantry, Inc. as of September
25, 1997 and September 24, 1998 and for each of the three years in the period
ended September 24, 1998, included in the prospectus, and the related financial
statement schedule included elsewhere in the registration statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports (which include an explanatory paragraph relating to the adoption of
statement of Financial Accounting Statements No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of)
appearing herein and elsewhere in the registration statement, and have been so
included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
The financial statements of Lil' Champ Food Stores, Inc. as of December
30, 1995 and December 28, 1996 and for the years then ended, included in the
prospectus, have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report appearing herein, and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The financial statements of Quick Stop Food Mart, Inc. as of December 31,
1996 and 1997 and for each of the three years in the period ended December 31,
1997 included in this prospectus have been audited by Cherry, Bekaert &
Holland, L.L.P., independent auditors, as stated in their report appearing
herein, and have been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The financial statements of Express Stop, Inc. as of December 31, 1997
and the year then ended included in this prospectus have been audited by
Griffin, Maxwell & Frazelle, P.A., independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
The financial statements of Taylor Oil Company as of December 31, 1997
and 1998 and for each of the three years in the period ended December 31, 1998
included in this prospectus have been audited by Edwards, Falls & Renegar,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The combined financial statements of Miller Enterprises, Inc. and
Peninsular Petroleum Company as of April 2, 1997 and April 1, 1998 and for each
of the three years ended March 27, 1996, April 2, 1997 and April 1, 1998
included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing.
The statement of net assets acquired from Miller Brothers and Circle
Investments, Ltd. as of January 28, 1999 of The Pantry, Inc. included in this
prospectus has been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein, and has been so included in reliance
upon the report of such firm given their authority as experts in accounting and
auditing.
111
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
The Pantry has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the common stock. This prospectus
does not contain all of the information set forth in the Registration
Statement, portions of which are omitted as permitted by the rules and
regulations of the Commission. For further information pertaining to The Pantry
and the common stock, reference is made to the Registration Statement,
including the exhibits thereto and the financial statements, notes and
schedules filed as a part thereof. Statements contained in this prospectus
concerning the provisions of documents are necessarily summaries of the
material provisions of such documents, and prospective investors are referred
to the copy of the applicable document filed with the Commission.
The Pantry currently files periodic reports in accordance with the
Securities Exchange Act with the Commission. Upon consummation of the offering
The Pantry will be subject to the information and periodic reporting
requirements of the Securities Exchange Act and will file periodic reports,
proxy statements and other information, with the Commission. You may read and
copy any document we file, at the Commission's public reference facility at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the Commission at 1-800-SEC-0330. In addition, the Commission maintains
an Internet site that contains reports, proxy and information statements, and
other information, regarding issuers that file electronically with the
Commission. The address of the Commission's site is http://www.sec.gov.
112
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
THE PANTRY, INC.:
Independent Auditors' Report............................................ F-3
Consolidated Balance Sheets as of September 25, 1997 and September 24,
1998, and March 25, 1999 (unaudited)................................... F-4
Consolidated Statements of Operations for the years ended September 26,
1996, September 25, 1997 and September 24, 1998, and the six months
ended March 26, 1998 and March 25, 1999 (unaudited).................... F-6
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the years ended September 26, 1996, September 25, 1997 and September
24, 1998, and the six months ended March 25, 1999 (unaudited).......... F-7
Consolidated Statements of Cash Flows for the years ended September 26,
1996, September 25, 1997 and September 24, 1998, and the six months
ended March 26, 1998 and March 25, 1999 (unaudited).................... F-8
Notes to Consolidated Financial Statements.............................. F-10
LIL' CHAMP FOOD STORES, INC.:
Independent Auditors' Report............................................ F-56
Balance Sheets as of December 30, 1995 and December 28, 1996, and
September 27, 1997 (unaudited)......................................... F-57
Statements of Operations for the years ended December 30, 1995 and
December 28, 1996, and the nine months ended September 28, 1996 and
September 27, 1997 (unaudited)......................................... F-58
Statements of Shareholder's Equity for the years ended December 30, 1995
and December 28, 1996, and the nine months September 27, 1997
(unaudited)............................................................ F-59
Statements of Cash Flows for the years ended December 30, 1995 and
December 28, 1996, and the nine months ended September 28, 1996 and
September 27, 1997 (unaudited)......................................... F-60
Notes to Financial Statements........................................... F-61
QUICK STOP FOOD MART, INC.:
Report of Independent Certified Public Accountants...................... F-72
Balance Sheets as of December 31, 1996 and 1997, and June 30, 1998
(unaudited)............................................................ F-73
Statements of Income for the years ended December 31, 1995, 1996 and
1997, and the six months ended June 30, 1997 and 1998 (unaudited)...... F-74
Statements of Stockholders' Equity for the years ended December 31,
1995, 1996 and 1997, and the six months ended June 30, 1998
(unaudited)............................................................ F-75
Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997, and the six months ended June 30, 1997 and 1998 (unaudited)...... F-76
Notes to Financial Statements........................................... F-77
EXPRESS STOP, INC.:
Report of Independent Auditors.......................................... F-84
Balance Sheets as of December 31, 1997 and September 30, 1998
(unaudited)............................................................ F-85
Statements of Income for the year ended December 31, 1997, and the nine
months ended September 30, 1997 and 1998 (unaudited)................... F-86
Statements of Retained Earnings for the year ended December 31, 1997,
and the nine months ended September 30, 1997 and 1998 (unaudited)...... F-87
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C>
Statements of Cash Flows for the year ended December 31, 1997, and the
nine months ended September 30, 1997 and 1998 (unaudited)............. F-88
Notes to Financial Statements.......................................... F-89
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
Report of Independent Certified Public Accountants..................... F-96
Combined Balance Sheets as of April 2, 1997 and April 1, 1998, and
December 30, 1998..................................................... F-97
Combined Statements of Income for the years ended March 27, 1996, April
2, 1997, April 1, 1998 and for the nine months ended December 25, 1997
and December 30, 1998................................................. F-98
Combined Statements of Stockholders' Equity for the years ended March
27, 1996, April 2, 1997, and April 1, 1998............................ F-99
Combined Statements of Cash Flows for the years ended March 27, 1996,
April 2, 1997, and April 1, 1998, and for the nine months ended
December 25, 1997, and December 30, 1998.............................. F-100
Notes to Combined Financial Statements................................. F-101
STATEMENT OF NET ASSETS ACQUIRED FROM MILLER BROTHERS AND CIRCLE
INVESTMENTS, LTD.
Independent Auditors' Report........................................... F-110
Statement of Net Assets Acquired from Miller Brothers and Circle
Investments, Ltd. as of January 28, 1999.............................. F-111
Notes to Statement of Net Assets Acquired.............................. F-112
TAYLOR OIL COMPANY:
Independent Auditors' Report........................................... F-113
Statement of Assets Sold .............................................. F-114
Statements of Income from Retail Operations for the years ended
December 31, 1996, 1997 and 1998...................................... F-115
Statements of Cash Flows from Retail Operations for the years ended
December 31, 1996, 1997 and 1998...................................... F-116
Notes to Financial Statements.......................................... F-117
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders of
The Pantry, Inc.
Sanford, North Carolina
We have audited the accompanying consolidated balance sheets of The
Pantry, Inc. and subsidiaries as of September 25, 1997 and September 24, 1998,
and the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the three years in the period ended
September 24, 1998. These financial statements are the responsibility of The
Pantry's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Pantry, Inc. and
subsidiaries as of September 25, 1997 and September 24, 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended September 24, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, in
fiscal 1996 The Pantry adopted Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of.
Raleigh, North Carolina
December 18, 1998 (June 4, 1999 as to the first paragraph of Note 12)
F-3
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited as to March 25, 1999 information)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 25, September 24, March 25,
1997 1998 1999
------------- ------------- -----------
(Unaudited)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 3,347 $ 34,404 $ 24,999
Receivables (net of allowance for
doubtful accounts of $150 at
September 25, 1997; $280 at
September 24, 1998 and $395 at March
25, 1999)............................ 2,101 9,907 14,829
Inventories (Note 3).................. 17,161 47,809 61,378
Income taxes receivable (Note 6)...... -- 488 4,581
Prepaid expenses...................... 1,204 2,216 2,634
Property held for sale................ 3,323 3,761 82
Deferred income taxes, net (Note 6)... 1,142 3,988 4,133
-------- -------- --------
Total current assets............... 28,278 102,573 112,636
-------- -------- --------
Property and equipment, net (Notes 4,
5, 7 and 10).......................... 77,986 300,978 405,727
-------- -------- --------
Other assets:
Goodwill (net of accumulated
amortization of $9,705 at September
25, 1997, $11,940 at September 24,
1998 and $13,854 at March 25, 1999)
(Notes 2 and 10)..................... 20,318 120,025 169,431
Deferred lease costs (net of
accumulated amortization of $8,956
at September 25, 1997, 9,001 at
September 24, 1998 and $9,024 at
March 25, 1999) ..................... 314 269 247
Deferred financing costs (net of
accumulated amortization of $4,345
at September 25, 1997, $4,871 at
September 24, 1998 and $5,840 at
March 25, 1999) (Note 5)............. 4,578 14,545 13,130
Environmental receivables (Note 8).... 6,511 13,187 12,732
Deferred income taxes (Note 6)........ 156 -- --
Escrow for Lil' Champ acquisition
(Note 2)............................. 4,049 -- --
Other................................. 609 3,243 9,027
-------- -------- --------
Total other assets................. 36,535 151,269 204,567
-------- -------- --------
Total assets........................... $142,799 $554,820 $722,930
======== ======== ========
</TABLE>
F-4
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS--(Continued)
(Unaudited as to March 25, 1999 information)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 25, September 24, March 25,
1997 1998 1999
------------- ------------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
-----------------------------
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt (Note
5)....................................... $ 33 $ 45 $ 5,431
Current maturities of capital lease
obligations (Note 7)..................... 285 1,240 1,240
Accounts payable:
Trade................................... 16,035 49,559 66,280
Money orders............................ 3,022 5,181 7,965
Accrued interest (Note 5)................. 4,592 11,712 10,794
Accrued compensation and related taxes.... 3,323 6,719 7,862
Income taxes payable (Note 6)............. 296 -- --
Other accrued taxes....................... 2,194 7,007 8,538
Accrued insurance......................... 3,887 5,745 8,501
Other accrued liabilities................. 2,856 24,348 30,861
-------- -------- --------
Total current liabilities............. 36,523 111,556 147,472
-------- -------- --------
Long-term debt (Note 5)..................... 100,305 327,269 454,277
-------- -------- --------
Other noncurrent liabilities:
Environmental costs (Note 8).............. 7,806 17,137 17,185
Deferred income taxes (Note 6)............ -- 20,366 23,414
Capital lease obligations (Note 7)........ 679 12,129 11,498
Employment obligations.................... 1,341 934 749
Accrued dividends on preferred stock
(Notes 2 and 13)......................... 7,958 4,391 5,837
Other..................................... 6,060 21,734 26,052
-------- -------- --------
Total other non-current liabilities... 23,844 76,691 84,735
-------- -------- --------
Commitments and contingencies (Notes 5, 7, 8
and 15)....................................
Shareholders' Equity (Deficit):
Preferred stock, $.01 par value, 150,000
shares authorized; 43,499 issued and
outstanding at September 25, 1997 and
17,500 issued and outstanding at
September 24, 1998 and March 25, 1999
(aggregate liquidation value: September
25, 1997--$43,499; September 24, 1998 and
March 25, 1999--$17,500) (Notes 2 and 13) -- -- --
Common stock, $.01 par value, 300,000
shares authorized (50,000,000 authorized
after stock split); 5,815,479 issued and
outstanding at September 25, 1997,
11,704,857 issued and outstanding at
September 24, 1998 and 11,861,478 issued
and outstanding at March 25, 1999
(Note 12)................................ 58 117 119
Additional paid-in capital................ 5,339 68,939 70,727
Shareholder loans......................... -- (215) (937)
Accumulated deficit....................... (23,270) (29,537) (33,463)
-------- -------- --------
Total shareholders' equity (deficit).. (17,873) 39,304 36,446
-------- -------- --------
Total liabilities and shareholders' equity
(deficit).................................. $142,799 $554,820 $722,930
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
March 26, March 25,
September 26, September 25, September 24, 1998 1999
1996 1997 1998 (Unaudited) (Unaudited)
------------- ------------- ------------- ----------- -----------
(52 weeks) (52 weeks) (52 weeks) (26 weeks) (26 weeks)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $188,091 $202,440 $460,798 $193,765 $303,962
Gasoline sales........ 192,737 220,166 509,958 215,718 360,917
Commissions........... 3,979 4,787 14,128 6,358 10,520
-------- -------- -------- -------- --------
Total revenues....... 384,807 427,393 984,884 415,841 675,399
-------- -------- -------- -------- --------
Cost of sales:
Merchandise........... 125,979 132,846 303,968 126,865 204,825
Gasoline.............. 167,610 197,268 447,565 190,324 314,633
-------- -------- -------- -------- --------
Total cost of sales.. 293,589 330,114 751,533 317,189 519,458
-------- -------- -------- -------- --------
Gross profit............ 91,218 97,279 233,351 98,652 155,941
-------- -------- -------- -------- --------
Operating expenses:
Store expenses........ 57,841 60,208 140,089 61,853 95,215
General and
administrative
expenses............. 17,751 16,796 32,761 15,532 22,356
Merger integration
costs (Note 2)....... -- -- 1,016 -- --
Restructuring charges
(Note 11)............ 1,560 -- -- -- --
Impairment of long-
lived assets
(Note 10)............ 3,034 -- -- -- --
Depreciation and
amortization......... 9,158 9,504 27,642 11,775 17,830
-------- -------- -------- -------- --------
Total operating
expenses............ 89,344 86,508 201,508 89,160 135,401
-------- -------- -------- -------- --------
Income from operations.. 1,874 10,771 31,843 9,492 20,540
-------- -------- -------- -------- --------
Other income (expense):
Interest expense...... (11,992) (13,039) (28,946) (12,851) (18,873)
Miscellaneous......... (660) 1,293 1,776 774 128
-------- -------- -------- -------- --------
Total other expense.. (12,652) (11,746) (27,170) (12,077) (18,745)
-------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary loss..... (10,778) (975) 4,673 (2,585) 1,795
Income tax benefits
(expense) (Note 6)..... 2,664 -- -- 916 (718)
-------- -------- -------- -------- --------
Income (loss) before
extraordinary loss..... (8,114) (975) 4,673 (1,669) 1,077
Extraordinary loss (Note
5)..................... -- -- (7,998) (6,800) (3,557)
-------- -------- -------- -------- --------
Net loss................ (8,114) (975) (3,325) (8,469) (2,480)
Preferred dividends..... (2,654) (5,304) (2,942) (1,586) (1,446)
-------- -------- -------- -------- --------
Net loss applicable to
common shareholders.... $(10,768) $ (6,279) $ (6,267) $(10,055) $ (3,926)
======== ======== ======== ======== ========
Earnings per share (Note
16):
Basic:
Income (loss) before
extraordinary loss.. $ (1.89) $ (1.08) $ 0.18 $ (0.36) $ (0.03)
Extraordinary loss... $ -- $ -- $ (0.82) $ (0.77) $ (0.30)
Net income (loss).... $ (1.89) $ (1.08) $ (0.64) $ (1.13) $ (0.33)
Diluted:
Income (loss) before
extraordinary loss.. $ (1.89) $ (1.08) $ 0.16 $ (0.36) $ (0.03)
Extraordinary loss... $ -- $ -- $ (0.73) $ (0.77) $ (0.30)
Net income (loss).... $ (1.89) $ (1.08) $ (0.57) $ (1.13) $ (0.33)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT)
(Unaudited as to Six Months Ended March 25, 1999 information)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------- ------------------------ Paid in
Shares Par Value Shares Par Value Capital
-------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, September 28,
1995................... -- $ -- 5,100,000 $ 51 $ 6,948
Net loss................ -- -- -- -- --
Issuances of common and
preferred stock........ 25,999 -- 715,479 7 (453)
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ---------- -------- --------
Balance, September 26,
1996................... 25,999 -- 5,815,479 58 6,495
Net loss................ -- -- -- -- --
Net proceeds from stock
issue.................. 17,500 -- -- -- 15,953
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ---------- -------- --------
Balance, September 25,
1997................... 43,499 -- 5,815,479 58 22,448
-------- -------- ---------- -------- --------
Net loss................ -- -- -- -- --
Issuances of common
stock.................. -- -- 5,889,378 59 57,092
Contribution of Series A
Preferred Stock and
related dividends to
Additional Paid in
Capital................ (25,999) -- -- -- 6,508
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ---------- -------- --------
Balance, September 24,
1998................... 17,500 -- 11,704,857 117 86,048
Net income.............. -- -- -- -- --
Issuances of common
stock.................. -- -- 156,621 2 1,788
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ---------- -------- --------
Balance, March 25,
1999................... 17,500 $ -- 11,861,478 $ 119 $ 87,836
======== ======== ========== ======== ========
<CAPTION>
Total
Additional
Paid in Shareholder Accumulated
Other(1) capital Loans Deficit Total
-------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, September 28,
1995................... $(17,109) $(10,161) $ -- $ (6,223) $(16,333)
Net loss................ -- -- -- (8,114) (8,114)
Issuances of common and
preferred stock........ -- (453) -- -- (446)
Dividends on preferred
stock.................. -- -- -- (2,654) (2,654)
-------- -------- ---------- -------- --------
Balance, September 26,
1996................... (17,109) (10,614) -- (16,991) (27,547)
Net loss................ -- -- -- (975) (975)
Net proceeds from stock
issue.................. -- 15,953 -- -- 15,953
Dividends on preferred
stock.................. -- -- -- (5,304) (5,304)
-------- -------- ---------- -------- --------
Balance, September 25,
1997................... (17,109) 5,339 -- (23,270) (17,873)
-------- -------- ---------- -------- --------
Net loss................ -- -- -- (3,325) (3,325)
Issuances of common
stock.................. -- 57,092 (215) -- 56,936
Contribution of Series A
Preferred Stock and
related dividends to
Additional Paid in
Capital................ -- 6,508 -- -- 6,508
Dividends on preferred
stock.................. -- -- -- (2,942) (2,942)
-------- -------- ---------- -------- --------
Balance, September 24.
1998................... (17,109) 68,939 (215) (29,537) 39,304
-------- -------- ---------- -------- --------
Net loss................ -- -- -- (2,480) (2,480)
Issuances of common
stock.................. -- 1,788 (722) -- 1,068
Dividends on preferred
stock.................. -- -- -- (1,446) (1,446)
-------- -------- ---------- -------- --------
Balance, March 25,
1999................... $(17,109) $ 70,727 $ (937) $(33,463) $ 36,446
======== ======== ========== ======== ========
</TABLE>
- --------
(1) Represents excess of amount paid in 1987 leveraged buy-out over net book
value for "carry over" shareholders. See Note 1.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
----------------------------------------- -----------------------
March 26, March 25,
September 26, September 25, September 24, 1998 1999
1996 1997 1998 (Unaudited) (Unaudited)
------------- ------------- ------------- ----------- -----------
(52 weeks) (52 weeks) (52 weeks) (26 weeks) (26 weeks)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss................ $(8,114) $ (975) $ (3,325) $ (8,469) $ (2,480)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Extraordinary loss..... -- -- 2,006 6,800 3,405
Impairment of long-
lived assets.......... 3,034 -- -- -- --
Depreciation and
amortization.......... 9,158 9,504 27,642 11,775 17,830
Provision for deferred
income taxes.......... (1,558) 371 138 (1,415) 120
(Gain) loss on sale of
property and
equipment............. 470 (1,054) 531 209 (410)
Provision for
environmental
expenses.............. 512 1,574 6,181 57 48
Provision for closed
stores................ 673 (11) 50 -- --
Write-off of property
held for sale......... 168 -- -- -- --
Changes in operating
assets and liabilities,
net of effects of
acquisitions:
Receivables............ (539) (527) (8,512) (3,758) (948)
Inventories............ (937) (2,273) (4,518) (781) (4,628)
Prepaid expenses....... 20 (429) 390 879 (18)
Other non-current
assets................ 432 (4,295) 5,111 5,366 (2,216)
Accounts payable....... 2,104 603 13,896 1,397 7,911
Other current
liabilities and
accrued expenses...... (639) 3,393 2,241 1,559 (5,686)
Employment
obligations........... (255) (698) (407) (185) (185)
Other noncurrent
liabilities........... 886 2,155 6,608 4,218 662
------- -------- --------- --------- ---------
Net cash provided by
operating activities... 5,415 7,338 48,032 17,652 13,405
------- -------- --------- --------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale.......... (4,050) (1,828) (5,203) (2,648) (93)
Additions to property
and equipment.......... (7,084) (14,749) (43,153) (17,814) (23,166)
Proceeds from sale of
property held for
sale................... 2,462 1,345 4,807 2,025 1,495
Proceeds from sale of
property and
equipment.............. 1,468 2,315 7,648 682 376
Acquisitions of related
businesses, net of cash
acquired............... -- (12,162) (250,592) (145,398) (129,900)
------- -------- --------- --------- ---------
Net cash used in
investing activities... (7,204) (25,079) (286,493) (163,153) (151,288)
------- -------- --------- --------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases... (347) (303) (1,424) (577) (631)
Proceeds from issuance
of capital leases...... -- -- 1,086 -- --
Principal repayments of
long-term debt......... (20) (26) (51,543) (57,009) (143,999)
Net proceeds from
issuance of long-term
debt................... -- 200 278,508 209,022 275,000
Net proceeds from equity
issues................. -- 15,953 56,935 31,936 1,068
Other financing costs... (3,505) (74) (14,044) (12,674) (2,960)
------- -------- --------- --------- ---------
Net cash provided by
(used in) financing
activities............. (3,872) 15,750 269,518 170,698 128,478
------- -------- --------- --------- ---------
Net increase (decrease)
in cash................ (5,661) (1,991) 31,057 25,197 (9,405)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD.... 10,999 5,338 3,347 3,347 34,404
------- -------- --------- --------- ---------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD ................ $ 5,338 $ 3,347 $ 34,404 $ 28,544 $ 24,999
======= ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended Six Months Ended
----------------------------------------- -----------------------
March 26, March 25,
September 26, September 25, September 24, 1998 1999
1996 1997 1998 (unaudited) (unaudited)
------------- ------------- ------------- ----------- -----------
(26 weeks) (26 weeks)
<S> <C> <C> <C> <C> <C>
Cash paid (refunded)
during the year:
Interest.............. $12,719 $12,863 $21,826 $6,570 $19,791
======= ======= ======= ====== =======
Taxes................. $ (403) $ (917) $ 784 $ 670 $ 302
======= ======= ======= ====== =======
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1997 and 1998, The Pantry entered into several business
acquisitions and divestitures. See Note 2--Business Acquisitions and Note 12--
Common Stock. In connection with the Lil' Champ acquisition, the holders of The
Pantry's Series A preferred stock contributed all outstanding shares of Series
A preferred stock and related accrued and unpaid dividends to the capital of
The Pantry, resulting in an increase in paid in capital of $6,508.
F-9
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited as to March 26, 1998 and March 25, 1999 information)
NOTE 1--HISTORY OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Pantry
The consolidated financial statements include the accounts of The Pantry,
Inc. and its wholly-owned subsidiaries, Sandhills, Inc., Lil' Champ Food
Stores, Inc., and its wholly-owned subsidiary, Miller Enterprises Inc., Global
Communications, Inc., PH Holding Corporation and PH Holding's wholly-owned
subsidiaries, TC Capital Management, Inc. and Pantry Properties, Inc. All
intercompany transactions and balances have been eliminated in consolidation.
The Pantry owns and operates approximately 1,149 convenience stores in North
Carolina, South Carolina, Florida, Tennessee, Kentucky, Indiana and Virginia.
Prior to November 2, 1993, The Pantry was a wholly-owned subsidiary of
Montrose Pantry Acquisition Corporation, an entity formed to affect the 1987
leveraged buy-out of The Pantry. On November 2, 1993, The Pantry was merged
into Montrose and Montrose's name was changed to The Pantry. Montrose had no
assets or operations other than its investment in The Pantry.
On November 30, 1995, Freeman Spogli & Co. Incorporated, through its
affiliates, FS Equity Partners III, L.P., and FS Equity Partners International,
L.P., acquired a 39.9% interest in The Pantry and Chase Manhattan Capital
Corporation acquired a 12.0% interest in The Pantry through a series of
transactions which included the purchase of common stock from certain
shareholders and the purchase of newly issued common and preferred stock. The
Freeman Spogli entities and Chase Capital subsequently acquired the remaining
interests of approximately 37.0% and 11.1%, respectively, on August 19, 1996
through the purchase of common and preferred stock from certain shareholders.
On December 30, 1996, the Freeman Spogli entities purchased additional
preferred stock of The Pantry.
On October 23, 1997, The Pantry acquired 100% of the outstanding common
stock of Lil' Champ from Docks U.S.A., Inc. Also during fiscal 1998, The Pantry
acquired several smaller convenience store chains. See 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.
Unaudited Financial Statements--Information subsequent to December 18,
1998 (the date of our independent auditors' report) is unaudited (except for
the first paragraph of Note 12, for which the auditor's report is dated June 4,
1999). In the opinion of management, the unaudited consolidated balance sheet
at March 25, 1999, and the unaudited consolidated statements of operations,
shareholders' equity, and cash flows for the six months ended March 26, 1998
and March 25, 1999 include all adjustments, which include only normal recurring
adjustments, necessary to present the financial position and results of
operations and cash flows for the periods then ended in accordance with
generally accepted accounting principles.
The results of operations for the six months ended March 25, 1999 and
March 26, 1998 are not necessarily indicative of results to be expected for the
full fiscal years. The results of operations and comparisons with prior and
subsequent interim periods are materially impacted by the results of operations
of businesses acquired since September 25, 1997. These acquisitions have been
accounted for under the purchase method. See "Note 2--Businesses Acquisitions."
Furthermore, the
F-10
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
convenience store industry in The Pantry's marketing areas experiences higher
levels of revenues and profit margins during the summer months than during the
winter months. Historically, The Pantry has achieved revenues and earnings in
its third and fourth quarters.
Acquisition Accounting
Montrose acquired all of The Pantry's common stock in a leveraged buy-
out as of August 13, 1987. Certain individuals and entities which held an
ownership interest in The Pantry retained approximately 45% of ownership
interest after the August 13, 1987 transaction. A new basis of accounting was
established as a result of the acquisition to the extent of the "new" equity
interests, 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.
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.
F-11
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
Estimated useful lives for financial statement purposes are as follows:
<TABLE>
<S> <C>
Buildings............................................. 20 to 33 1/2 years
Gasoline equipment.................................... 7 to 10 years
Other equipment, furniture and fixtures............... 3 to 10 years
Automobiles........................................... 3 to 5 years
</TABLE>
Upon sale or retirement of depreciable assets, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is
recognized. Leased buildings capitalized in accordance with 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 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.
F-12
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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, fiscal year 1998, and the six months ended March 25, 1999 were $9.0
million, $20.7 million, and $18.7 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.
. 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.
F-13
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
. 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.
Sales and cost of sales included $61,129,000 and $130,219,000 of such
taxes for the six months ended March 26, 1998 and March 25, 1999, respectively
(unaudited).
Advertising costs
Advertising costs are expensed as incurred. Advertising expense was
approximately $1,047,000, $581,000 and $1,019,000 for fiscal 1996, 1997 and
1998, respectively.
Stock Based Compensation
The Pantry's stock option plan is accounted for in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. The Pantry follows the disclosure requirements of 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.
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
F-14
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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 during the three months ended December 24, 1998 did not have an impact on
The Pantry's net income or stockholder's equity as The Pantry had no
differences between net loss and comprehensive income.
In June 1998, the Financial Accounting Standards Board issued 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 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.
F-15
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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.
F-16
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The purchase prices have been allocated to the assets purchased and the
liabilities assumed based upon the fair values on the dates of the
acquisitions, as follows (amounts in thousands):
<TABLE>
<CAPTION>
Stallings,
Quick Stop
Lil' Champ and Others Total
---------- ---------- --------
<S> <C> <C> <C>
ASSETS ACQUIRED:
Receivables, net............................... $ 1,617 $ 2,100 $ 3,717
Inventories.................................... 20,113 8,758 28,871
Deferred income taxes.......................... 2,992 -- 2,992
Prepaid expenses and other current assets...... 1,402 -- 1,402
Property and equipment......................... 155,382 48,682 204,064
Other noncurrent assets........................ 3,696 -- 3,696
-------- -------- --------
Total assets acquired.......................... 185,202 59,540 244,742
-------- -------- --------
LIABILITIES ASSUMED:
Short-term capital lease obligations........... 1,027 -- 1,027
Accounts payable--trade........................ 10,870 228 11,098
Other liabilities and accrued expenses......... 36,093 -- 36,093
Long-term capital lease obligations............ 11,716 -- 11,716
Environmental remediation liabilities.......... 3,150 -- 3,150
Noncurrent deferred income taxes............... 20,530 -- 20,530
Other noncurrent liabilities................... 8,070 996 9,066
-------- -------- --------
Total liabilities assumed...................... 91,456 1,224 92,680
-------- -------- --------
Net tangible assets acquired................... 93,746 58,316 152,062
Goodwill....................................... 42,622 55,908 98,530
-------- -------- --------
Total consideration paid, including direct
costs, net of cash acquired................... $136,368 $114,224 $250,592
======== ======== ========
</TABLE>
The Stallings and Quick Stop purchase price allocations are preliminary
estimates, based on available information, 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.
Fiscal 1999 Acquisitions (Unaudited):
Subsequent to September 24, 1998, The Pantry acquired the businesses
described below, which were accounted for by the purchase method of accounting:
. The October 22, 1998 acquisition of assets of A.G. Lee Oil Company,
Inc., located in eastern and central North Carolina, for $3.8 million,
financed by cash on hand.
. The November 5, 1998 acquisition of assets of Express Stop, Inc.
including 22 convenience stores located throughout North and South
Carolina. Total consideration paid was approximately $21.8 million,
and was financed by proceeds of $16.0 million from The Pantry's 1998
bank credit facility and cash on hand.
. The January 28, 1999 acquisition of all of the outstanding common
stock of Miller Enterprises, Inc. and real estate assets of affiliates
of Miller Enterprises. Miller Enterprises
F-17
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
is a leading operator of convenience stores, operating 121 stores
located in central Florida and operated under the name "Handy Way."
Total consideration paid was $95.1 million and was financed with
proceeds from The Pantry's 1999 bank credit facility and cash on hand.
. The February 25, 1999 acquisition of certain assets of 60 convenience
stores of Taylor Oil Company. The stores are located throughout North
Carolina and Virginia and are operated under the name "ETNA." Total
consideration was approximately $22.8 million and was financed by
proceeds of $19.0 million from The Pantry's 1999 bank credit facility
and cash on hand.
The purchase price of the Miller Enterprises and affiliates acquisition is
subject to working capital and capital expenditure adjustments pending the
completion of a closing balance-sheet audit of Miller Enterprises as of
January 28, 1999. $2.5 million of the purchase price of the Express Stop, Inc.
acquisition was subject to an escrow agreement until March 1999, and was to be
forfeited upon the occurrence of specific events or conditions relating to the
operations of video poker machines in the State of South Carolina. The events
or conditions specified in the purchase agreement did not occur, and the $2.5
million held in escrow was paid to Express Stop, Inc. in March 1999.
Goodwill associated with the 1999 acquisitions is being amortized over
30 years using the straight-line method.
The following unaudited pro forma information presents a summary of
consolidated results of operations of The Pantry and acquired businesses as if
the 1998 and 1999 transactions occurred at the beginning of the fiscal year
for each of the periods presented (amounts in thousands):
<TABLE>
<CAPTION>
Six Months Ended
--------------------
March 26, March 25,
1997 1998 1998 1999
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Total revenues................... $1,716,779 $1,658,157 $827,185 $805,923
Income (loss) before
extraordinary loss.............. $ (9,220) $ 3,514 $ 1,207 $ (1,050)
Net loss......................... $ (9,220) $ (3,286) $ (5,593) $ (4,607)
</TABLE>
In management's opinion, the unaudited pro forma information is not
necessarily indicative of actual results that would have occurred had the
acquisitions been consummated at the beginning of fiscal 1997 or fiscal 1998,
or of future operations of the combined companies.
In connection with the Lil' Champ acquisition, The Pantry recorded an
integration charge of approximately $1.0 million for costs of combining its
existing businesses with the acquired businesses of Lil' Champ. The charge
includes
. $.3 million for relocation costs
. $.6 million for elimination of duplicated contractual services for which
there is no future economic benefit
. $.1 million for other consolidation and related expenses
The Pantry's integration plan includes
. the relocation of approximately 11 employees
F-18
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
. 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>
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.
F-19
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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>
NOTE 5--LONG-TERM DEBT:
At September 25, 1997, September 24, 1998 and March 25, 1999, long-term
debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
March
1997 1998 25, 1999
-------- -------- --------
<S> <C> <C> <C>
Senior notes payable; due November 15, 2000;
interest payable semi-annually at 12%....... $ 99,995 $ 48,995 $ --
Senior subordinated notes payable; due
October 15, 2007; interest payable semi-
annually at 10.25%.......................... -- 200,000 200,000
Term loan facility--Tranche A; interest
payable monthly at LIBOR (4.94 at March 25,
1999) plus 3.0%; principal due in quarterly
installments beginning April 30, 1999
through January 31, 2004.................... -- -- 79,086
Term loan facility--Tranche B; interest
payable monthly at LIBOR (4.94 at March 25,
1999) plus 3.5%; principal due in quarterly
installments beginning April 30, 1999
through January 31, 2006.................... -- -- 159,939
Acquisition facility; interest payable
monthly at LIBOR (4.94% at March 25, 1999)
plus 3.0%; principal due in quarterly
installments beginning April 30, 2001
through January 31, 2004 ................... -- 78,000 19,000
Notes payable to McLane Company, Inc.; zero
(0.0%) interest, with principal due in
annual installments through February 26,
2003........................................ -- -- 1,380
Other notes payable; various interest rates
and maturity dates.......................... 343 319 303
-------- -------- --------
100,338 327,314 459,708
Less--current maturities..................... (33) (45) (5,431)
-------- -------- --------
$100,305 $327,269 $454,277
======== ======== ========
</TABLE>
F-20
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
While the senior notes are unsecured, the terms of the senior notes
contain certain covenants restricting
. 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 January 28, 1999, The Pantry redeemed $49.0 million in principal of the
senior notes.
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
. 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
F-21
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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
As of September 24, 1998, there was $78,000,000 outstanding under the
acquisition line. The Pantry had outstanding letters of credit of $13,545,000
at September 24, 1998, issued under the revolving credit facility.
On January 28, 1999, The Pantry entered into the 1999 bank credit
facility, replacing the 1998 bank credit facility, consisting of
. a $45.0 million revolving credit facility available for working capital
financing, general corporate purposes and issuing commercial and standby
letters of credit
F-22
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
. a $50.0 million acquisition facility available to finance acquisition of
related businesses
. term loan facilities with outstanding borrowings of $240.0 million
The 1999 bank credit facility contains covenants restricting the ability
of The Pantry and any of its subsidiaries to among other things:
. 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, as defined in the 1999 bank credit
facility
. a maximum pro forma leverage ratio
. a maximum capital expenditure allowance
The Pantry used the proceeds of the term loan facilities and a $5.0
million initial draw under its revolving credit facility, along with cash on
hand, to
. finance the Miller acquisition (described below)
. repay $94.0 million outstanding under the prior bank credit facility,
and replace outstanding letters of credit
. redeem its outstanding senior notes in the aggregate principal amount of
$49.0 million
. pay related transaction costs
On January 28, 1999, The Pantry redeemed $49.0 million in principal
amount of senior notes and paid accrued and unpaid interest up to, but not
including, the date of purchase and a 4% call premium. The repurchase of 100%
of the senior notes outstanding, the payment of accrued interest and the call
premium were financed with proceeds from The Pantry's term loan facilities, and
a draw under its revolving credit facility.
The Pantry recognized an extraordinary loss of approximately $5.9 million
in connection with the repurchase of the senior notes including the payment of
the 4% call premium of $2.0 million, fees paid in connection with the
amendments and commitments under the bank credit facility, and the write-off of
deferred financing costs related to our repayment of our former credit
facility.
As of September 24, 1998 and March 25, 1999, The Pantry was in compliance
with all covenants and restrictions relating to all its outstanding borrowings.
F-23
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1998 information)
As of September 24, 1998 and March 25, 1999, substantially all of The
Pantry's and its subsidiaries' net assets are restricted as to payment of
dividends and other distributions.
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>
F-24
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
As of September 25, 1997 and September 24, 1998, deferred tax liabilities
(assets) are comprised of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Depreciation.............................................. $ 6,513 $ 32,921
Deferred lease cost....................................... 27 17
Inventory................................................. 940 3,417
Other..................................................... 469 1,672
------- --------
Gross deferred tax liabilities............................ 7,949 38,027
------- --------
Capital lease obligations................................. (321) (1,207)
Allowance for doubtful accounts........................... (58) (108)
Environmental expenses.................................... (500) (2,114)
Accrued insurance reserves................................ (1,607) (4,482)
Exit and employee termination costs....................... -- (1,860)
Accrued compensation...................................... (667) --
Other..................................................... (616) (3,154)
------- --------
Gross deferred tax assets................................. (3,769) (12,925)
Net operating loss carryforwards.......................... (2,622) (6,836)
General business credits.................................. (1,846) (1,832)
AMT Credits............................................... (2,696) (2,492)
Deferred tax assets valuation allowance................... 1,686 2,436
------- --------
$(1,298) $ 16,378
======= ========
</TABLE>
As of September 25, 1997 and September 24, 1998, net current deferred
income tax assets totaled $1,142,000 and $3,988,000, respectively, and net
noncurrent deferred income tax assets (liabilities) totaled $156,000 and
$(20,366,000), respectively.
Reconciliations of income taxes at the Federal statutory rate (34%) to
actual taxes provided are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ----- -------
<S> <C> <C> <C>
Tax benefit at Federal statutory rate............. $(3,665) $(332) $(1,131)
Tax benefit at state rate, net of Federal income
tax benefit...................................... (316) (325) (153)
Permanent differences:
Amortization of goodwill........................ 1,127 235 474
Other........................................... 14 248 190
Tax benefit from creation of general business
credits.......................................... -- (151) --
Valuation allowance............................... 176 325 620
------- ----- -------
Net income tax benefit............................ $(2,664) $ -- $ --
======= ===== =======
</TABLE>
F-25
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
As of September 24, 1998 The Pantry had net operating loss carryforwards,
general business credits and AMT credits which can be used to offset future
Federal income taxes. The benefit of these carryforwards is recognized, net of
a valuation allowance for a portion of the net operating losses and credits
which The Pantry believes may expire unused, as deferred tax assets. Loss
carryforwards as of September 24, 1998 have the following expiration dates (in
thousands):
<TABLE>
<CAPTION>
Federal State
------- -------
<S> <C> <C>
2009........................................................ $ -- $ 3,158
2010........................................................ -- 2,974
2011........................................................ -- 10,919
2012........................................................ 2,332 5,101
2013........................................................ -- 12,820
2018........................................................ 12,022 --
------- -------
Total loss carryforwards.................................... $14,354 $34,972
======= =======
</TABLE>
The valuation allowance increased $176,000 and $325,000 in 1996 and 1997,
primarily to provide for operating loss carryforwards and available tax credits
that more likely than not will not be realized, based on estimates of future
earnings and expected timing of reversals of temporary differences. The
valuation allowance increased $620,000 in 1998, which was primarily
attributable to federal net operating losses, net of a decrease for state tax
net economic loss carryovers (as discussed below).
The State of North Carolina and the State of Tennessee have assessed
Sandhills, Inc., a subsidiary of The Pantry, with additional taxes plus
penalties and accrued interest totaling approximately $5 million, for the
periods February 1, 1992 to September 26, 1996. 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>
F-26
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
Amortization expense related to capitalized leased assets was $261,000,
$185,000, and $1,249,000 for fiscal 1996, 1997, and 1998 respectively.
Future minimum lease payments as of September 24, 1998, for capital
leases and operating leases that have initial or remaining terms in excess of
one year are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Fiscal Year Leases Leases
----------- ------- ---------
<S> <C> <C>
1999..................................................... $ 2,507 $ 21,462
2000..................................................... 2,396 20,179
2001..................................................... 2,309 18,203
2002..................................................... 2,307 16,954
2003..................................................... 2,307 15,817
Thereafter............................................... 5,022 38,083
------- --------
Net minimum lease payments............................... 16,848 $130,698
========
Amount representing interest (8% to 20%)................. 3,479
-------
Present value of net minimum lease payments.............. 13,369
Less--current maturities................................. 1,240
-------
$12,129
=======
</TABLE>
Rental expense for operating leases was approximately $8,126,000,
$9,618,000 and $23,758,000 for fiscal years 1996, 1997 and 1998, respectively.
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.
F-27
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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, September 24, 1998, and March 25, 1999 were
$5.0 million, $23.4 million, and $27.2 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 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
F-28
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
. 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
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
F-29
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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, 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, $17.1 million and $17.2 million
as of September 25, 1997, September 24, 1998 and March 25, 1999, respectively,
represent estimates for future expenditures for remediation, tank removal and
litigation associated with 92, 205 and 207 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 March 25, 1999 the current average remediation
cost per site is $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
F-30
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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, and March 25, 1999, these anticipated reimbursements of $13.2 million
and $12.7 million, respectively, are recorded as long-term environmental
receivables. In Florida, remediation of such contamination reported before
January 1, 1999 will be performed by the state and substantially all of the
costs will be paid by the state trust fund. The Pantry will perform remediation
in other states through independent contractor firms engaged by The Pantry. For
certain sites the trust fund does not cover a deductible or has a copay which
may be less than the cost of such remediation. Although The Pantry is not aware
of releases or contamination at other locations where it currently operates or
has operated stores, any such releases or contamination could require
substantial remediation expenditures, some or all of which may not be eligible
for reimbursement from state trust funds.
The Pantry has reserved $500,000 to cover third party claims for
environmental conditions at adjacent real properties that are not covered by
state trust funds or by private insurance. This reserve is based on
management's best estimate of losses that may be incurred over the next several
years based on, among other things, the average remediation cost for
contaminated sites and our historical claims experience.
Several of the locations identified as contaminated are being cleaned up
by third parties who have indemnified The Pantry as to responsibility for clean
up matters. Additionally, The Pantry is awaiting closure notices on several
other locations which will release The Pantry from responsibility related to
known contamination at those sites. These sites continue to be included in our
environmental reserve until a final closure notice is received.
F-31
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
NOTE 9--BENEFIT PLANS:
The Pantry sponsors a 401(k) Employee Retirement Savings Plan for
eligible employees. Employees must be at least nineteen years of age and have
one year of service with at least 1,000 hours worked to be eligible to
participate in the plan. Employees may contribute up to 15% of their annual
compensation, and contributions are matched by The Pantry on the basis of 50%
of the first 5% contributed. Matching contribution expense was $330,000,
$305,000 and $396,000 for fiscal years 1996, 1997 and 1998, respectively.
NOTE 10--IMPAIRMENT OF LONG-LIVED ASSETS:
In fiscal year 1996, The Pantry early-adopted 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. In connection with
this offering, also on June 4, 1999, The Pantry effected a 51-for-1 stock split
of its common stock. The accompanying financial statements reflect The Pantry's
anticipated 51-for-1 stock split, retroactively applied to all periods
presented. In connection with the stock split, the number of authorized shares
of common stock was increased to 50,000,000 (300,000 shares previously). There
was no change in par values of the common stock as a result of the stock split.
F-32
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
Upon completion of the planned initial public offering, Freeman Spogli
will own approximately 9,349,524 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 2,346,000 shares.
In connection with the Lil' Champ acquisition and related transactions,
The Pantry issued 3,672,000 shares of common stock, par value $0.01, to certain
existing shareholders and a member of management for $32.4 million. Prior to
the purchase of common stock, Freeman Spogli and Chase 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 2,217,378 shares of common stock, par value $0.01 per
share, to certain existing shareholders for an aggregate purchase price of
$25.0 million.
NOTE 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 by both the senior notes
F-33
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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
1,275,000 shares of The Pantry's common stock. The plan is administered by the
board of directors or a committee of the board of directors. Options are
granted at prices determined by the board of directors and may be exercisable
in one or more installments. Additionally, the terms and conditions of awards
under the plan may differ from one grant to another. Under the plan, incentive
stock options may only be granted to employees with an exercise price at least
equal to the fair market value of the related common stock on the date the
option is granted. Fair values are based on the most recent common stock sales.
During 1998, options to acquire 576,861 shares of common stock were granted
under the plan with exercise prices ranging from $8.82-$11.27 per share
(weighted-average exercise price of $9.39 per share).
The following table summarizes information about stock options
outstanding at September 24, 1998:
<TABLE>
<CAPTION>
Number
Outstanding at Weighted-Average
Date September 24, Remaining Weighted-Average
Exercise Prices Issued 1998 Contractual Life Exercise Price
--------------- ------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
$8.82.............. 1/1/98 443,751 9 years $ 8.82
$11.27............. 8/25/98 133,110 9 years $11.27
-------
Total............ 576,861
</TABLE>
F-34
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
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................................ $9.39
Weighted-average expected lives (years)............................... 2.33
Risk-free interest rate............................................... 5.5%
Dividend yield........................................................ 0.00%
</TABLE>
On August 31, 1998, The Pantry adopted a stock subscription plan. The
subscription plan allows The Pantry to offer to certain employees the right to
purchase shares of common stock at a purchase price equal to the fair market
value on the date of purchase. A purchaser may not sell, transfer or pledge
their shares
. prior to the first anniversary of the date on which the purchaser
acquires the shares
. after the first anniversary, except in compliance with the provisions
of the subscription agreement and a pledge agreement if part of the
consideration for such shares includes a secured promissory note
In the event that the purchaser's employment with The Pantry and all of its
subsidiaries terminates for any reason, The Pantry shall have the option to
repurchase from the purchaser all or any portion of the shares acquired by the
purchaser under the subscription agreement for a period of six months after
the effective date of such termination. The repurchase option shall terminate
upon the later to occur of
. the first anniversary of the date the shares were originally acquired
. an initial public offering of common stock by The Pantry registered
under the Securities Act (other than an offering registered on Form S-
4 or Form S-8) resulting in gross proceeds to The Pantry in excess of
$25 million
After the first anniversary of the date the shares were originally acquired by
the purchaser, the purchaser may transfer the shares for cash (only) to a
third party, subject to The Pantry's right of first refusal with respect to
such sale. Finally, under certain circumstances, a purchaser of shares under
the subscription plan may be forced to sell all or part of the shares
purchased under such plan if Freeman Spogli finds a third-party buyer for all
or part of the shares of common stock held by Freeman Spogli. No issuances of
shares under the subscription plan had been made at September 24, 1998. On
September 25, 1998 and November 30, 1999, 134,436 shares, net of subsequent
repurchases of 6,273 shares, were sold under the subscription plan. These
shares were sold at fair value ($11.27), as determined by the most recent
equity investment (July 1998). In connection with these sales, The Pantry
received $722,000 of secured promissory notes receivable, bearing an interest
rate of 8.5%, due August 31, 2003.
In December 1996, in connection with its purchase of 17,500 shares of
Series B preferred stock, Freeman Spogli acquired warrants to purchase
2,346,000 shares of common stock. The
F-35
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
warrants are exercisable at $7.45 per share until December 30, 2006, and
contain adjustment provisions in the event The Pantry declares dividends or
distributions, makes stock splits, or engages in mergers, reorganizations or
reclassifications. None of these warrants had been exercised at March 25, 1999.
On June 3, 1999, The Pantry adopted a new 1999 stock option plan
providing for the grant of incentive stock options and non-qualified stock
options to officers, directors, employees and consultants. An aggregate of
3,825,000 shares of common stock has been reserved for issuance under the 1999
stock option plan. Effective upon consummation of the initial public offering
discussed in note 12, The Pantry intends to grant options for approximately
200,000 shares to officers and employees. While all options under this grant
have not been allocated, The Pantry intends to grant incentive stock options
for 33,800 shares to Mr. Sodini, 13,000 shares to Mr. Crook, 13,000 shares to
Mr. Flyg, 13,000 shares to Mr. Sweeney and 13,000 shares to Mr. McCormack.
These options will vest in three annual installments, expire in seven years and
be exercisable at the initial public offering price.
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 2,320,551 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, 16,779 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 698,700
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 $2.98 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 2,152,812 shares of common stock and
9,624.336 shares of Series A preferred stock for an aggregate purchase
price of approximately $16.0 million and Chase Capital purchased 643,416 shares
of common stock and 2,876.448 shares of Series A preferred stock for an
aggregate purchase price of approximately $4.8 million. The purchase price for
the common stock was $2.98 per share and the purchase price for the Series A
preferred stock was $1,000.00 per share.
F-36
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
In December 1996, Freeman Spogli purchased 17,500 shares of Series B
preferred stock and warrants to purchase 2,346,000 shares of common stock for
approximately $17.5 million. The purchase price for the Series B preferred
stock was $1,000.00 per share and the purchase price for 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 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 3,030,471 shares of common stock and Chase Capital purchased
596,190 shares of common stock for an aggregate purchase price of approximately
$32.0 million. Peter J. Sodini, The Pantry's Chief Executive Officer, purchased
45,339 shares of common stock for an aggregate purchase price of $400,050,
payable $185,000 in cash and $215,050 in the form of a secured promissory note
in our favor. The purchase price for the common stock was $8.82 per share. All
of the outstanding Series A preferred stock was contributed back to The Pantry
and cancelled at this time.
In July 1998, in connection with the acquisition of Quick Stop and the
acquisition of Stallings, Freeman Spogli purchased 1,845,690 shares of common
stock and Chase Capital purchased 371,688 shares of common stock for an
aggregate purchase price of $25.0 million. The purchase price for the common
stock was $11.27 per share.
In November 1998, Peter Starrett, a director of The Pantry, purchased
22,185 shares of common stock for a purchase price of $250,125. Freeman Spogli
has the right to require the sale of Mr. Starrett's shares in the event it
sells all of its holdings of common stock. In addition, 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.
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
F-37
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
. 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
NOTE 16--EARNINGS PER SHARE:
The Pantry computes earnings per share data in accordance the
requirements of SFAS No. 128, Earnings per Share. The following table reflects
the calculation of basic and diluted earnings per share. The table also gives
retroactive effect to The Pantry's anticipated 51-for-1 stock split of its
common stock (in thousands):
<TABLE>
<CAPTION>
Year Ended Six Months Ended
-------------------------- ------------------
March, March,
1996 1997 1998 1998 1999
-------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Net loss applicable to common
shareholders:
Income (loss) before
extraordinary loss.......... $ (8,114) $ (975) $ 4,673 $ (1,669) $ 1,077
Dividends on preferred
stock....................... (2,654) (5,304) (2,942) (1,586) (1,446)
-------- ------- ------- --------- -------
Income (loss) applicable to
common shareholders before
extraordinary items......... (10,768) (6,279) 1,731 (3,255) (369)
Extraordinary loss........... -- -- (7,998) (6,800) (3,557)
-------- ------- ------- --------- -------
Net loss applicable to common
shareholders $(10,768) $(6,279) $(6,267) $ (10,055) $(3,926)
======== ======= ======= ========= =======
Earnings per share--basic:
Weighted-average shares
outstanding................. 5,668 5,815 9,732 8,937 11,857
Income (loss) before
extraordinary loss per
share--basic................ $ (1.90) $ (1.08) $ 0.18 $ (0.36) $ (0.03)
Extraordinary loss per
share--basic................ -- -- (0.82) (0.77) (0.30)
-------- ------- ------- --------- -------
Loss per share--basic........ $ (1.90) $ (1.08) $ (0.64) $ (1.13) $ (0.33)
======== ======= ======= ========= =======
Earnings per share--assuming
dilution:
Weighted-average shares
outstanding................. 5,668 5,815 9,732 8,937 11,857
Dilutive impact of options
and warrants outstanding.... -- -- 1,280 -- --
-------- ------- ------- --------- -------
Weighted-average shares and
potential dilutive shares
outstanding................. 5,668 5,815 11,012 8,937 11,857
======== ======= ======= ========= =======
Income (loss) before
extraordinary loss per
share--assuming dilution.... $ (1.90) $ (1.08) $ 0.16 $ (0.36) $ (0.03)
Extraordinary loss per
share--assuming dilution.... -- -- (0.73) (0.77) (0.30)
-------- ------- ------- --------- -------
Net income (loss) per share--
assuming dilution........... $ (1.90) $ (1.08) $ (0.57) $ (1.13) $ (0.33)
======== ======= ======= ========= =======
</TABLE>
Warrants to purchase 2,346,000 shares of common stock at $7.45 per share
were outstanding during 1997 and the six month periods ended March 26, 1998 and
March 25, 1999, but were
F-38
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
excluded from the computation of diluted earnings per share because the impact
of their inclusion would be anti-dilutive. Options to purchase 576,861 shares
of common stock at prices from $8.82 to $11.27 per share were outstanding for
the six months ended March 25, 1999, but were also excluded from the
computations of diluted earnings per share for that period as their inclusion
would also be anti-dilutive.
NOTE 17--SUPPLEMENTAL GUARANTORS INFORMATION:
In connection with the Lil' Champ acquisition and commitments under the
Bank Credit Facility, Lil' Champ, Sandhills, Inc. and Global Communications,
Inc. (the "Guarantors") jointly and severally, unconditionally guaranteed, on
an unsecured senior subordinated basis, the full and prompt performance of The
Pantry's obligations under its Senior Subordinated Notes, its Senior Notes
Indenture and its Bank Credit Facility.
The senior subordinated notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, as to the payment of principal, premium,
if any, and interest, jointly and severally, by all current direct and indirect
restricted subsidiaries (currently, Sandhills and Lil Champ, wholly-owned
subsidiaries of The Pantry) and future direct and indirect restricted
subsidiaries. The senior subordinated notes contain covenants that, among other
things, restrict the ability of The Pantry and any restricted subsidiary to:
.incur additional indebtedness
.pay dividends or make distributions
.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 and Miller
Enterprises as of March 25, 1999) would not be material to investors and
therefore such financial statements are not provided. The following
supplemental combining financial statements present information regarding the
guarantors and The Pantry.
The 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.
F-39
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Statements of Operations
Year Ended September 26, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Guarantor Non-Guarantor
Pantry Subsidiary Subsidiary Eliminations Total
-------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $188,091 $ -- $ -- $ -- $188,091
Gasoline sales........ 192,737 -- -- -- 192,737
Commissions........... 3,979 -- -- -- 3,979
-------- ------- ----- -------- --------
Total revenues...... 384,807 -- -- -- 384,807
-------- ------- ----- -------- --------
Cost of sales:
Merchandise........... 125,979 -- -- -- 125,979
Gasoline.............. 167,610 -- -- -- 167,610
-------- ------- ----- -------- --------
Total cost of
sales.............. 293,589 -- -- -- 293,589
-------- ------- ----- -------- --------
Gross profit............ 91,218 -- -- -- 91,218
-------- ------- ----- -------- --------
Operating expenses:
Store expenses........ 69,605 -- (293) (11,471) 57,841
General and
administrative
expenses............. 17,648 80 23 -- 17,751
Restructuring
charges.............. 1,560 -- -- -- 1,560
Impairment of long-
lived assets......... 3,034 -- -- -- 3,034
Depreciation and
amortization......... 9,138 14 6 -- 9,158
-------- ------- ----- -------- --------
Total operating
expenses........... 100,985 94 (264) (11,471) 89,344
-------- ------- ----- -------- --------
Income from operations.. (9,767) (94) 264 11,471 1,874
-------- ------- ----- -------- --------
Equity in earnings of
subsidiaries........... 14,597 -- -- (14,597) --
-------- ------- ----- -------- --------
Other income (expense):
Interest expense...... (14,540) -- (14) 2,562 (11,992)
Miscellaneous......... (1,068) 14,243 198 (14,033) (660)
-------- ------- ----- -------- --------
Total other
expense............ (15,608) 14,243 184 (11,471) (12,652)
-------- ------- ----- -------- --------
Income (loss) before
income taxes........... (10,778) 14,149 448 (14,597) (10,778)
Income tax benefit
(expense).............. 2,664 (4,811) (128) 4,939 2,664
-------- ------- ----- -------- --------
Net income (loss)....... (8,114) 9,338 320 (9,658) (8,114)
Preferred dividends..... (2,654) -- -- -- (2,654)
-------- ------- ----- -------- --------
Net income (loss)
applicable to common
shareholders........... $(10,768) $ -- $ -- $ -- $(10,768)
======== ======= ===== ======== ========
</TABLE>
F-40
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Year Ended September 26, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
The Pantry Subsidiary Subsidiary Eliminations Total
---------- ---------- ------------- ------------ -------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)...... $(8,114) $ 9,339 $ 319 $(9,658) $(8,114)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Impairment of long-
lived assets........ 3,034 -- -- -- 3,034
Depreciation and
amortization........ 9,152 -- 6 -- 9,158
Provision for
deferred income
taxes............... (1,558) -- -- -- (1,558)
Loss on sale of
property and
equipment........... 470 -- -- -- 470
Provision for
environmental
expenses............ 512 -- -- -- 512
Provision for closed
stores.............. 673 -- -- -- 673
Write-off of property
held for sale....... 168 -- -- -- 168
Equity earnings of
affiliates.......... (9,658) -- -- 9,658 --
Changes in operating
assets and
liabilities, net:
Receivables.......... (627) (392) (8) 488 (539)
Inventories.......... (937) -- -- -- (937)
Prepaid expenses..... 19 (1) 2 -- 20
Other non-current
assets.............. 448 (17) 1 -- 432
Accounts payable..... 2,104 -- -- -- 2,104
Other current
liabilities and
accrued expenses.... (641) 125 (27) (96) (639)
Employment
obligations......... (255) -- -- -- (255)
Other noncurrent
liabilities......... 1,279 -- (1) (392) 886
------- ------- ------ ------- -------
Net cash provided by
(used in) operating
activities............. (3,931) 9,054 292 -- 5,415
------- ------- ------ ------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (3,301) -- (799) 50 (4,050)
Additions to property
and equipment......... (7,070) -- (14) -- (7,084)
Proceeds from sale of
property held for
sale.................. 2,462 -- 50 (50) 2,462
Proceeds from sale of
property and
equipment............. 1,458 -- 10 -- 1,468
Intercompany notes
receivable
(payable)............. 12,502 (12,502) -- --
Acquisition of related
businesses............ -- -- -- -- --
------- ------- ------ ------- -------
Net cash provided by
(used in) investing
activities............. 6,051 (12,502) (753) -- (7,204)
------- ------- ------ ------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital lease
obligations........... (347) -- -- -- (347)
Principal repayments
of long-term debt..... (5) -- (15) -- (20)
Net proceeds from
equity issue.......... -- -- -- -- --
Other financing
costs................. (3,505) -- -- -- (3,505)
------- ------- ------ ------- -------
Net cash provided by
(used in) financing
activities............. (3,857) -- (15) -- (3,872)
------- ------- ------ ------- -------
Net increase (decrease)
in cash................ (1,737) (3,448) (476) -- (5,661)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR...... 3,247 3,584 4,168 -- 10,999
------- ------- ------ ------- -------
CASH AND CASH
EQUIVALENTS AT END OF
YEAR................... $ 1,510 $ 136 $3,692 $ -- $ 5,338
======= ======= ====== ======= =======
</TABLE>
F-41
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Balance Sheets
September 25, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Guarantor Non-Guarantor
Pantry Subsidiary Subsidiary Eliminations Total
-------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents........... $ 2,247 $ 279 $ 821 $ -- $ 3,347
Receivables, net....... 4,056 4,562 30 (6,547) 2,101
Inventories............ 17,161 -- -- -- 17,161
Prepaid expenses....... 1,195 6 3 -- 1,204
Property held for
sale.................. 3,323 -- -- -- 3,323
Deferred income
taxes................. 1,142 -- -- -- 1,142
-------- ------- ------ -------- --------
Total current
assets............ 29,124 4,847 854 (6,547) 28,278
-------- ------- ------ -------- --------
Investment in
subsidiaries........... 47,225 -- -- (47,225) --
-------- ------- ------ -------- --------
Property and equipment,
net.................... 77,641 -- 345 -- 77,986
-------- ------- ------ -------- --------
Other assets:
Goodwill, net.......... 20,318 -- -- -- 20,318
Deferred lease cost,
net................... 314 -- -- -- 314
Deferred financing
cost, net............. 4,578 -- -- -- 4,578
Environmental
receivables........... 6,511 -- -- -- 6,511
Deferred income
taxes................. 156 -- -- -- 156
Escrow for Lil' Champ
acquisition........... -- -- 4,049 -- 4,049
Intercompany notes
receivable............ -- 39,434 -- (39,434) --
Other.................. 534 74 1 -- 609
-------- ------- ------ -------- --------
Total other
assets............ 32,411 39,508 4,050 (39,434) 36,535
-------- ------- ------ -------- --------
Total assets....... $186,401 $44,355 $5,249 $(93,206) $142,799
======== ======= ====== ======== ========
</TABLE>
F-42
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Balance Sheets
September 25, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Guarantor Non-Guarantor
Pantry Subsidiary Subsidiary Eliminations Total
-------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
- -----------------------------
Current liabilities:
Current maturities of long-
term debt.................. $ 17 $ -- $ 16 $ -- $ 33
Current maturities of
capital lease
obligations................ 285 -- -- -- 285
Accounts payable:
Trade..................... 16,032 3 -- -- 16,035
Money orders.............. 3,022 -- -- -- 3,022
Accrued interest............ 5,564 -- 1 (973) 4,592
Accrued compensation and
related taxes.............. 3,322 -- 1 -- 3,323
Income taxes payable........ 313 1,560 235 (1,812) 296
Other accrued taxes......... 2,194 -- -- -- 2,194
Accrued insurance........... 3,887 -- -- -- 3,887
Other accrued liabilities... 6,382 113 122 (3,761) 2,856
-------- ------- ------ -------- --------
Total current
liabilities............ 41,018 1,676 375 (6,546) 36,523
-------- ------- ------ -------- --------
Long-term debt............... 100,168 -- 137 -- 100,305
-------- ------- ------ -------- --------
Other non-current
liabilities:
Environmental reserve....... 7,806 -- -- -- 7,806
Capital lease obligations... 679 -- -- -- 679
Employment obligations...... 1,341 -- -- -- 1,341
Accrued dividends on
preferred stock............ 7,958 -- -- -- 7,958
Intercompany note payable... 39,434 -- -- (39,434) --
Other....................... 5,870 150 40 -- 6,060
-------- ------- ------ -------- --------
Total other non-current
liabilities............ 63,088 150 40 (39,434) 23,844
-------- ------- ------ -------- --------
Shareholders' Equity
(Deficit):
Preferred stock.............. -- -- -- -- --
Common stock................. 58 -- -- -- 58
Additional paid-in capital... 5,339 25 5,001 (5,026) 5,339
Retained earnings (deficit).. (23,270) 42,504 (304) (42,200) (23,270)
-------- ------- ------ -------- --------
Total shareholders'
equity (deficit)....... (17,873) 42,529 4,697 (47,226) (17,873)
-------- ------- ------ -------- --------
Total liabilities and
shareholders' equity
(deficit).............. $186,401 $44,355 $5,249 $(93,206) $142,799
======== ======= ====== ======== ========
</TABLE>
F-43
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Year Ended September 25, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
The Pantry Subsidiary Subsidiary Eliminations Total
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $202,440 $ -- $ -- $ -- $202,440
Gasoline sales........ 220,166 -- -- -- 220,166
Commissions........... 4,787 -- -- -- 4,787
-------- ------ ----- ------- --------
Total revenues...... 427,393 -- -- -- 427,393
-------- ------ ----- ------- --------
Cost of sales:
Merchandise........... 132,846 -- -- -- 132,846
Gasoline.............. 197,268 -- -- -- 197,268
-------- ------ ----- ------- --------
Total cost of
sales.............. 330,114 -- -- -- 330,114
Gross profit............ 97,279 -- -- -- 97,279
-------- ------ ----- ------- --------
Operating expenses:
Store expenses........ 73,225 -- (291) (12,726) 60,208
General and
administrative
expenses............. 16,731 42 23 -- 16,796
Depreciation and
amortization......... 9,485 13 6 -- 9,504
-------- ------ ----- ------- --------
Total operating
expenses........... 99,441 55 (262) (12,726) 86,508
-------- ------ ----- ------- --------
Income from operations.. (2,162) (55) 262 12,726 10,771
-------- ------ ----- ------- --------
Equity in earnings of
subsidiaries........... 16,605 -- -- (16,605) --
Other income (expense):
Interest expense...... (16,095) -- (13) 3,069 (13,039)
Miscellaneous......... 677 16,207 204 (15,795) 1,293
-------- ------ ----- ------- --------
Total other
expense............ (15,418) 16,207 191 (12,726) (11,746)
-------- ------ ----- ------- --------
Income (loss) before
income taxes........... (975) 16,152 453 (16,605) (975)
Income tax benefit
(expense).............. -- (5,492) (155) 5,647 --
-------- ------ ----- ------- --------
Net income (loss)....... (975) 10,660 298 (10,958) (975)
Preferred dividends..... (5,304) -- -- -- (5,304)
-------- ------ ----- ------- --------
Net loss applicable to
common shareholders.... $ (6,279) -- -- -- $ (6,279)
======== ====== ===== ======= ========
</TABLE>
F-44
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Year Ended September 25, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
The Pantry Subsidiary Subsidiary Eliminations Total
---------- ---------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)....... $ (975) $10,660 $ 298 $(10,958) $ (975)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization......... 9,499 -- 5 -- 9,504
Provision for deferred
income taxes......... 371 -- -- -- 371
Gain on sale of
property and
equipment............ (1,054) -- -- -- (1,054)
Provision for
environmental
expenses............. 1,574 -- -- -- 1,574
Provision for closed
stores............... (11) -- -- -- (11)
Equity earnings of
affiliates........... (10,958) -- -- 10,958 --
Changes in operating
assets and
liabilities, net:
Receivables........... 129 (664) 8 -- (527)
Inventories........... (2,273) -- -- -- (2,273)
Prepaid expenses...... (426) (3) -- -- (429)
Other non-current
assets............... (5,378) 14 1 1,068 (4,295)
Accounts payable...... 600 3 -- -- 603
Other current
liabilities and
accrued expenses..... 3,396 246 135 (384) 3,393
Employment
obligations.......... (698) -- -- -- (698)
Other noncurrent
liabilities.......... 2,970 (131) -- (684) 2,155
-------- ------- ------ -------- --------
Net cash provided by
(used in) operating
activities............. (3,234) 10,125 447 -- 7,338
-------- ------- ------ -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (1,874) -- (4) 50 (1,828)
Additions to property
and equipment......... (14,749) -- -- -- (14,749)
Proceeds from sale of
property held for
sale.................. 642 -- 753 (50) 1,345
Proceeds from sale of
property and
equipment............. 2,315 -- -- -- 2,315
Intercompany notes
receivable (payable).. 9,982 (9,982) -- -- --
Acquisition of related
businesses............ (12,162) -- -- -- (12,162)
-------- ------- ------ -------- --------
Net cash provided by
(used in) investing
activities............. (15,846) (9,982) 749 -- (25,079)
-------- ------- ------ -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital lease
obligations........... (303) -- -- -- (303)
Principal repayments of
long-term debt........ (10) -- (16) -- (26)
Proceeds from issuance
of long-term debt..... 200 -- -- -- 200
Net proceeds from equity
issue.................. 15,953 -- -- -- 15,953
Other financing costs.. (74) -- -- -- (74)
-------- ------- ------ -------- --------
Net cash provided by
(used in) financing
activities............. 15,766 -- (16) -- 15,750
-------- ------- ------ -------- --------
Net increase (decrease)
in cash................ (3,314) 143 1,180 -- (1,991)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR...... 1,512 136 3,690 -- 5,338
-------- ------- ------ -------- --------
CASH AND CASH
EQUIVALENTS AT END OF
YEAR................... $ (1,802) $ 279 $4,870 $ -- $ 3,347
======== ======= ====== ======== ========
</TABLE>
F-45
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc. and Subsidiaries
Supplemental Combining Balance Sheets
Year Ended September 24, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Non-
Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
-------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents.......... $ 24,031 $ 6,300 $4,073 $ -- $ 34,404
Receivables, net...... 11,211 9,263 1,030 (11,597) 9,907
Inventories........... 24,933 22,876 -- -- 47,809
Income taxes
receivable........... 270 (2,098) (472) 2,788 488
Prepaid expenses...... 1,206 1,007 3 -- 2,216
Property held for
sale................. 3,761 -- -- -- 3,761
Deferred income
taxes................ 1,262 2,726 -- -- 3,988
-------- -------- ------ --------- --------
Total current
assets............. 66,674 40,074 4,634 (8,809) 102,573
-------- -------- ------ --------- --------
Investment in
subsidiaries........... 69,317 -- -- (69,317) --
-------- -------- ------ --------- --------
Property and equipment,
net.................... 125,340 175,298 340 -- 300,978
-------- -------- ------ --------- --------
Other assets:
Goodwill, net......... 72,375 47,650 -- -- 120,025
Deferred lease cost,
net.................. 269 -- -- -- 269
Deferred financing
cost, net............ 14,545 -- -- -- 14,545
Environmental
receivables, net..... 11,566 1,621 -- -- 13,187
Intercompany notes
receivable........... 19,803 49,705 -- (69,508) --
Other................. 155 3,088 -- -- 3,243
-------- -------- ------ --------- --------
Total other assets.. 118,713 102,064 -- (69,508) 151,269
-------- -------- ------ --------- --------
Total assets........ $380,044 $317,436 $4,974 $(147,634) $554,820
======== ======== ====== ========= ========
</TABLE>
F-46
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc. and Subsidiaries
Supplemental Combining Balance Sheets--(Continued)
Year Ended September 24, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Non-
Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
-------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS'
EQUITY (DEFICIT):
-----------------
Current liabilities:
Current maturities of
long-term debt....... $ 17 $ 10 $ 18 $ -- $ 45
Current maturities of
capital lease
obligations.......... 213 1,027 -- -- 1,240
Accounts payable:
Trade............... 28,563 20,996 -- -- 49,559
Money orders........ 4,112 1,069 -- -- 5,181
Accrued interest...... 11,564 1,283 1 (1,136) 11,712
Accrued compensation
and related taxes.... 4,366 2,352 1 -- 6,719
Other accrued taxes... 3,108 3,899 -- -- 7,007
Accrued insurance..... 3,188 2,557 -- -- 5,745
Other accrued
liabilities.......... 11,118 18,877 122 (5,769) 24,348
-------- -------- ------ --------- --------
Total current
liabilities...... 66,249 52,070 142 (6,905) 111,556
-------- -------- ------ --------- --------
Long-term debt.......... 188,151 139,000 118 -- 327,269
-------- -------- ------ --------- --------
Other non-current
liabilities:
Environmental
reserve.............. 13,487 3,650 -- -- 17,137
Deferred income
taxes................ (36) 22,001 -- (1,599) 20,366
Capital lease
obligations.......... 1,534 10,595 -- -- 12,129
Employment
obligations.......... 934 -- -- -- 934
Accrued dividends on
preferred stock...... 4,391 -- -- -- 4,391
Intercompany note
payable.............. 50,705 20,822 -- (71,527)
Other................. 15,325 5,737 38 634 21,734
-------- -------- ------ --------- --------
Total other non-current
liabilities............ 86,340 62,805 38 (72,492) 76,691
-------- -------- ------ --------- --------
Shareholders' Equity
(Deficit):
Preferred stock....... -- -- -- -- --
Common stock.......... 117 1 -- (1) 117
Additional paid-in
capital.............. 68,939 6,758 5,001 (11,759) 68,939
Shareholder loan...... (215) -- -- -- (215)
Accumulated earnings
(deficit)............ (29,537) 56,802 (325) (56,477) (29,537)
-------- -------- ------ --------- --------
Total
shareholders'
equity
(deficit)........ 39,304 63,561 4,676 (68,237) 39,304
-------- -------- ------ --------- --------
Total liabilities
and shareholders'
equity
(deficit)........ $380,044 $317,436 $4,974 $(147,634) $554,820
======== ======== ====== ========= ========
</TABLE>
F-47
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Year Ended September 24, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $245,402 $215,396 $ -- $ -- $460,798
Gasoline sales........ 269,865 240,093 -- -- 509,958
Commissions........... 6,838 7,290 -- -- 14,128
-------- -------- ----- -------- --------
Total revenues...... 522,105 462,779 -- -- 984,884
-------- -------- ----- -------- --------
Cost of sales:
Merchandise........... 162,027 141,941 -- -- 303,968
Gasoline.............. 238,381 209,184 -- -- 447,565
-------- -------- ----- -------- --------
Total cost of
sales.............. 400,408 351,125 -- -- 751,533
-------- -------- ----- -------- --------
Gross profit............ 121,697 111,654 -- -- 233,351
-------- -------- ----- -------- --------
Operating expenses:
Store expenses........ 89,774 66,046 (240) (15,491) 140,089
General and
administrative
expenses............. 18,398 14,341 22 -- 32,761
Merger integration
costs................ -- 1,016 -- -- 1,016
Depreciation and
amortization......... 14,003 13,633 6 -- 27,642
-------- -------- ----- -------- --------
Total operating
expenses........... 122,175 95,036 (212) (15,491) 201,508
-------- -------- ----- -------- --------
Income (loss) from
operations............. (478) 16,618 212 15,491 31,843
-------- -------- ----- -------- --------
Equity in earnings of
subsidiaries........... 22,864 -- -- (22,864) --
-------- -------- ----- -------- --------
Other income (expense):
Interest expense...... (18,241) (14,926) (12) 4,233 (28,946)
Miscellaneous......... 528 20,943 29 (19,724) 1,776
-------- -------- ----- -------- --------
Total other income
(expense).......... (17,713) 6,017 17 (15,491) (27,170)
-------- -------- ----- -------- --------
Income (loss) before
income taxes and
extraordinary loss..... 4,673 22,635 229 (22,864) 4,673
Income tax benefit
(expense).............. -- (8,337) (250) 8,587 --
-------- -------- ----- -------- --------
Net income (loss) before
extraordinary item..... 4,673 14,298 (21) (14,277) 4,673
Extraordinary loss...... (7,998) -- -- -- (7,998)
-------- -------- ----- -------- --------
Net income (loss)....... (3,325) 14,298 (21) (14,277) (3,325)
Preferred dividends..... (2,942) -- -- -- (2,942)
-------- -------- ----- -------- --------
Net loss applicable to
common shareholders.... $ (6,267) $ -- $ -- $ -- $ (6,267)
======== ======== ===== ======== ========
</TABLE>
F-48
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Year Ended September 24, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Guarantor Non-Guarantor
The Pantry Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)....... $ (3,325) $ 14,298 $ (21) $(14,277) $ (3,325)
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Extraordinary loss..... 2,006 -- -- -- 2,006
Depreciation and
amortization.......... 14,014 13,623 5 -- 27,642
Change in deferred
income taxes.......... -- 1,737 -- (1,599) 138
(Gain) loss on sale of
property and
equipment............. 88 443 -- -- 531
Provision for
environmental
expenses.............. 5,681 500 -- -- 6,181
Provision for closed
stores................ 50 -- -- -- 50
Equity earnings of
affiliates............ (15,359) -- -- 15,359 --
Changes in operating
assets and liabilities,
net:
Receivables............ (10,380) (2,165) (1,017) 5,050 (8,512)
Inventories............ 986 (5,504) -- -- (4,518)
Prepaid expenses....... (11) 401 -- -- 390
Other noncurrent
assets................ 379 681 4,050 1 5,111
Accounts payable....... 13,393 503 -- -- 13,896
Other current
liabilities and
accrued expenses...... 11,632 (6,497) 254 (3,148) 2,241
Employment
obligations........... (407) -- -- -- (407)
Other noncurrent
liabilities........... 8,459 (2,483) (2) 634 6,608
--------- --------- ------- -------- ---------
Net cash provided by
operating activities... 27,206 15,537 3,269 2,020 48,032
--------- --------- ------- -------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (5,203) -- -- -- (5,203)
Additions to property
and equipment......... (27,569) (15,584) -- -- (43,153)
Proceeds from sale of
property held for
sale.................. 4,807 -- -- -- 4,807
Proceeds from sale of
property and
equipment............. 2,102 5,546 -- -- 7,648
Intercompany notes
receivable (payable).. (8,532) 10,551 -- (2,019) --
Acquisition of related
businesses, net of
cash acquired......... (102,684) (147,908) -- -- (250,592)
--------- --------- ------- -------- ---------
Net cash used in
investing activities... (137,079) (147,395) -- (2,019) (286,493)
--------- --------- ------- -------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases.. (303) (1,121) -- -- (1,424)
Proceeds from issuance
of capital leases..... 1,086 -- -- -- 1,086
Principal repayments of
long-term debt........ (51,516) (10) (17) -- (51,543)
Proceeds from issuance
of long-term debt..... 139,499 139,010 -- (1) 278,508
Net proceeds from
equity issue.......... 56,935 -- -- -- 56,935
Other financing costs.. (14,044) -- -- -- (14,044)
--------- --------- ------- -------- ---------
Net cash provided by
(used in) financing
activities............. 131,657 137,879 (17) (1) 269,518
--------- --------- ------- -------- ---------
Net increase in cash.... 21,784 $ 6,021 3,252 -- 31,057
Cash and Cash
Equivalents at
Beginning of Year...... 2,247 279 821 -- 3,347
--------- --------- ------- -------- ---------
Cash and Cash
Equivalents at End of
Year................... $ 24,031 $ 6,300 $ 4,073 $ -- $ 34,404
========= ========= ======= ======== =========
</TABLE>
F-49
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Six Months Ended March 26, 1998
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $ 99,613 $ 94,152 $ -- $ -- $193,765
Gasoline sales........ 105,466 110,252 -- -- 215,718
Commissions........... 2,915 3,443 -- -- 6,358
-------- -------- ----- ------ --------
Total revenues...... 207,994 207,847 -- -- 415,841
-------- -------- ----- ------ --------
Cost of sales:
Merchandise........... 64,374 62,491 -- -- 126,865
Gasoline.............. 93,984 96,340 -- -- 190,324
-------- -------- ----- ------ --------
Total cost of
sales.............. 158,358 158,831 -- -- 317,189
-------- -------- ----- ------ --------
Gross profit............ 49,636 49,016 -- -- 98,652
-------- -------- ----- ------ --------
Operating expenses:
Store expenses........ 37,962 30,212 (119) (6,202) 61,853
General and
administrative
expenses............. 8,481 7,039 12 -- 15,532
Depreciation and
amortization......... 6,187 5,585 3 -- 11,775
-------- -------- ----- ------ --------
Total operating
expenses........... 52,630 42,836 (104) (6,202) 89,160
-------- -------- ----- ------ --------
Income from operations.. (2,994) 6,180 104 6,202 9,492
-------- -------- ----- ------ --------
Equity in earnings of
subsidiaries........... 8,071 -- -- (8,071) --
-------- -------- ----- ------ --------
Other income (expense):
Interest expense...... (8,125) (6,785) (6) 2,065 (12,851)
Miscellaneous......... 463 8,562 15 (8,266) 774
-------- -------- ----- ------ --------
Total other
expense............ (7,662) 1,777 9 (6,201) (12,077)
-------- -------- ----- ------ --------
Income (loss) before
income taxes and
extraordinary loss..... (2,585) 7,957 113 (8,070) (2,585)
Income tax benefit
(expense).............. 916 (2,755) (132) 2,887 916
-------- -------- ----- ------ --------
Income (loss) before
extraordinary loss..... (1,669) 5,202 (19) (5,183) (1,669)
Extraordinary loss, net
of taxes............... (6,800) -- -- -- (6,800)
-------- -------- ----- ------ --------
Net income (loss)....... (8,469) 5,202 (19) (5,183) (8,469)
Preferred dividends..... (1,586) -- -- -- (1,586)
-------- -------- ----- ------ --------
Net loss applicable to
common shareholders.... $(10,055) $ -- $ -- $ -- $(10,055)
======== ======== ===== ====== ========
</TABLE>
F-50
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Six Months Ended March 26, 1998
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)....... $ (8,469) $ 5,202 $(19) $(5,183) $ (8,469)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Extraordinary loss.... 6,800 -- -- -- 6,800
Depreciation and
amortization......... 6,193 5,580 2 -- 11,775
Provision for deferred
income taxes......... (1,398) -- (17) -- (1,415)
(Gain) loss on sale of
property and
equipment............ 100 109 -- -- 209
Reserves for
environmental
issues............... 57 -- -- -- 57
Equity earnings of
affiliates........... (5,183) -- -- 5,183 --
Changes in operating
assets and liabilities,
net:
Receivables........... (3,068) (6,891) 26 6,175 (3,758)
Inventories........... 1,501 (2,282) -- -- (781)
Prepaid expenses...... 423 462 (6) -- 879
Other noncurrent
assets............... (15) (386) -- 5,767 5,366
Accounts payable...... (661) 2,056 -- 2 1,397
Other current
liabilities and
accrued expenses..... 5,883 3,462 136 (7,922) 1,559
Employment
obligations.......... (185) -- -- -- (185)
Other noncurrent
liabilities.......... 2,675 1,543 -- -- 4,218
-------- --------- ---- ------- ---------
Net cash provided by
operating activities... 4,653 8,855 122 4,022 17,652
-------- --------- ---- ------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale.......... (2,648) -- -- -- (2,648)
Additions to property
and equipment.......... (11,324) (6,490) -- -- (17,814)
Proceeds from sale of
property held for
sale................... 2,025 -- -- -- 2,025
Proceeds from sale of
property and
equipment.............. 316 366 -- -- 682
Intercompany notes
receivable (payable)... 4,048 -- (26) (4,022) --
Acquisitions of related
businesses, net of cash
acquired of $10,487.... (9,500) (135,898) -- -- (145,398)
-------- --------- ---- ------- ---------
Net cash used in
investing activities... (17,083) (142,022) (26) (4,022) (163,153)
-------- --------- ---- ------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases... (151) (426) -- -- (577)
Principal repayments of
long-term debt......... (57,000) -- (9) -- (57,009)
Proceeds from issuance
of long-term debt...... 63,267 145,755 -- -- 209,022
Net proceeds from equity
issue.................. 31,936 -- -- -- 31,936
Other financing costs... (12,674) -- -- -- (12,674)
-------- --------- ---- ------- ---------
Net cash provided by
(used in) financing
activities............. 25,378 145,329 (9) -- 170,698
-------- --------- ---- ------- ---------
NET INCREASE IN CASH.... 12,948 12,162 87 -- 25,197
CASH & CASH EQUIVALENTS,
BEGINNING OF YEAR...... 2,247 279 821 -- 3,347
-------- --------- ---- ------- ---------
CASH & CASH EQUIVALENTS,
END OF QUARTER......... $ 15,195 $ 12,441 $908 $ -- $ 28,544
======== ========= ==== ======= =========
</TABLE>
F-51
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Balance Sheets
March 25, 1999
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents........... $ 9,686 $ 11,089 $4,224 $ -- $ 24,999
Receivables, net....... 19,281 25,878 1,030 (31,360) 14,829
Inventories............ 32,163 29,215 -- -- 61,378
Income taxes
receivable
(payable)............. 1,883 (2,634) (551) 5,883 4,581
Prepaid expenses....... 1,297 1,329 8 -- 2,634
Property held for
sale.................. 82 -- -- -- 82
Deferred income
taxes................. 1,366 2,767 -- -- 4,133
-------- -------- ------ --------- --------
Total current
assets............ 65,758 67,644 4,711 (25,477) 112,636
-------- -------- ------ --------- --------
Investment in
subsidiaries........... 77,188 968 -- (78,156) --
-------- -------- ------ --------- --------
Property and equipment,
net.................... 147,662 257,728 337 -- 405,727
-------- -------- ------ --------- --------
Other assets:
Goodwill, net.......... 97,555 71,876 -- -- 169,431
Deferred lease cost,
net................... 247 -- -- -- 247
Deferred financing
cost, net............. 13,130 -- -- -- 13,130
Environmental
receivables, net...... 11,566 1,166 -- -- 12,732
Intercompany note
receivable............ 257,465 49,705 -- (307,170) --
Other.................. 3,214 4,845 -- 968 9,027
-------- -------- ------ --------- --------
Total other
assets............ 383,177 127,592 -- (306,202) 204,567
-------- -------- ------ --------- --------
Total assets....... $673,785 $453,932 $5,048 $(409,835) $722,930
======== ======== ====== ========= ========
</TABLE>
F-52
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Balance Sheets--(Continued)
March 25, 1999
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
- -----------------------------
Current liabilities:
Current maturities of long-
term debt.................. $ 5,117 $ 296 $ 18 $ -- $ 5,431
Current maturities of
capital lease
obligations................ 213 1,027 -- -- 1,240
Short-term debt............. -- -- -- -- --
Accounts payable:
Trade..................... 35,009 31,297 -- (26) 66,280
Money orders.............. 4,620 3,345 -- -- 7,965
Accrued interest............ 14,373 -- 1 (3,580) 10,794
Accrued compensation and
related taxes.............. 4,019 3,842 1 -- 7,862
Income taxes payable........ -- -- -- -- --
Other accrued taxes......... 2,529 6,009 -- -- 8,538
Accrued insurance........... 3,825 4,676 -- -- 8,501
Other accrued liabilities... 24,634 23,464 121 (17,358) 30,861
-------- -------- ------ --------- --------
Total current
liabilities............ 94,339 73,956 141 (20,964) 147,472
-------- -------- ------ --------- --------
Long-term debt............... 453,072 1,097 108 -- 454,277
-------- -------- ------ --------- --------
Other noncurrent liabilities:
Environmental reserves...... 13,566 3,619 -- -- 17,185
Deferred income taxes....... (1,667) 25,081 -- -- 23,414
Capital lease obligations... 1,413 10,085 -- -- 11,498
Employment obligations...... 749 -- -- -- 749
Accrued dividends on
preferred stock............ 5,837 -- -- -- 5,837
Intercompany note payable... 51,705 259,961 -- (311,666) --
Other....................... 18,325 7,690 37 -- 26,052
-------- -------- ------ --------- --------
Total other noncurrent
liabilities............ 89,928 306,436 37 (311,666) 84,735
-------- -------- ------ --------- --------
SHAREHOLDERS' EQUITY
(DEFICIT):
Preferred stock.............. -- -- -- -- --
Common stock................. 119 1 5,001 (5,002) 119
Additional paid-in capital... 70,727 6,882 -- (6,882) 70,727
Shareholder loans............ (937) -- -- -- (937)
Accumulated earnings
(deficit)................... (33,463) 65,560 (239) (65,321) (33,463)
-------- -------- ------ --------- --------
Total shareholders'
equity (deficit)....... 36,446 72,443 4,762 (77,205) 36,446
-------- -------- ------ --------- --------
Total liabilities and
shareholders' equity
(deficit).............. $673,785 $453,932 $5,048 $(409,835) $722,930
======== ======== ====== ========= ========
</TABLE>
F-53
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Six Months Ended March 25, 1999
(Unaudited)
<TABLE>
<CAPTION>
Total
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $170,297 $133,655 $ -- $ -- $303,962
Gasoline sales........ 212,186 148,731 -- -- 360,917
Commissions........... 6,294 4,226 -- -- 10,520
-------- -------- ----- -------- --------
Total revenues...... 388,777 286,622 -- -- 675,399
-------- -------- ----- -------- --------
Cost of sales:
Merchandise........... 115,711 89,114 -- -- 204,825
Gasoline.............. 186,555 128,078 -- -- 314,633
-------- -------- ----- -------- --------
Total cost of
sales.............. 302,266 217,192 -- -- 519,458
-------- -------- ----- -------- --------
Gross profit............ 86,511 69,430 -- -- 155,941
-------- -------- ----- -------- --------
Operating expenses:
Store expenses........ 65,635 41,158 (121) (11,457) 95,215
General and
administrative
expenses............. 11,849 10,496 11 -- 22,356
Depreciation and
amortization......... 9,119 8,708 3 -- 17,830
-------- -------- ----- -------- --------
Total operating
expenses........... 86,603 60,362 (107) (11,457) 135,401
-------- -------- ----- -------- --------
Income (loss) from
operations............. (92) 9,068 107 11,457 20,540
-------- -------- ----- -------- --------
Equity in earnings of
subsidiaries........... 13,677 16 -- (13,693) --
-------- -------- ----- -------- --------
Other income (expense):
Interest expense...... (11,564) (9,819) (5) 2,515 (18,873)
Miscellaneous......... (226) 14,237 72 (13,955) 128
-------- -------- ----- -------- --------
Total other
expense............ (11,790) 4,418 67 (11,440) (18,745)
-------- -------- ----- -------- --------
Income (loss) before
income taxes and
extraordinary loss..... 1,795 13,502 174 (13,676) 1,795
Income tax benefit
(expense).............. (718) (4,717) (89) 4,806 (718)
-------- -------- ----- -------- --------
Net income (loss) before
extraordinary item..... 1,077 8,785 85 (8,870) 1,077
Extraordinary loss...... (3,557) -- -- -- (3,557)
-------- -------- ----- -------- --------
Net income (loss)....... (2,480) 8,785 85 (8,870) (2,480)
Preferred dividends..... (1,446) -- -- -- (1,446)
-------- -------- ----- -------- --------
Net loss applicable to
common shareholders.... $ (3,926) $ -- $ -- $ -- $ (3,926)
======== ======== ===== ======== ========
</TABLE>
F-54
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited as to March 26, 1998 and March 25, 1999 information)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Six Months Ended March 25, 1999
(Unaudited)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)....... $ (2,480) $ 8,785 $ 85 $ (8,870) $ (2,480)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Extraordinary loss..... 3,405 -- -- -- 3,405
Depreciation and
amortization.......... 9,119 8,708 3 -- 17,830
Change in deferred
income taxes.......... (136) 256 -- -- 120
(Gain) loss on sale of
property and
equipment............. (741) 344 -- (13) (410)
Reserves for
environmental issues.. 79 (31) -- -- 48
Equity earnings of
affiliates............ (8,950) -- -- 8,950 --
Changes in operating
assets and liabilities,
net:
Receivables............ (9,311) (7,685) 569 15,479 (948)
Inventories............ (3,668) (960) -- -- (4,628)
Prepaid expenses....... (44) 31 (5) -- (18)
Other noncurrent
assets................ (218) (2,011) -- 13 (2,216)
Accounts payable....... 6,914 997 -- -- 7,911
Other current
liabilities and
accrued expenses...... 16,036 (9,863) (490) (11,369) (5,686)
Employment
obligations........... (185) -- -- -- (185)
Other noncurrent
liabilities........... 2,999 (1,703) (1) (633) 662
--------- ------- ------ -------- ---------
Net cash provided by
(used in) operating
activities............. 12,819 (3,132) 161 3,557 13,405
--------- ------- ------ -------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (93) -- -- -- (93)
Additions to property
and equipment......... (12,259) (10,907) -- -- (23,166)
Proceeds from sale of
property held for
sale.................. 1,495 -- -- -- 1,495
Proceeds from sale of
property and
equipment............. 376 -- -- -- 376
Intercompany notes
receivable (payable).. (2,081) 100,139 -- (98,058) --
Acquisitions of related
businesses, net of
cash acquired ........ (143,610) (80,791) -- 94,501 (129,900)
--------- ------- ------ -------- ---------
Net cash provided by
(used in) investing
activities............. (156,172) 8,441 -- (3,557) (151,288)
--------- ------- ------ -------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases.. (121) (510) -- -- (631)
Principal repayments of
long-term debt........ (143,979) (10) (10) -- (143,999)
Proceeds from issuance
of long-term debt..... 275,000 -- -- -- 275,000
Net proceeds from
equity issues......... 1,068 -- -- -- 1,068
Other financing costs.. (2,960) -- -- -- (2,960)
--------- ------- ------ -------- ---------
Net cash provided by
(used in) financing
activities............. 129,008 (520) (10) -- 128,478
--------- ------- ------ -------- ---------
NET INCREASE (DECREASE)
IN CASH................ (14,345) 4,789 151 -- (9,405)
CASH & CASH EQUIVALENTS,
BEGINNING OF YEAR...... 24,031 6,300 4,073 -- 34,404
--------- ------- ------ -------- ---------
CASH & CASH EQUIVALENTS,
END OF YEAR............ $ 9,686 $11,089 $4,224 $ -- $ 24,999
========= ======= ====== ======== =========
</TABLE>
F-55
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Lil' Champ Food Stores, Inc.
Jacksonville, Florida
We have audited the accompanying balance sheets of Lil' Champ Food
Stores, Inc. (a wholly-owned subsidiary of Docks U.S.A., Inc.) as of December
30, 1995 and December 28, 1996, and the related statements of operations,
shareholder's equity, and cash flows for the years then ended. These financial
statements are the responsibility of Lil' Champ's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Lil' Champ Food Stores, Inc. as of December
30, 1995 and December 28, 1996 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Jacksonville, Florida
February 14, 1997
F-56
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
BALANCE SHEETS
(Unaudited as to September 27, 1997 information)
(Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
December 30, December 28, September 27,
1995 1996 1997
------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and equivalents.................. $ 13,553 $ 19,510 $ 9,506
Certificates of deposit............... 805 805 805
Receivables, net of allowance for
doubtful accounts (1995-$0; 1996-
$21; 1997-$21)....................... 1,518 1,820 1,824
Environmental receivables, current
portion, net of allowance for
uncollectible amounts (1995-$545;
1996-$710; 1997-$515)................ 1,798 2,066 1,330
Inventories........................... 17,072 17,938 18,017
Prepaid income taxes.................. 68 2,784 545
Current portion of deferred income
taxes................................ 313
Prepaid expenses and other assets..... 1,444 1,365 1,032
Due from affiliates................... 238 225 304
-------- -------- --------
Total current assets................ 36,809 46,513 33,363
-------- -------- --------
PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS, net of accumulated
depreciation and amortization (1995-
$56,543; 1996-$62,062; 1997-$61,848).. 110,083 117,354 119,158
BUILDINGS UNDER CAPITAL LEASES, net of
accumulated amortization (1995-$7,592;
1996-$7,895; 1997-$8,664)............. 8,210 11,264 10,396
OTHER ASSETS:
Investment in The Eli Witt Company.... 2,037
Goodwill, net of accumulated
amortization (1995-$4,391; 1996-
$5,166; 1997-$5,747)................. 14,981 14,206 13,625
Environmental receivables, net of
allowance for uncollectible amounts
(1995-$1,013; 1996-$429; 1997-
$734)................................ 3,341 1,249 1,521
Other................................. 1,076 921 1,042
-------- -------- --------
Total other assets.................. 21,435 16,376 16,188
-------- -------- --------
TOTAL ASSETS........................... $176,537 $191,507 $179,105
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable, trade............... $ 12,841 $ 18,287 $ 19,612
Current portion of obligations under
capital leases....................... 871 1,037 990
Current portion of long-term debt..... 4,353 4,355 10,700
Accrued compensation and employee
benefits............................. 1,867 2,146 2,182
Current portion of accrued workers'
compensation self insurance.......... 2,579 2,271 2,261
Accrued medical and health
insurance............................ 900 630 565
Accrued interest...................... 179 272 46
Lottery payable....................... 1,828 2,131 1,657
Other taxes payable................... 4,809 2,766 4,081
Deferred income taxes payable......... 90 159
Money orders trust fund payable....... 242 (309) 766
Other accrued liabilities............. 4,536 4,690 5,378
-------- -------- --------
Total current liabilities........... 35,005 38,366 48,397
-------- -------- --------
DEFERRED INCOME........................ 211 298 259
DEFERRED INCOME TAXES.................. 7,856 10,060 9,824
OBLIGATIONS UNDER CAPITAL LEASES, less
current portion....................... 9,604 12,547 11,837
ACCRUED WORKERS' COMPENSATION SELF-
INSURANCE less current portion........ 6,391 6,674 7,713
ENVIRONMENTAL RESERVE.................. 3,150
LONG-TERM DEBT, less current portion... 18,050 22,695
DUE TO DOCKS de FRANCE, S.A............ 12,000 6,000
-------- -------- --------
Total liabilities................... 89,117 96,640 81,180
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Notes 4,
6, 8 and 11)
SHAREHOLDER'S EQUITY:
Common stock; authorized issued and
outstanding 500 shares of $1 par
value................................ 1 1 1
Additional paid-in capital............ 67,966 67,966 67,966
Retained earnings..................... 19,453 26,900 29,958
-------- -------- --------
Total shareholder's equity.......... 87,420 94,867 97,925
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY................................ $176,537 $191,507 $179,105
======== ======== ========
</TABLE>
See notes to financial statements.
F-57
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
STATEMENTS OF OPERATIONS
(In Thousands Except Store Data)
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
------------------------- ---------------------------
December 30, December 28, September 28, September 27,
1995 1996 1996 1997
------------ ------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Number of stores in
operation at end of
period................. 501 495 499 488
======== ======== ======== ========
REVENUES:
Gasoline sales........ $257,056 $278,905 $207,208 $214,676
Merchandise sales..... 217,282 226,146 171,322 177,426
Commissions........... 7,978 8,164 5,979 5,971
-------- -------- -------- --------
Total revenues...... 482,316 513,215 384,509 398,073
-------- -------- -------- --------
COST OF SALES:
Gasoline.............. $227,592 251,614 186,110 193,499
Merchandise........... 143,598 148,877 112,909 116,879
-------- -------- -------- --------
Total cost of
sales.............. 371,190 400,491 299,019 310,378
-------- -------- -------- --------
GROSS PROFIT............ 111,126 112,724 85,490 87,695
-------- -------- -------- --------
Store operating
expense................ 70,289 73,721 55,486 56,339
General and
administrative
expenses............... 15,452 14,191 11,397 12,581
Environmental
contamination charge... 3,381
Depreciation and
amortization........... 11,568 11,361 8,439 8,989
-------- -------- -------- --------
Total operating
expenses........... 97,309 99,273 75,322 81,290
-------- -------- -------- --------
INCOME FROM OPERATIONS.. 13,817 13,451 10,168 6,405
OTHER INCOME (EXPENSE):
Interest expense...... (3,219) (2,670) (1,994) (1,712)
Miscellaneous......... 1,873 1,647 865 588
-------- -------- -------- --------
Total other
expense............ (1,346) (1,023) (1,129) (1,124)
-------- -------- -------- --------
INCOME BEFORE INCOME
TAXES.................. 12,471 12,428 9,039 5,281
INCOME TAX EXPENSE...... (4,985) (4,981) (3,622) (2,223)
-------- -------- -------- --------
NET INCOME.............. $ 7,486 $ 7,447 $ 5,417 $ 3,058
======== ======== ======== ========
</TABLE>
See notes to financial statements.
F-58
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
STATEMENTS OF SHAREHOLDER'S EQUITY
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to Nine Months Ended September 27, 1997 information)
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
Common Stock
------------ Additional
Par Paid-in Retained
Shares Value Capital Earnings Total
------ ----- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994............ 500 $ 1 $67,966 $11,967 $79,934
Net income.......................... 7,486 7,486
--- --- ------- ------- -------
BALANCE, DECEMBER 30, 1995............ 500 1 67,966 19,453 87,420
Net income.......................... 7,447 7,447
--- --- ------- ------- -------
BALANCE, DECEMBER 28, 1996............ 500 1 67,966 26,900 94,867
Net income.......................... 3,058 3,058
--- --- ------- ------- -------
BALANCE, SEPTEMBER 27, 1997........... 500 $ 1 $67,966 $29,958 $97,925
=== === ======= ======= =======
</TABLE>
See notes to financial statements.
F-59
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
------------------------- ---------------------------
December 30, December 28, September 28, September 27,
1995 1996 1996 1997
------------ ------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............ $ 7,486 $ 7,447 $ 5,417 $ 3,058
Adjustments to
reconcile net income
to cash provided by
operating activities:
Depreciation and
amortization....... 11,568 11,361 8,439 8,989
Loss on investment.. 37
(Gain) loss on sale
of assets.......... 225 (90) 193 132
Changes in assets and
liabilities
Deferred income
taxes.............. (744) 2,607 (167)
Receivables......... (10) (302) (300) (4)
Inventories......... (467) (866) (1,352) (79)
Prepaid taxes....... (68) (2,716) (507) 2,239
Prepaid expenses and
other assets....... 89 2,058 1,416 676
Due from
affiliates......... (43) 13 43 (79)
Accounts payable,
trade.............. 795 5,446 5,630 1,325
Enviromental
Reserve............ 3,150
Other liabilities... (345) (2,066) 2,148 3,565
Income taxes
payable............ (598)
Accrued interest.... (67) 93 92 (226)
-------- -------- -------- --------
Net cash provided
by operating
activities....... 17,821 23,022 21,219 22,579
-------- -------- -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of property,
equipment and
leasehold
improvements......... (11,977) (21,353) (16,124) (10,153)
Proceeds from sale of
equipment and
leasehold
improvements......... 632 4,708 3,176 677
Proceeds related to
Eli Witt investment.. 2,000
-------- -------- -------- --------
Net cash used in
investing
activities....... (11,345) (14,645) (12,948) (9,476)
-------- -------- -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Additional borrowings
under long-term
debt................. 2,000 20,000 12,000
Payments to Docks de
France, S.A. ........ (6,000) (6,000) (6,000) (6,000)
Principal payments
under long-term
debt................. (4,862) (15,353) (7,348) (28,350)
Principal payments
under capital lease
obligations.......... (921) (1,067) (890) (757)
-------- -------- -------- --------
Net cash used in
financing
activities....... (9,783) (2,420) (14,238) (23,107)
-------- -------- -------- --------
NET INCREASE
(DECREASE)............. (3,307) 5,957 (5,967) (10,004)
CASH AND EQUIVALENTS,
BEGINNING OF YEAR...... 16,860 13,553 13,553 19,510
-------- -------- -------- --------
CASH AND EQUIVALENTS,
END OF YEAR............ $ 13,553 $ 19,510 $ 7,586 $ 9,506
======== ======== ======== ========
CASH PAID FOR:
Interest.............. $ 3,286 $ 2,577 $ 1,902 $ 1,937
======== ======== ======== ========
Income taxes.......... $ 6,438 $ 5,090 $ 4,130 $ 2,250
======== ======== ======== ========
</TABLE>
See notes to financial statements.
F-60
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
1--COMPANY'S BUSINESS
Lil' Champ Food Stores, Inc. is a convenience store chain operating in
central and northern Florida and southeastern Georgia.
2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year--Lil' Champ operates on the basis of a 52-53 week fiscal year
ending on the last Saturday in December. The years ended December 28, 1996 and
December 30, 1995 consisted of 52 weeks.
Unaudited Financial Statements--In the opinion of management, the
Unaudited Balance Sheet as of September 27, 1997, and the unaudited statements
of Operations, Shareholder's Equity, and Cash Flows for the nine months ended
September 28, 1996 and September 27, 1997 include all adjustments (which
include only normal recurring adjustments) necessary to present the financial
position and results of operations and cash flows for the periods then ended in
accordance with generally accepted accounting principles.
Cash and Equivalents--Lil' Champ considers all investments with an
original maturity of three months or less to be cash equivalents.
Certificates of Deposit--Certificates of deposit for $500,000 secure a
standby letter of credit and are pledged to the State of Georgia as security
for payment of workers' compensation claims.
Certificates of deposit for $305,000 are pledged to the State of Florida
as security for payment of workers' compensation claims.
Inventories--Merchandise inventories are valued at the lower of last-in,
first-out (LIFO) cost or market using the retail method. Information relating
to the first-in, first-out (FIFO) method may be useful in comparing operating
results to those companies not on LIFO. If the FIFO method had been used by the
Company, merchandise inventory would have been $3,112,000 and $3,086,000 higher
than as reported as of December 30, 1995 and December 28, 1996. Due to the LIFO
method of inventory valuation, income before income taxes was decreased by
$206,000 for the year ended December 30, 1995 and increased by $26,000 for the
year ended December 28, 1996.
Gasoline is valued at the lower of FIFO cost or market.
Property, Equipment and Leasehold Improvements--Property, equipment and
leasehold improvements are stated at cost, which includes cost of construction,
property taxes and interest incurred during development. Depreciation and
amortization for financial reporting purposes are computed using the straight-
line method based upon the following estimated useful lives in years:
<TABLE>
<S> <C>
Buildings.......................................... 18-30
Office and store equipment......................... 3-15
Automotive equipment............................... 3-4
Leasehold improvements, equipment and buildings Shorter of the initial
under lease....................................... lease term or estimated
useful under lease life
of asset.
</TABLE>
F-61
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
Repairs and maintenance are charged to income; major expenditures for
renewals and betterments are capitalized. When items of property are sold or
otherwise disposed of, the related costs and accumulated depreciation or
amortization are removed from the accounts, and any resulting gains or losses
are credited or charged to income.
Investment in the Eli Witt Company--At December 30, 1995 and December 28,
1996, Lil' Champ owned less than 15% of the outstanding common stock of The
Eli Witt Company, formerly known as Certified Grocers of Florida, Inc. Lil'
Champ also did not have the ability to exert significant influence over the
operations of Eli Witt. As a result, Lil' Champ accounted for its investment
in Eli Witt under the cost method of accounting of accounting for investments.
Writedowns of this investment are considered to be permanent diminutions in
value.
Goodwill--Goodwill is being amortized using the straight-line method over
twenty-five years.
Advertising Costs--Lil' Champ expenses advertising costs as incurred. For
the years ended December 30, 1995 and December 28, 1996, advertising expense
totaled approximately $490,000 and $454,000, respectively. There were no
advertising costs reported as assets at December 30, 1995 or December 28,
1996.
Leasing Arrangements--A substantial portion of Lil' Champ's operations
are conducted in leased premises. Some leases on convenience store locations
provide for a base rental amount per month and contingent additional rentals
if an annual gross sales floor is exceeded. Renewal options generally provide
for multiple terms of five years each and in some instances are at increased
rentals. Some leases require Lil' Champ to pay real estate taxes and other
expenses.
Certain building and equipment leases have been capitalized and are being
amortized over the shorter of the lease term or the estimated useful life of
the asset. All other leases are accounted for as operating leases. In most
cases, management expects that leases will be renewed or replaced by other
leases in the normal course of business.
Workers' Compensation Self-Insurance--Lil' Champ self-insures its
exposure to workers' compensation claims up to certain limits. Lil' Champ
records estimated liabilities based on currently available information.
Ultimate claims and expenses may vary from the current estimates and as
adjustments become necessary, they are recorded in earnings in the periods in
which they become known.
Group Health Self Insurance--Lil' Champ self-insures its group health
insurance claims to certain limits per occurrence. Estimated liabilities are
based on prior years' experience on claims and on current year fixed
administrative costs.
Income Taxes--Lil' Champ's parent files consolidated Federal income tax
returns. For financial statement purposes, Lil' Champ determines its income
tax liability and provisions using the separate return method.
F-62
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
Deferred income taxes are provided on temporary differences between the
financial reporting and the tax basis of Lil' Champ's assets and liabilities.
Deferred Income--Gains resulting from sale/leaseback transactions
involving land and buildings have been deferred. Such gains are being amortized
in proportion to the amortization of the leased asset, if a capital lease, or
in proportion to the related gross rental charged to expense over the lease
term, if an operating lease.
Excise and Use taxes--Lil' Champ collects and remits various federal and
state excise taxes on petroleum products. Sales and cost of sales included
approximately $62,708,000 and $65,375,000 for the years ended December 30, 1995
and December 28, 1996, respectively.
Sales and cost of sales included $49,495,000 and $48,099,000 of such taxes
for the nine-months ended September 28, 1996 and September 27, 1997,
respectively (unaudited).
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3--PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
A summary of property, equipment and leasehold improvements, net, follows
(in thousands):
<TABLE>
<CAPTION>
December 30, December 28,
1995 1996
------------ ------------
<S> <C> <C>
Land............................................... $ 44,581 $ 44,894
Buildings.......................................... 30,172 29,000
Store equipment.................................... 26,327 34,539
Leasehold improvements............................. 7,629 7,468
Automotive equipment............................... 547 581
Office equipment................................... 589 587
Construction in progress........................... 238 285
-------- --------
$110,083 $117,354
======== ========
</TABLE>
F-63
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
4--LEASES
Capital Leases--Minimum future lease payments under capital leases at
December 28, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year Ending:
1997............................................................ $ 2,274
1998............................................................ 2,170
1999............................................................ 2,083
2000............................................................ 2,039
2001............................................................ 1,973
Thereafter...................................................... 10,750
-------
Total minimum lease payments...................................... 21,289
Less interest portion............................................. (7,705)
-------
Present value of minimum lease payments (current portion of
$1,037).......................................................... $13,584
=======
</TABLE>
Operating Leases--Rent expense for the years December 30, 1995 and
December 28, 1996 was approximately $7,935,000 and $8,552,000. Minimum annual
rentals under noncancellable leases having an initial or remaining term of more
than one year at December 28, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year Ending:
1997.............................................................. $ 4,672
1998.............................................................. 4,342
1999.............................................................. 3,995
2000.............................................................. 3,465
2001.............................................................. 2,756
Thereafter........................................................ 9,865
-------
Total........................................................... $29,095
=======
</TABLE>
F-64
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
5--LONG-TERM DEBT
At December 30, 1995 and December 28, 1996 long-term debt comprised the
following (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Borrowings under revolving credit agreement with Credit
Lyonnais; interest is based on the New York interbank
eurodollar market rate plus .4% (6.30% and 6.08% at
December 30, 1995 and December 28, 1996); expiring
January 31, 1997. Guaranteed by Docks de France,
S.A. .................................................. $ 6,000 $ 3,000
Note payable to bank under a commitment for total
borrowings up to $8,000 at a variable rate (6.684% and
6.50% at December 30, 1995 and December 28, 1996),
payable in annual installments of 16.67% of the loan
balance payable January 1996 and 1997 and the balance
due January 1998; guaranteed by Docks de France,
S.A. .................................................. 5,334 4,001
Borrowings under $20,000 revolving credit agreement with
Credit Lyonnais; interest is based on the Paris
Interbank Official Rate plus .25% (5.84% at
December 28, 1996), maturing on June 8, 1998.
Guaranteed by Docks de France, S.A. ................... 20,000
Borrowings under $15,000 revolving credit agreement with
Societe Generale; interest is based on the New York
interbank eurodollar market rate plus .35% (6.314% at
December 30, 1995), guaranteed by Docks de France, S.A.
On December 30, 1996 the Company secured a letter of
intent to extend this credit facility for one year..... 11,000
Other notes and mortgages payable, generally due in
monthly installments of principal plus interest at
various rates and terms................................ 69 49
-------- --------
22,403 27,050
Less current portion.................................... (4,353) (4,355)
-------- --------
$18,050 $22,695
======== ========
</TABLE>
The borrowings with Credit Lyonnais require Lil' Champ to obtain consent
from Credit Lyonnais before paying any dividends.
Because Lil' Champ has the ability and the intent to refinance $6,000,000
of borrowings from Docks de France, S.A. otherwise coming due during 1997, this
amount has been reclassified from current liabilities to long-term as of
December 28, 1996.
Aggregate principal payments required on long-term debt during each of
the fiscal years ending subsequent to December 28, 1996 are as follows (in
thousands):
<TABLE>
<S> <C>
Fiscal Year Ending In:
1997............................................................ $ 4,355
1998............................................................ 22,691
1999............................................................ 4
--------
$ 27,050
========
</TABLE>
F-65
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
6--RELATED PARTY TRANSACTIONS
Lil' Champ is a wholly-owned subsidiary of Docks U.S.A., Inc., and is an
affiliate of Docks de France, S.A., the parent company of Docks U.S.A. Certain
premises used by Lil' Champ in its operations are leased under arrangements
with related parties. The related parties include Julian Jackson, a former
owner and a director of Lil' Champ, L.L. and W.T. Huntley, former owners and
consultants to Lil' Champ trusts controlled by Julian Jackson, Robert Jackson
and Lester Jackson, brothers of an officer of Lil' Champ, Robert Duss, an
attorney for Lil' Champ, and James Crowell, former Controller of Lil' Champ.
Rental payments under such leases for the years ended December 30, 1995 and
December 28, 1996 were approximately $2,417,000 and $2,582,000. Required future
rentals, which relate to both capital and operating leases, at December 28,
1996 are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal Year Ending In:
1997............................................................. $ 2,825
1998............................................................. 2,813
1999............................................................. 2,749
2000............................................................. 2,672
2001............................................................. 2,600
Thereafter....................................................... 12,498
-------
$26,157
=======
</TABLE>
Sunbelt Wholesale, a company controlled by Robert Jackson, furnishes
certain supplies to Lil' Champ. Payments to Sunbelt Wholesale were
approximately $2,233,000 and $2,102,000 for the years ended December 30, 1995
and December 28, 1996.
Allsafe Security Systems, Inc. and Allsafe Paging Systems, Inc.,
companies controlled by Lester Jackson, supplies burglar alarms, security
systems and an alerting system which allows mobility to store personnel. This
equipment is subject to a monthly rental fee plus charges for initial
installation and maintenance. Approximately $882,000 and $1,207,000 was
expended for this service for the years ended December 30, 1995 and December
28, 1996.
The $6,000,000 due to Docks de France, S.A. is payable June 25, 1997.
Interest accrues at 6.6% per annum. Interest of $990,000 and $594,000 was paid
for the years ended December 30, 1995 and December 28, 1996. See note 5 related
to the classification of this amount.
Lil' Champ paid Docks U.S.A., Inc. approximately $500,000 of service
agreement fees for the years ended December 30, 1995 and December 28, 1996.
During 1996, Lil' Champ entered into four sale-leaseback transactions
with Julian Jackson or to affiliates and one with the spouse of an employee,
whereby buildings with a net book value of $4,022,000 were sold to Mr. Jackson
and the spouse of an employee for $4,176,000. These same properties were then
leased back to Lil' Champ for a 15 year term. The leases require Lil' Champ to
F-66
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
pay customary operating and repair expenses and contain renewal options at
lease termination. Minimum annual rentals due to Mr. Jackson and the spouse of
an employee under the leases total approximately $418,000 and $41,000,
respectively. The leases were classified as capital leases, therefore the
underlying property was capitalized and the obligation recognized. Lil' Champ
recognized a gain of approximately $155,000 on the sale, $143,000 of which is
deferred and is being amortized over the 15 year term of the related capital
leases.
7--INCOME TAXES
The provision for income taxes for the years ended December 30, 1995 and
December 28, 1996 is comprised of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Current:
Federal.................................................. $4,897 $2,028
State.................................................... 832 346
------ ------
5,729 2,374
------ ------
Deferred:
Federal.................................................. (634) 2,223
State.................................................... (110) 384
------ ------
(744) 2,607
------ ------
Provision for income taxes................................. $4,985 $4,981
====== ======
</TABLE>
Income taxes, for the years ended December 30, 1995 and December 28,
1996, differ from the amount computed by applying the federal statutory
corporate rate to earnings before income taxes. The amounts of such differences
(in thousands) and the reasons are set forth in the table below:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Provision based on federal income tax rate................. $4,240 $4,226
State income taxes--net of federal income tax benefit...... 580 481
Nondeductible amortization................................. 267 267
Other...................................................... (102) 7
------ ------
Actual provision for income taxes.......................... $4,985 $4,981
====== ======
</TABLE>
F-67
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
The types of temporary differences and their related tax effects which
create deferred tax liabilities at December 30, 1995 and December 28, 1996 are
summarized below (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Deferred tax liabilities:
Fixed asset basis differences............................ $7,960 $10,525
Reserve for LIFO......................................... 1,821 1,582
Deductible prepaids...................................... 3,066 1,762
Other.................................................... 609
------ -------
12,847 14,478
------ -------
Deferred tax assets:
Capital leases........................................... 853 874
Writedown of investment in Eli Witt...................... 516
Self-insured liabilities................................. 3,719 3,454
Other.................................................... 216
------ -------
5,304 4,328
------ -------
Net deferred tax liability................................. $7,543 $10,150
====== =======
</TABLE>
8--COMMITMENTS AND CONTINGENCIES
Lil' Champ is a party to various lawsuits, threatened suits and claims.
It is the opinion of management that the resolution of such matters will not
have a material adverse effect on Lil' Champ's financial position or results of
operations.
9--CASH FLOW
Supplemental disclosure of noncash investing and financing activities (in
thousands):
<TABLE>
<CAPTION>
1995 1996
---- ------
<S> <C> <C>
Additional capital lease obligations on buildings............. $-0- $4,176
==== ======
</TABLE>
10--RETIREMENT SAVINGS PLAN
Lil' Champ has a 401(k) plan for all full-time employees who are 21 years
of age or older and who have been employed one year with at least 1,000 hours
of service. Participants can contribute 1% to 10% of their salary, not to
exceed a maximum allowable contribution amount. Participant contributions are
100% vested. Distributions may be made at employment termination, retirement,
or in the event participants are disabled or can demonstrate financial
hardship. Lil' Champ matches an amount equal to 15% of the participants'
contribution. The total contribution for the years ended December 30, 1995 and
December 28, 1996 was $83,000 and $98,000.
F-68
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
11--ENVIRONMENTAL MATTERS
The ownership and/or operation of underground storage tanks is subject to
federal, state and local laws and regulations.
Prior to 1996, Lil' Champ was involved in evaluating and cleaning up
environmental contamination caused by releases of petroleum products at its
stores. The costs related to this process are reimbursable from state programs
in both Florida and Georgia, which are funded from taxes and fees paid based on
the purchase of petroleum products. As a result, Lil' Champ has recorded
receivables for such reimbursements totaling $6,697,000 and $4,454,000 at
December 30, 1995 and December 28, 1996 and $4,100,000 at September 27, 1997.
Lil' Champ has not been able to reasonably estimate that amount which will be
reimbursed by the state of Georgia; therefore, amounts expended for clean-up in
Georgia have generally been expensed and although some portion of this amount
may be reimbursed in the future Lil' Champ has not recorded a receivable for
such amounts. Lil' Champ has provided an allowance on environmental receivables
of $1,558,000 and $1,139,000 as of December 30, 1995 and December 28, 1996 and
$1,249,000 as of September 27, 1997. This allowance is an estimate of amounts
that Lil' Champ has incurred that may not be reimbursed by the state of Florida
and outside engineering firms and is based on historical experience of
reimbursement from these entities. Amounts due from the State of Florida trust
funds are expected to be collected by December 31, 1999. Amounts due from the
State of Georgia are expected to be collected over the next two to four years.
In prior years, Lil' Champ entered into agreements with outside
engineering firms to assume the clean-up of contamination sites in Florida.
Under these arrangements Lil' Champ was still responsible for the clean-up of
the sites but Lil' Champ did not incur significant expenditures to complete the
clean-up of existing sites. Lil' Champ had expended funds which were submitted
to the State for reimbursement by the outside engineering firms. These amounts,
which represent approximately 48% of the gross environmental receivable, will
be reimbursed directly to the engineering firms who will in-turn reimburse Lil'
Champ.
During 1996, new legislation was enacted by the State of Florida which
replaced the State's previous reimbursement program. All expenditures incurred
through March 29, 1995 and submitted for reimbursement by December 31, 1996
will be evaluated and reimbursed on the same basis as prior submissions. Under
the new legislation, the State has assumed the responsibility for clean-up of
registered sites assessed and reported to the State under the previous program,
but not yet remediated, exclusive of tank or other hardware replacement.
Georgia Underground Storage Tank Fund--Remediation of contaminated sites
in Georgia will be reimbursed under the state program for eligible costs to a
maximum of $1,000,000 per site. A $10,000 deductible applies to each site. All
Lil' Champ sites in Georgia qualify for coverage from this fund. Lil' Champ
does not currently expect remediation at any of its sites to exceed $1,000,000
of coverage.
F-69
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
Florida Underground Storage Tank Fund--Remediation of contaminated sites
in Florida is eligible for reimbursement under the state's program. For
incidents discovered and reported to the state prior to July 1, 1992, the state
will reimburse for all eligible remediation costs to a maximum of $1,000,000
per incident with an annual aggregate of $2,000,000 per facility. For incidents
discovered from July 1, 1992 to June 30, 1993, the state will reimburse for all
eligible reimbursement costs to a maximum of $1,000,000 subject to a $1,000
deductible. For incidents discovered from July 1, 1993 to December 31, 1993,
the state will reimburse for all eligible reimbursement costs to a maximum of
$1,000,000 subject to a $5,000 deductible. For incidents discovered from
January 1, 1994 to December 31, 1996 the maximum reimbursement was reduced to
$300,000 per site with a $10,000 deductible. For incidents discovered
subsequent to December 31, 1996, the maximum reimbursement was reduced to
$150,000 per site with a $10,000 deductible. For incidents discovered
subsequent to December 31, 1998 no costs will be eligible for reimbursement
under this program. Lil' Champ is responsible for all costs in excess of the
state limits. Notwithstanding this schedule of limits, certain of the Lil'
Champ sites are covered under the other Florida "trust fund" programs pursuant
to which the state will pay all required costs.
During 1997, in response to recent changes to State of Florida laws which
limited the maximum coverage amounts of the Florida state trust funds,
management of Lil' Champ engaged an independent environmental consulting firm
to perform a comprehensive review of the status of its stores as it relates to
environmental remediation. As a result, Lil' Champ recorded an environmental
contamination charge of approximately $3,381,000. This charge relates to 50
stores and consists of trust fund and private insurance deductibles of $600,000
and clean-up costs for known and future discharges in excess of reimbursement
limits set by state trust funds and private insurers of approximately
$2,781,000. The charge was established on an undiscounted basis and has been
reflected in the accompanying statement of operations for the nine-month period
ended September 27, 1997 as a change in estimate. Costs relating to this charge
are expected to be incurred over a one to five year period.
In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
96-1, Environmental Remediation Liabilities. Statement of Position 96-1
provides authoritative guidance on specific accounting issues that are present
in the recognition, measurement, display and disclosure of environmental
remediation liabilities. The provisions of this Statement of Position are
effective for fiscal years beginning after December 15, 1996. Lil' Champ's
management does not believe the adoption of this statement will have a material
impact on Lil' Champ's financial statements.
F-70
<PAGE>
LIL' CHAMP FOOD STORES, INC.
(A Wholly-Owned Subsidiary of Docks U.S.A., Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 30, 1995 and December 28, 1996
(Unaudited as to September 28, 1996 and September 27, 1997 information)
12--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each class
of financial instrument of Lil' Champ are as follows:
. Long-term debt--The carrying amount of Lil' Champ's borrowings
approximate fair value because the interest rates are based on
floating rates identified by reference to market rates.
. Due to Docks de France, S.A.--The fair values of Lil' Champ's account
payable to Docks de France, S.A. are estimated based on current rates
offered to the Company for debt of the same remaining maturities:
The carrying amounts and fair values of long-term debt and Due to
Docks de France at December 31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
-------- -------
<S> <C> <C>
Long-term debt......................................... $27,050 $27,050
Due to Docks de France, S. A. ......................... $ 6,000 $ 5,662
</TABLE>
13--SUBSEQUENT EVENT (UNAUDITED)
On October 23, 1997, The Pantry, Inc. purchased all of the capital stock
of Lil' Champ for $132.7 million in cash and repaid all outstanding
indebtedness of Lil' Champ.
F-71
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Quick Stop Food Mart, Inc.
Fayetteville, North Carolina
We have audited the accompanying balance sheets of Quick Stop Food Mart,
Inc. as of December 31, 1996 and 1997, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
Quick Stop Food Mart's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Quick Stop Food
Mart, Inc. as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Cherry, Bekaert &
Holland, L.L.P.
Fayetteville, North Carolina
March 6, 1998, except for Note 10,
as to which the date is February 24, 1999
F-72
<PAGE>
QUICK STOP FOOD MART, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
----------------------- -----------
1996 1997 1998
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents................ $ 1,489,685 $ 930,995 $ 2,209,473
Receivables (net of allowance for
doubtful accounts of $30,000 in 1996 and
$33,000 in 1997 and 1998)............... 971,690 1,241,442 965,351
Inventories.............................. 3,303,988 3,805,653 3,334,167
Other current assets..................... 147,765 140,265 292,520
----------- ----------- -----------
TOTAL CURRENT ASSETS................. 5,913,128 6,118,355 6,801,511
----------- ----------- -----------
PROPERTY AND EQUIPMENT
Land and buildings....................... 6,794,281 9,615,335 9,912,660
Store and office equipment............... 16,135,535 21,651,228 22,345,714
Transportation equipment................. 937,019 1,026,034 1,094,310
Leasehold improvements................... 2,575,573 3,117,212 3,277,948
Construction-in-progress................. 2,308,181 137,347 23,006
----------- ----------- -----------
28,750,589 35,547,156 36,653,638
Less accumulated depreciation.......... 12,826,346 14,609,791 16,071,013
----------- ----------- -----------
NET PROPERTY AND EQUIPMENT........... 15,924,243 20,937,365 20,582,625
----------- ----------- -----------
OTHER NONCURRENT ASSETS.................... 1,510,193 1,724,495 1,799,870
----------- ----------- -----------
$23,347,564 $28,780,215 $29,184,006
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt........ $ 1,121,949 $ 804,606 $ 5,941,863
Line of credit........................... -- 600,000 1,300,000
Bonds payable related party.............. 25,829 25,829 25,829
Accounts payable and accrued expenses.... 7,750,842 7,995,854 7,788,880
----------- ----------- -----------
TOTAL CURRENT LIABILITIES............ 8,898,620 9,426,289 15,056,572
----------- ----------- -----------
LONG-TERM DEBT............................. 2,002,604 5,529,179 --
----------- ----------- -----------
TOTAL LIABILITIES.................... 10,901,224 14,955,468 15,056,572
----------- ----------- -----------
STOCKHOLDERS' EQUITY
Common stock (par value $1). Authorized
100,000 shares; issued and outstanding
1,026 shares in 1996 and 1,078 shares in
1997 and 1998........................... 1,026 1,078 1,078
Additional paid-in capital............... 671,577 886,446 886,446
Retained earnings........................ 11,773,737 12,937,223 13,239,910
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY........... 12,446,340 13,824,747 14,127,434
----------- ----------- -----------
$23,347,564 $28,780,215 $29,184,006
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-73
<PAGE>
QUICK STOP FOOD MART, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended June
Years Ended December 31, 30,
-------------------------------------- -----------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $ 54,465,453 $ 55,590,572 $ 62,411,823 $29,491,717 $30,036,745
Gasoline sales ....... 79,150,257 86,041,854 99,372,689 47,635,887 44,527,464
Commissions........... 268,186 263,966 274,251 134,167 135,549
Sundry income......... 1,583,258 1,672,132 2,444,771 960,360 1,223,067
------------ ------------ ------------ ----------- -----------
Total revenues........ 135,467,154 143,568,524 164,503,534 78,222,131 75,922,825
------------ ------------ ------------ ----------- -----------
Cost of goods sold:
Merchandise........... 41,089,562 41,726,964 47,124,314 22,197,881 22,796,664
Gasoline.............. 69,970,070 78,161,250 89,978,556 43,747,671 40,494,066
------------ ------------ ------------ ----------- -----------
Total cost of goods
sold................. 111,059,632 119,888,214 137,102,870 65,945,552 63,290,730
------------ ------------ ------------ ----------- -----------
Gross Profit.......... 24,407,522 23,680,310 27,400,664 12,276,579 12,632,095
Operating and
administrative
expenses............... 21,639,341 21,812,494 24,569,641 11,878,685 11,278,924
------------ ------------ ------------ ----------- -----------
Income from
operations........... 2,768,181 1,867,816 2,831,023 397,894 1,353,171
Other income............ 407,372 466,743 254,463 184,370 149,516
------------ ------------ ------------ ----------- -----------
Net income............ $ 3,175,553 $ 2,334,559 $ 3,085,486 $ 582,264 $ 1,502,687
============ ============ ============ =========== ===========
</TABLE>
See Notes to Financial Statements
F-74
<PAGE>
QUICK STOP FOOD MART, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------- Six Months Ended
1995 1996 1997 June 30, 1998
----------- ----------- ----------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
COMMON STOCK
Beginning of year..... $ 1,023 $ 1,023 $ 1,026 $ 1,078
Additional shares
issued (3 shares in
1996 and 52 shares in
1997)................ -- 3 52 --
----------- ----------- ----------- -----------
End of year........... $ 1,023 $ 1,026 $ 1,078 $ 1,078
=========== =========== =========== ===========
ADDITIONAL PAID-IN
CAPITAL
Beginning of year..... $ 649,198 $ 649,198 $ 671,577 $ 886,446
Additions............. -- 22,379 214,869 --
----------- ----------- ----------- -----------
End of year........... $ 649,198 $ 671,577 $ 886,446 $ 886,446
=========== =========== =========== ===========
RETAINED EARNINGS
Beginning of year..... $ 9,236,916 $11,131,019 $11,773,737 $12,937,223
Net income............ 3,175,553 2,334,559 3,085,486 1,502,687
Stockholder
distributions........ (1,281,450) (1,691,841) (1,922,000) (1,200,000)
----------- ----------- ----------- -----------
End of year........... $11,131,019 $11,773,737 $12,937,223 $13,239,910
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-75
<PAGE>
QUICK STOP FOOD MART, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
-------------------------------------- ----------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income............. $ 3,175,553 $ 2,334,559 $ 3,085,486 $ 582,264 $1,502,687
Adjustments to
reconcile net income
to net cash provided
by operating
activities --
Depreciation and
amortization........ 1,778,181 1,880,460 2,514,142 1,084,392 1,465,309
(Gain) loss on
disposal of property
and equipment....... (68,573) 17,114 89,722 -- --
(Increase) decrease
in receivables...... 13,954 (53,488) (269,752) 20,381 276,091
(Increase) decrease
in inventories...... 119,566 (392,916) (501,665) (397,216) 471,486
(Increase) decrease
in other current
assets.............. (248,229) 91,243 7,500 (36,576) (152,255)
(Increase) decrease
in other noncurrent
assets.............. (237,213) (355,925) (223,322) 142,680 (79,463)
Increase (decrease)
in accounts payable
and accrued
expenses............ 436,565 1,253,749 245,012 355,484 (206,973)
----------- ----------- ------------ ----------- ----------
NET CASH PROVIDED
BY OPERATING
ACTIVITIES........ 4,969,804 4,774,796 4,947,123 1,751,409 3,276,882
----------- ----------- ------------ ----------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from sale of
property and
equipment............. 155,000 45,575 1,852,021 -- --
Additions to property
and equipment......... (1,248,986) (6,613,166) (9,459,986) (4,455,070) (1,106,482)
----------- ----------- ------------ ----------- ----------
NET CASH USED BY
INVESTING
ACTIVITIES........ (1,093,986) (6,567,591) (7,607,965) (4,455,070) (1,106,482)
----------- ----------- ------------ ----------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from issuance
of debt............... 1,285,000 -- 20,936,250 4,304,469 700,000
Principal payments on
debt.................. (2,202,716) (461,494) (17,127,019) (254,765) (391,922)
Proceeds from sale of
stock................. -- 22,382 214,921 214,921 --
Stockholder
distributions......... (1,281,450) (1,691,841) (1,922,000) (1,300,000) (1,200,000)
----------- ----------- ------------ ----------- ----------
NET CASH FLOWS
PROVIDED (USED) BY
FINANCING
ACTIVITIES........ (2,199,166) (2,130,953) 2,102,152 2,964,625 (891,922)
----------- ----------- ------------ ----------- ----------
NET INCREASE
(DECREASE) IN CASH
AND CASH
EQUIVALENTS....... 1,676,652 (3,923,748) (558,690) 260,964 1,278,478
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD.... 3,736,781 5,413,433 1,489,685 1,489,685 930,995
----------- ----------- ------------ ----------- ----------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD................. $ 5,413,433 $ 1,489,685 $ 930,995 $ 1,750,649 $2,209,473
=========== =========== ============ =========== ==========
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid.......... $ 356,158 $ 295,729 $ 537,603 $ 240,106 $ 310,571
=========== =========== ============ =========== ==========
</TABLE>
See Notes to Financial Statements.
F-76
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Quick Stop Food Mart, Inc. operates convenience stores under the name of
"Quick Stop" in North and South Carolina. Revenues are generated primarily by
the sale of various merchandise and petroleum products to the general public.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Statements of Cash Flows
For purposes of the statements of cash flows, Quick Stop considers all
highly liquid debt instruments purchased with a maturity date of three months
or less to be cash equivalents.
Inventories
Substantially all merchandise inventories are stated at the lower of cost
or market using the retail last-in, first-out (LIFO) inventory method. Gasoline
inventories are stated at the lower of cost or market using the LIFO method.
The current cost of inventories valued under the first-in, first-out, (FIFO)
method exceeded their LIFO carrying values by approximately $1,738,000,
$1,717,000, and $1,717,000 at December 31, 1996 and 1997, and June 30, 1998
respectively.
Property and Equipment
Property and equipment is stated at cost. Maintenance and repairs are
charged to operations as incurred, and renewals and betterments are
capitalized. Gains or losses on disposals are credited or charged to
operations.
Depreciation
Depreciation and amortization is charged to income over the estimated
useful lives of assets using the straight-line method for financial statement
purposes. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings..................................................... 7-25 years
Store and office equipment.................................... 3-10 years
Transportation equipment...................................... 5 years
Leasehold improvements........................................ 5-30 years
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1996, and
1997 and for the 6-month periods ended June 30, 1997 and 1998, was $1,767,540,
$1,869,819, $2,503,455, $1,079,072 and $1,461,222, respectively.
F-77
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stockholders' Equity
All stockholders have equal voting rights according to the number of
shares held. Distributions are primarily made to compensate for the individual
tax impact of Subchapter "S" earnings passed through to each stockholder.
Excise and Use Taxes
Quick Stop collects and remits various federal and state excise taxes on
petroleum products. Sales and cost of sales included $24,910,081, $25,142,217,
and $31,721,206 for the years ended December 31, 1995, 1996, and 1997,
respectively.
Sales and cost of sales included $15,148,212 and $14,052,868 of such
taxes for the six-months ended June 30, 1997 and 1998, respectively
(unaudited).
Advertising
Quick Stop expenses advertising costs as incurred. Advertising costs for
the years ended 1995, 1996 and 1997 were approximately $253,000, $299,000 and
$207,000, respectively.
Income Taxes
Quick Stop has elected by unanimous consent of its stockholders to be
taxed under the provisions of Subchapter "S" of the Internal Revenue code.
Under those provisions, Quick Stop does not pay federal and state income taxes
on its taxable income. Instead, the stockholders are liable for individual
federal and state income taxes on their respective shares of Quick Stop's
taxable income.
Profit-Sharing Plan
Quick Stop sponsors a profit-sharing plan covering full-time employees
who meet specified age and length of service requirements. Contributions are
determined annually based on a percentage of net income as approved by the
board of directors. Contributions amounted to $367,000 in 1995 $278,000 in 1996
and $386,000 in 1997. The board of directors intends to terminate the plan
after receipt of a determination letter from the IRS. No contributions were
made to the plan after December 31, 1997.
Environmental Remediation
Quick Stop accrues environmental remediation costs if it is probable that
an asset has been impaired or a liability incurred at the financial statement
date and the amount can be reasonably estimated. At December 31, 1996 and 1997
and June 30, 1998, Quick Stop was not aware of any liability for environmental
remediation costs nor was it aware of any environmental loss contingencies
requiring accrual in accordance with Statement of Financial Accounting
Standards No. 5 or Statement of Position 96-1. Therefore, no accruals were
established.
Unaudited Interim Financial Statements
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
F-78
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 2--CASH AND CASH EQUIVALENTS
Quick Stop maintains cash and cash equivalent balances at several
financial institutions in North and South Carolina. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. At December 31, 1996 and 1997, Quick Stop's uninsured bank balances
totalled approximately $1,339,000 and $760,000, respectively.
NOTE 3--LINES OF CREDIT
Quick Stop has entered into four credit line arrangements with a local
bank providing maximum borrowings of $15,750,000. Amounts borrowed under these
agreements are due on May 31, 1998 and require monthly interest payments at the
prevailing prime rate minus 1/4%. On May 31, 1998, any unpaid principal
balances shall be set up as a term note. The credit lines are guaranteed by
related parties and secured by inventory, accounts receivable, and equipment.
These credit lines and certain other long term debt obligations contain
restrictions on the combined amounts of stockholders' compensation, dividends
which may be paid, the issuance of additional debt, and other covenants. In
addition, the loan agreements provide that certain financial ratios and other
financial requirements be maintained.
The lines of credit were renewed on May 31, 1998 for a year under the
same terms. These obligations were repaid in full on July 2, 1998 in connection
with the sale of assets (see Note 10).
No advances were outstanding at December 31, 1996; advances outstanding
at December 31, 1997, and June 30, 1998, totalled $600,000 and $1,300,000,
respectively.
NOTE 4--BONDS PAYABLE RELATED PARTY
Bonds payable related party includes obligations to majority stockholders
that are due currently and includes interest at the applicable federal rate.
The obligations are unsecured.
NOTE 5--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1996 1997 1998
---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Notes payable to individuals, due in
monthly installments of $4,371 including
interest at 7.5%; collateralized by
deeds of trust.......................... $ 221,146 $ 184,016 $ 164,364
Notes payable to bank, due in monthly
installments of approximately $48,700
plus interest ranging from the
prevailing prime rate minus 1/4% to the
prevailing prime rate plus 1/2%;
collateralized by inventories, property
and equipment, assignment of leases on
certain properties, and deeds of trust.. 2,535,298 5,950,639 5,667,300
Note payable to bank, due in monthly
installments of $15,747 including
interest at 6.75%. The loan is
collaterized by inventories and property
and equipment........................... 368,109 199,130 110,199
---------- ---------- ---------
3,124,553 6,333,785 5,941,863
Less current installments................ 1,121,949 804,606 5,941,863
---------- ---------- ---------
$2,002,604 $5,529,179 $ --
========== ========== =========
</TABLE>
F-79
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Maturities of long-term debt at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
December 31
-----------
<S> <C>
1998......................................................... $804,606
1999......................................................... 697,313
2000......................................................... 1,684,049
2001......................................................... 1,611,178
2002......................................................... 1,536,639
----------
$6,333,785
==========
</TABLE>
Interest expense for years ended December 31, 1995, 1996 and 1997
totalled approximately $354,000, $293,000 and $553,000, respectively.
In connection with the sale of assets and corporate dissolution described
in Note 10, the notes payable balances outstanding at June 30, 1998, were
repaid during 1998 and 1999. Accordingly, these balances have been reflected as
current liabilities at June 30, 1998.
NOTE 6--STOCK OPTION PLANS
In accordance with a non-qualified stock option plan for key employees,
options have been granted to purchase 281 shares of common stock. The purchase
price of these options are fixed at prices ranging from $4,000 to $7,461 per
share.
Options granted, exercised and canceled during 1995, 1996 and 1997 are as
follows,
<TABLE>
<CAPTION>
December 31,
--------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Options outstanding on January 1.......................... 148 148 145
Granted................................................... -- -- --
Exercised................................................. -- 3 52
Canceled.................................................. -- -- --
Options outstanding at December 31........................ 148 145 93
</TABLE>
The weighted average exercise price for options outstanding at December
31, 1995, 1996 and 1997 was $6,175, $6,220 and $7,461. Options exercised during
1996 and 1997 had a weighted average exercise price of $4,000 in each year.
All options outstanding at December 31, 1997, were exercised on July 1,
1998, for $7,461 per share, in connection with the sale of assets and corporate
dissolution (see Note 10).
NOTE 7--STOCKHOLDER DISTRIBUTIONS
During the years ended December 31, 1995, 1996, and 1997, and the six-
month period ended June 30, 1998, Quick Stop made distributions to its
stockholders of amounts estimated to compensate for the individual tax impact
of Sub chapter "S" earnings passed through to each stockholder. Total
distributions amounted to approximately $1,281,000, $1,692,000, $1,922,000, and
$1,200,000 in each of the respective periods.
F-80
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 8--SALE TO RELATED PARTY
During 1997, Quick Stop sold land and buildings with a book value of
approximately $1,697,000 to a company owned by the majority shareholders of
Quick Stop, realizing a gain of approximately $5,000.
NOTE 9--COMMITMENTS AND CONTINGENT LIABILITIES
Lessee Arrangements
Quick Stop conducts substantially all of its operations utilizing leased
facilities. Some of the operating leases provide that Quick Stop pay taxes,
maintenance and other occupancy expenses applicable to leased premises.
Generally, the leases provide for renewal for various periods at stipulated
rates. Some leases also provide for contingent rents, which are based on store
sales. These contingent amounts are payable in addition to minimum rental
payments.
At December 31, 1997, minimum rental payments under noncancellable
operating leases are as follows:
<TABLE>
<CAPTION>
Years Ending Related Parties Other
------------ --------------- ----------
<S> <C> <C>
1998............................................ $ 1,505,118 $1,080,622
1999............................................ 1,505,118 879,891
2000............................................ 1,505,118 848,379
2001............................................ 1,505,118 705,236
2002............................................ 1,505,118 565,215
Thereafter...................................... 4,013,647 2,116,449
----------- ----------
Total minimum lease payments.................. $11,539,237 $6,195,792
=========== ==========
</TABLE>
Rental expense charged to operations is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rentals under operating leases.... $2,469,107 $2,948,423 $3,125,215
Contingent rentals under operating
leases................................... 15,604 20,573 24,955
---------- ---------- ----------
$2,484,711 $2,968,996 $3,150,170
========== ========== ==========
</TABLE>
The principal owners of Quick Stop and other companies which they own or
with which they are associated are considered related parties. Rental expense
listed above included minimum rental payments to related parties of
approximately $1,466,000, $1,485,000 and $1,521,000 for years ended December
31, 1995, 1996 and 1997, respectively.
F-81
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Lessor Arrangements
Quick Stop subleases facilities to others primarily through
noncancellable operating leases with terms ranging from five to twenty years.
The following is a schedule of future minimum rental income for noncancellable
operating leases with remaining terms of one year or more at December 31, 1997:
<TABLE>
<CAPTION>
Years Ending
------------
<S> <C>
1998........................................................ $ 160,572
1999........................................................ 157,642
2000........................................................ 132,642
2001........................................................ 120,792
2002........................................................ 105,192
Thereafter.................................................. 452,890
----------
Total minimum rental income.................................. $1,129,730
==========
</TABLE>
Quick Stop has guaranteed the repayment of principal and interest on
certain obligations of a related corporation. These obligations are
collateralized by all inventories and equipment of Quick Stop. At December 31,
1997 and June 30, 1998 such guarantees totalled approximately $3,300,000 and
$3,150,000, respectively.
At December 31, 1997 and June 30, 1998 Quick Stop had letters of credit
outstanding totaling $350,000 and $250,000, respectively, which may be drawn
upon to cover a corrective action arising from operating underground storage
tanks and to cover workers' compensation claims.
At December 31, 1997 and June 30, 1998 Quick Stop had contracted with
outside parties for approximately $800,000 for various construction projects.
Quick Stop is subject to laws and regulations relating to the protection
of the environment. While it is not possible to quantify with certainty the
potential impact of actions regarding environmental matters, particularly any
future remediation and other compliance efforts, in the opinion of management,
compliance with the present environmental protection laws will not have a
material adverse effect on the financial position, competitive position, or
capital expenditures of Quick Stop.
Quick Stop is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position of Quick Stop.
NOTE 10--SUBSEQUENT EVENT--SALE OF ASSETS AND CORPORATE DISSOLUTION
Effective July 2, 1998, Quick Stop sold certain assets to The Pantry,
Inc., including the operating assets of Quick Stop's seventy-five (75)
convenience stores, inventory and the "Quick Stop" name. The sales price was
$50,000,000 in cash, plus inventory at cost. Quick Stop retained primarily cash
and cash equivalents, real estate and debt associated with the real estate.
In connection with the acquisition, Quick Stop changed its name from
"Quick Stop Food Mart, Inc." to "Southern Carolina Property, Inc." paid off all
line of credit balances and equipment
F-82
<PAGE>
QUICK STOP FOOD MART, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
loans outstanding at July 2, 1998, and negotiated long term real estate
operating leases with The Pantry, Inc. In addition, certain operating lease
obligations between Quick Stop and related parties were renegotiated between
these related parties and The Pantry, Inc.
All stock options outstanding at December 31, 1997, were exercised prior
to July 2, 1998, for $7,461 per share.
Effective January 29, 1999, the board of directors elected to dissolve
Quick Stop and distribute all remaining assets and liabilities to the
shareholders. Quick Stop is currently redeeding real estate and renegotiating
mortgages associated with the real estate.
F-83
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Express Stop, Inc.
Fayetteville, North Carolina
We have audited the accompanying balance sheet of Express Stop, Inc. as
of December 31, 1997, and the related statement of income, retained earnings,
and cash flows for the year then ended. These financial statements are the
representation of Express Stop's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Express Stop, Inc.
as of December 31, 1997 and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ Griffin, Maxwell, & Frazelle,
P.A.
Fayetteville, North Carolina
September 25, 1998
F-84
<PAGE>
EXPRESS STOP, INC.
BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents (Note 2)............... $1,654 $1,315
Certificates of deposit.......................... 279 283
Accounts receivable: (Note 5)
Trade.......................................... 36 13
Merchandise distributors....................... 353 158
Credit cards................................... 190 252
Inventories (Notes 3 and 5)...................... 1,364 1,393
Prepaid expenses and other....................... 34 86
------ ------
Total current assets......................... 3,910 3,500
------ ------
LONG-TERM RECEIVABLES AND OTHER ASSETS
Environmental remediation receivables (Note 11).. 1,100 1,100
Advances to affiliated companies, unsecured...... 116 251
Investment in partnership (Note 4)............... 109 149
Other (Note 12).................................. 77 185
------ ------
1,402 1,685
------ ------
PROPERTY AND EQUIPMENT (Note 5)
Equipment........................................ 4,387 4,146
Vehicles......................................... 160 137
Leasehold improvements........................... 914 1,026
Construction and equipment installations in
progress........................................ -- 575
------ ------
5,461 5,884
Less accumulated depreciation and amortization... 3,337 3,271
------ ------
2,124 2,613
------ ------
$7,436 $7,798
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt (Note 5).... $ 177 $ 532
Accounts payable:
Trade.......................................... 2,151 1,751
Other.......................................... 69 60
Accrued expenses:
Salaries....................................... 185 102
Profit sharing................................. 25 --
Other.......................................... 58 69
------ ------
Total current liabilities.................... 2,665 2,514
------ ------
LONG-TERM DEBT, less current maturities (Note 5)... 1,073 612
------ ------
OTHER NONCURRENT LIABILITIES
Environmental remediation liabilities (Note 11).. 1,100 1,100
Deferred income, net (Note 7).................... 81 76
Other............................................ 56 56
------ ------
1,237 1,232
------ ------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 11)
STOCKHOLDERS' EQUITY
Common stock, par value $15 per share, authorized
and issued 2,000 shares........................... 30 30
Retained earnings................................ 2,431 3,410
------ ------
2,461 3,440
------ ------
$7,436 $7,798
====== ======
</TABLE>
See Notes to Financial Statements.
F-85
<PAGE>
EXPRESS STOP, INC.
STATEMENTS OF INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------ ---------------------------
December 31, September 30, September 30,
1997 1997 1998
------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues:
Merchandise sales................... $18,439 $13,630 $15,910
Fuel sales (Note 6)................. 29,984 22,631 20,384
Video sales......................... 1,432 1,042 1,402
Commissions and other (Note 10)..... 347 176 233
------- ------- -------
50,202 37,479 37,929
------- ------- -------
Cost of sales:
Merchandise......................... 13,960 10,241 12,028
Fuel (Note 6)....................... 27,222 20,714 18,257
------- ------- -------
41,182 30,955 30,285
------- ------- -------
Gross Profit...................... 9,020 6,524 7,644
------- ------- -------
Operating expenses: (Notes 7, 8, 9 and
10)
Store expenses...................... 5,291 3,901 3,889
General and administrative.......... 851 611 721
Depreciation and amortization....... 753 537 572
------- ------- -------
6,895 5,049 5,182
------- ------- -------
Income from operations................ 2,125 1,475 2,462
------- ------- -------
Financial revenue (expense):
Interest and dividends.............. 49 32 66
Interest expense.................... (122) (95) (89)
Gain on sale of equipment........... 5 7 48
Equity in partnership earnings (Note
4)................................. 42 31 41
------- ------- -------
(26) (25) 66
------- ------- -------
Net income............................ $ 2,099 $ 1,450 $ 2,528
======= ======= =======
</TABLE>
See Notes to Financial Statements.
F-86
<PAGE>
EXPRESS STOP, INC.
STATEMENTS OF RETAINED EARNINGS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
December 31, September 30, September 30,
1997 1997 1998
------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Balance, beginning.................... $ 1,370 $1,370 $2,431
Net income............................ 2,099 1,450 2,528
Less cash dividends on common stock,
$519.00, $419.00, and $775.00 per
share, respectively.................. (1,038) (838) (1,549)
------- ------ ------
Balance, ending....................... $ 2,431 $1,982 $3,410
======= ====== ======
</TABLE>
See Notes to Financial Statements.
F-87
<PAGE>
EXPRESS STOP, INC.
STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
December 31, September 30, September 30,
1997 1997 1998
------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers......... $ 49,723 $ 36,881 $ 37,650
Cash paid to suppliers and
employees........................... (47,037) (35,676) (35,393)
Other operating revenue.............. 347 175 233
Interest and dividends received...... 49 32 66
Interest paid........................ (122) (95) (89)
-------- -------- --------
Net cash provided by operating
activities........................ 2,960 1,317 2,467
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certificates of deposit.. (161) (161) (4)
Repayments by (advances to)
affiliated companies................ (26) 90 (135)
Purchase of property and equipment... (689) (512) (1,124)
Proceeds from sale of equipment...... 19 47 111
Partnership distributions received... 42 32 1
-------- -------- --------
Net cash used in investing
activities........................ (815) (504) (1,151)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term borrowings... -- 200 269
Principal payments on long-term
borrowings.......................... (81) -- --
Repayments to affiliates............. (195) (209) (375)
Dividend payments to shareholders.... (1,038) (838) (1,549)
-------- -------- --------
Net cash used in financing
activities........................ (1,314) (847) (1,655)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents..................... 831 (34) (339)
Cash and cash equivalents at beginning
of period............................ 823 823 1,654
-------- -------- --------
Cash and cash equivalents at end of
period............................... $ 1,654 $ 789 $ 1,315
======== ======== ========
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net income........................... $ 2,099 $ 1,450 $ 2,528
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization....... 773 537 572
Distributive share of partnership
income............................. (42) (31) (41)
Gain on sale of assets.............. (5) (7) (48)
Change in assets and liabilities:
Accounts receivable................. (257) (422) 19
Inventory........................... (208) (227) (29)
Prepaid expenses.................... 29 24 (52)
Deposits............................ 134 -- --
Other assets........................ (43) -- 29
Accounts payable.................... 410 79 (389)
Accrued expenses.................... 37 (86) (97)
Deferred income..................... 33 -- (25)
-------- -------- --------
Net cash provided by operating
activities........................ $ 2,960 $ 1,317 $ 2,467
======== ======== ========
</TABLE>
See Notes to Financial Statements
F-88
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
Express Stop, Inc.'s operations consist primarily of the operation of
convenience stores located in North and South Carolina.
A summary of Express Stop's significant accounting policies follows:
Estimates:
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Statements of cash flows:
For purposes of the statements of cash flows, Express Stop considers all
highly liquid debt instruments purchased with a maturity date of three months
or less to be cash equivalents.
Financial instruments:
The carrying value of cash, receivables and accounts payable approximate
fair value due to the short maturity of these instruments. The fair value of
investment in partnership is not subject to estimation because of its illiquid
nature. The fair values of long-term debt, which are approximately equal to
their carrying values, are estimated based on interest rates commercially
available for the same or similar debt.
Inventories:
Inventories are valued at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method.
Property and equipment:
Property and equipment is stated at cost, less accumulated depreciation
and amortization. Depreciation is provided primarily by the use of accelerated
methods over the estimated useful lives of the assets.
Impairment of assets:
Express Stop reviews long-lived assets on a store-by-store basis whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If an evaluation were required, the projected
future undiscounted cash flows attributable to each store would be compared to
the carrying value of the long-lived assets of that store to determine if a
write-down to fair value is required.
F-89
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Investment in partnership:
Investment in partnership is accounted for using the equity method. The
initial investment was recorded at cost. Subsequently, the carrying amount has
been increased to reflect Express Stop's share of income, and has been reduced
to reflect Express Stop's share of losses and cash distributions.
Advertising:
Express Stop expenses advertising as incurred. Advertising expense was
$57,000 for the year ended December, 31, 1997.
Income taxes:
Express Stop, with the consent of its stockholders, has elected to be
taxed under sections of the federal and state income tax law, which provide
that, in lieu of corporation income taxes, the stockholders separately account
for their pro rata shares of Express Stop's items of income, deductions, losses
and credits. Therefore, these statements do not include any provision for
corporation income taxes.
Unaudited interim financial statements
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
NOTE 2--CASH
Express Stop maintains cash deposits in several commercial banks. The
amounts on deposit at December 31, 1997 exceeded the insurance limits provided
by the Federal Deposit Insurance Corporation by approximately $1,667,000.
NOTE 3--INVENTORIES
Inventories consist of the following: (in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
<S> <C> <C>
Merchandise..................................... $ 987 $1,059
Fuel............................................ 377 334
------ ------
$1,364 $1,393
====== ======
</TABLE>
F-90
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 4--INVESTMENT IN PARTNERSHIP
Express Stop owns a 50% interest in a general partnership (Mexican
Express) which sells branded food items in two of Express Stop's store
locations. Express Stop has included $43,000 of income in the statement of
operations for the year ended December 31, 1997.
NOTE 5--LINE OF CREDIT AND LONG-TERM DEBT
Express Stop, its stockholders and an affiliated partnership have been
granted a financing arrangement which provides for
. a term loan up to $1,700,000, payable $23,500 per month including
interest
. a term loan up to $950,000, payable $12,500 per month including
interest
. a term loan up to $750,000, payable $9,900 per month including
interest
. a line of credit of up to $500,000 payable accrued interest only
per month with credit line due upon demand
Interest on the first two advances is calculated at LIBOR rate plus
2.15%. Interest on the third and fourth advances is calculated at LIBOR rate
plus 2.00%. Collateral includes equipment with a cost of $2,719,000 and a book
value of $1,103,000, inventory with a book value of $575,000, accounts
receivable of $288,000, deed of trust on property owned by affiliates, and the
personal guarantee of the stockholders. Total advances to all parties to this
agreement amounted to $1,805,000 as of December 31, 1997. All of these advances
were made subject to the term loan agreements described above.
Long-term debt consists of the following as of December 31, 1997: (in
thousands)
<TABLE>
<S> <C>
Outstanding advances under the above financing agreement........... $1,190
Note payable to bank, due in monthly installments of $435 including
interest at 7.59% to September, 2006 collateralized by equipment
with a book value of $61,000 and a deed of trust on real estate
owned by the stockholders......................................... 33
Note payable to utility company, due in monthly installments of
$1,082 including interest at 7% to March, 2000. Collateralized by
equipment with a book value of $22,000............................ 27
------
1,250
Less current maturities............................................ 177
------
$1,073
======
</TABLE>
The prime rate of interest was 8.50% and the LIBOR rate was 5.95% as of
December 31, 1997.
F-91
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Approximate principal maturities of long-term debt for the years
following December 31, 1997 are as follows: (in thousands)
<TABLE>
<S> <C>
1998................................................................ $177
1999................................................................ 192
2000................................................................ 197
2001................................................................ 210
2002................................................................ 227
Later............................................................... 247
------
$1,250
======
</TABLE>
As of September 30, 1998, Express Stop and its stockholders and
affiliates had borrowed $750,000 subject to the term loan agreement described
in 3) above and $500,000 subject to the line of credit described in 4) above,
to finance the construction and equipping of two additional stores. (Unaudited)
NOTE 6--EXCISE AND USE TAXES
Express Stop collects and remits various federal and state excise and use
taxes on petroleum products. Sales and cost of sales included approximately
$9,655,000 of such taxes for the year ended December 31, 1997.
Sales and cost of sales included approximately $7,200,000 and $6,500,000
of such taxes, respectively, for the nine months ended September 30, 1997 and
1998. (Unaudited)
NOTE 7--DEFERRED INCOME
Express Stop has received funds from a major oil company in conjunction
with a modernization assistance program to help pay for new or newly modernized
retail outlets. Express Stop opened one such outlet in 1994, two in 1996, and
one in 1997. Amounts received are amortized over the terms of the modernization
assistance program amortization and/or loan agreements, which range from 10 to
15 years. The unamortized amount is refundable to the oil company if Express
Stop discontinues marketing the major brand of fuel or ceases to be an approved
distributor for the major oil company. As of December 31, 1997 accumulated
amortization was $12,500, and $7,000 was credited to expense in 1997.
NOTE 8--DEFINED CONTRIBUTION RETIREMENT PLAN
Express Stop has adopted a defined contribution retirement plan covering
all employees who have completed three years of service. Contributions totaled
$25,000 for the year ended December 31, 1997.
NOTE 9--LEASE COMMITMENTS AND RENTAL EXPENSE
Express Stop leases store buildings, land, store equipment and office
facilities under operating leases. The real estate leases require the payment
by Express Stop of property taxes, utilities and routine maintenance.
F-92
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Rent expense for operating leases of real estate and equipment amounted
to $725,000 and $257,000, respectively for the year ended December 31, 1997.
Future minimum lease payments as of December 31, 1997 for operating
leases with an initial or remaining term in excess of one year are as follows:
(in thousands)
<TABLE>
<CAPTION>
Real Estate Equipment
----------- ---------
<S> <C> <C>
1998................................................. $ 700 $160
1999................................................. 521 107
2000................................................. 437 7
2001................................................. 437 --
2002................................................. 408 --
Thereafter........................................... 2,031 --
------ ----
$4,534 $274
====== ====
</TABLE>
NOTE 10--RELATED PARTY TRANSACTIONS
The majority of the above leases are with the stockholders or with
entities controlled by the stockholders. Rents paid under these real estate and
equipment leases amounted to $583,000 and $195,000, respectively for the year
ended December 31, 1997.
Commissions and other income include $80,000 paid to Express Stop by
entities controlled by the stockholders, for accounting, data processing and
administrative services provided.
NOTE 11--COMMITMENTS AND CONTINGENCIES
The State of South Carolina Administrative Law Judge Division has
affirmed a decision by the Department of Revenue to revoke the business license
of one of Express Stop's stores because of an alleged violation of the South
Carolina Video Games Machine Act. Express Stop has appealed this action, and
the order has been stayed by the Court of Common Pleas for Richmond County,
South Carolina. No further action has been taken or is expected, and Express
Stop does not anticipate that any material loss will be incurred.
The South Carolina Department of Health and Environmental Control has
made inquiries about a third party settlement received by Express Stop for
damages incurred by the faulty supply and installation of petroleum tanks and
equipment at one of its stores. The purpose of the inquiry is to determine if
any outside funding source would have to be exhausted prior to payment of
future remediation costs at this site. No action has been taken or is expected
to be commenced, and Express Stop intends to vigorously contest this matter if
it is asserted in the future. Express Stop has deferred $56,000 of the
settlement received from the third party. Legal counsel has estimated that the
potential loss, although unlikely, could range from $0 to $82,000 in excess of
the deferral.
Express Stop is involved in certain other legal proceedings arising in
the course of normal business activities. In the opinion of management, the
ultimate settlement of these proceedings will not have a material adverse
effect on the financial statements.
The shareholders have contracted for the construction of two new store
buildings in the total amount of $1,335,000. None of these funds were expended
as of December 31, 1997.
F-93
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Express Stop is subject to Federal and state environmental laws and
regulations governing the use and maintenance of underground storage tanks.
These laws and regulations require expenditures for compliance, and establish
requirements for the installation and upgrading of tank systems, continual
monitoring and inspection, recordkeeping, identification of leaking or
otherwise defective tank systems, and possible corrective actions.
The Environmental Protection Agency has required that leak detection
procedures be implemented at all stores, and that corrosion protection and
overfill/spill prevention devices be installed by the end of 1998. Express Stop
anticipates that it will meet the 1998 deadline for all of its underground
storage tanks.
North and South Carolina have established trust funds for the sharing,
recovery, and reimbursement of costs incurred as a result of releases from
underground storage tanks. The Company participates in these programs by virtue
of the payment of registration fees on each underground storage tank and taxes
on the purchase of motor fuels. The trust funds essentially provide insurance
of up to $1,000,000 per site for cleanup of environmental contamination,
exclusive of per-site deductibles, contamination which occurred prior to the
establishment of the trusts, and the removal and disposal of defective
underground storage tanks.
As of December 31, 1997, Express Stop is responsible for the remediation
of contamination at six sites. $1,100,000 has been accrued for these estimated
future remediation costs, which includes the costs of remediation, tank removal
(2 sites) and potential litigation (1 site). The cost estimate is predicated on
management's evaluation of the effect of presently enacted laws and
regulations, cleanup and removal technology which is currently in existence,
and currently available facts. Express Stop's policy is to expense all
deductibles from trust funds and private insurers as incurred. To date, all
deductibles for current claims have been paid. The remaining costs accrued and
the related receivable are undiscounted because the timing and amounts of
future payments and receipts are uncertain. Based on presently enacted laws and
regulations, the current classification and priority of the contaminated sites,
management's evaluation of the financial viability of its insurance carriers,
and prior reimbursement experience from trust funds, Express Stop expects to be
able to recoup all of these estimated expenditures from either trust funds
($750,000) or insurance carriers ($350,000), should they be incurred.
Although Express Stop is not aware of releases or contamination at other
locations which it operates, any such event could require material remediation
costs, some or all of which may not be reimbursable from trust funds, insurance
or other third parties.
NOTE 12--SUBSEQUENT EVENTS
In May 1998, Express Stop sold its store operation located in Mebane,
North Carolina to an unrelated third party. The sales price was $240,000 for
fixtures and equipment and $50,000 for inventory, and a gain of $33,000 was
realized upon completion of the transaction. Express Stop took a note
receivable from the buyer, collateralized by a security agreement on the assets
acquired, in the amount of $145,000, repayable in sixty monthly installments of
$2,940 including interest at 8.00%.
F-94
<PAGE>
EXPRESS STOP, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
At September 25, 1998, Express Stop has reached an agreement in principal
to sell substantially all of its operating assets to The Pantry, Inc. The sales
price is $20,300,000 plus the cost of inventory acquired. $2,500,000 of the
purchase price is subject to an escrow agreement until March 1999, and may be
forfeited upon the occurrence of specific events or conditions relating to the
operating of video poker machines in the State of South Carolina.
F-95
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Miller Enterprises, Inc. and
Peninsular Petroleum Company:
We have audited the accompanying combined balance sheets of Miller
Enterprises, Inc. and Peninsular Petroleum Company, (Florida corporations) as
of April 2, 1997 and April 1, 1998 and the related combined statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended April 1, 1998. These financial statements are the responsibility
of Miller Enterprises' and Peninsular Petroleum's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Miller Enterprises, Inc.
and Peninsular Petroleum Company as of April 2, 1997 and April 1, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended April 1, 1998 in conformity with generally accepted accounting
principles.
As explained in Note 1 and Note 5 to the financial statements, previously
issued financial statements were restated to reclassify receivables due from
stockholders as a deduction of stockholders' equity.
/s/ ARTHUR ANDERSEN LLP
Jacksonville, Florida
June 4, 1999
F-96
<PAGE>
MILLER ENTERPRISES, INC. AND
PENINSULAR PETROLEUM COMPANY
COMBINED BALANCE SHEETS
APRIL 2, 1997, APRIL 1, 1998, AND DECEMBER 30, 1998
<TABLE>
<CAPTION>
April 2, April 1, December 30,
1997 1998 1998
------------ ------------ ------------
(Unaudited)
ASSETS
------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents......... $ 13,905,044 $ 12,282,797 $ 10,648,576
Accounts and notes receivable..... 3,846,452 4,878,095 5,507,034
Inventories....................... 7,401,844 4,659,131 5,862,141
Prepaid expenses and other........ 1,383,597 1,605,777 1,854,862
------------ ------------ ------------
Total current assets............ 26,536,937 23,425,800 23,872,613
------------ ------------ ------------
Property and equipment.............. 42,230,649 44,624,853 52,203,049
Less accumulated depreciation..... (23,183,642) (19,728,258) (21,393,897)
------------ ------------ ------------
Property and equipment, net....... 19,047,007 24,896,595 30,809,152
------------ ------------ ------------
Other assets:
Note receivable from related
party............................ -- -- 1,272,595
Other assets...................... 438,181 172,985 2,161,993
------------ ------------ ------------
Total other assets.............. 438,181 172,985 3,434,588
------------ ------------ ------------
Total assets.................... $ 46,022,125 $ 48,495,380 $ 58,116,353
============ ============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY
-----------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable.................. $ 13,341,528 $ 10,205,305 $ 12,542,871
Income taxes payable.............. 3,409,519 3,461,841 3,069,184
Accrued payroll expenses.......... 872,192 680,124 853,973
Accrued self-insurance reserves... 1,613,670 1,564,454 1,026,754
Other accrued expenses and
liabilities...................... 3,084,949 2,330,980 3,134,328
Current portion of long-term
debt............................. 1,071,270 1,238,976 1,530,675
------------ ------------ ------------
Total current liabilities....... 23,393,128 19,481,680 22,157,785
Long-term debt, less current
portion............................ 7,645,975 6,602,138 9,762,094
Other noncurrent liabilities........ 1,507,965 2,270,353 5,426,394
------------ ------------ ------------
Total liabilities............... 32,547,068 28,354,171 37,346,273
------------ ------------ ------------
Commitments and contingencies (Notes
1, 7, 8, 9, 10, and 12)
Stockholders' equity:
Capital stock..................... 6,877,922 6,163,314 6,163,314
Additional paid-in capital........ 749,577 1,019,663 1,019,663
Retained earnings................. 10,360,729 17,627,285 18,371,490
Receivables due from
stockholders..................... (4,513,171) (4,669,053) (4,784,387)
------------ ------------ ------------
Total stockholders' equity...... 13,475,057 20,141,209 20,770,080
------------ ------------ ------------
Total liabilities and stockholders'
equity............................. $ 46,022,125 $ 48,495,380 $ 58,116,353
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-97
<PAGE>
MILLER ENTERPRISES, INC. AND
PENINSULAR PETROLEUM COMPANY
COMBINED STATEMENTS OF INCOME
For the Years Ended March 27, 1996, April 2, 1997, and April 1, 1998
and For the Nine Months Ended December 25, 1997 and December 30, 1998
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
---------------------------------------- --------------------------
March 27, April 2, April 1, December 25, December 30,
1996 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $136,626,214 $148,222,390 $122,554,607 $ 97,853,788 $ 80,886,319
Gasoline sales........ 113,623,513 139,233,090 145,186,322 108,962,544 106,293,593
Commissions........... 2,843,857 2,740,526 2,720,675 2,027,707 1,609,443
Other................. 99,110 139,981 138,745 130,073 151,792
------------ ------------ ------------ ------------ ------------
Total revenues...... 253,192,694 290,335,987 270,600,349 208,974,112 188,941,147
------------ ------------ ------------ ------------ ------------
Cost of sales:
Merchandise........... 93,672,065 100,427,933 79,136,610 65,137,202 50,700,620
Gasoline.............. 98,232,796 122,936,536 126,285,061 94,925,918 91,656,914
------------ ------------ ------------ ------------ ------------
Total cost of
sales.............. 191,904,861 223,364,469 205,421,671 160,063,120 142,357,534
------------ ------------ ------------ ------------ ------------
Gross Profit............ 61,287,833 66,971,518 65,178,678 48,910,992 46,583,613
------------ ------------ ------------ ------------ ------------
Operating Expenses:
Store expenses........ 41,483,791 44,727,224 42,205,094 33,468,781 31,760,582
General and
administrative
expenses............. 13,044,366 14,739,025 15,540,929 9,755,926 10,772,133
Depreciation and
amortization......... 3,327,063 3,276,034 3,153,420 2,284,203 2,552,342
------------ ------------ ------------ ------------ ------------
Total operating
expenses........... 57,855,220 62,742,283 60,899,443 45,508,910 45,085,057
------------ ------------ ------------ ------------ ------------
Income from operations.. 3,432,613 4,229,235 4,279,235 3,402,082 1,498,556
Other Income (Expenses):
Interest income....... 12,456 78,312 267,129 127,395 92,975
Interest expense...... (517,408) (457,480) (389,641) (295,641) (223,091)
Gain on sale of fixed
assets............... 425,219 97,229 10,639,819 10,639,819 --
Other (expense)
income............... 30,874 129,991 (237,274) (149,081) 66,138
------------ ------------ ------------ ------------ ------------
Total other
(expense) income... (48,859) (151,948) 10,280,033 10,322,492 (63,978)
------------ ------------ ------------ ------------ ------------
Income before income
taxes.................. 3,383,754 4,077,287 14,559,268 13,724,574 1,434,578
Income tax expense...... 1,186,206 1,463,472 5,472,857 5,340,591 425,322
------------ ------------ ------------ ------------ ------------
Net income.............. $ 2,197,548 $ 2,613,815 $ 9,086,411 $ 8,383,983 $ 1,009,256
============ ============ ============ ============ ============
Pro forma tax adjustment
on
S Corporation income... 103,739 108,100 150,330 60,863 126,990
------------ ------------ ------------ ------------ ------------
Pro forma net income.... $ 2,093,809 $ 2,505,715 $ 8,936,081 $ 8,323,120 $ 882,266
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-98
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended March 27, 1996, April 2, 1997, and April 1, 1998
<TABLE>
<CAPTION>
Miller Enterprises, Inc.
---------------------------------------------------------------------------
Class A Class B Peninsular
Preferred Stock Common Stock Common Stock Additional Receivable Common Stock
------------------- --------------- ------------- Paid-In Due from -------------- Retained
Shares Amount Shares Amount Shares Amount Capital Stockholders Shares Amount Earnings
------- ---------- ------- ------ ------ ------ ---------- ------------ ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March
29, 1995....... 695,860 $6,958,620 277,938 $2,779 16,251 $163 $ 464,295 $(3,840,361) 10,000 $10,000 $ 6,250,133
Net income...... -- -- -- -- -- -- -- -- -- -- 2,197,548
Shareholder
distributions.. -- -- -- -- -- -- -- -- -- -- (105,000)
Purchase and
retirement of
stock.......... (3,955) (39,550) (1,541) (15) -- -- -- -- -- -- (56,450)
Issuance of
common stock... -- -- -- -- 2,032 20 105,293 -- -- -- --
Advances to
Stockholders... (535,646)
------- ---------- ------- ------ ------ ---- ---------- ----------- ------ ------- -----------
Balance at March
27, 1996....... 691,905 6,919,070 276,397 2,764 18,283 183 569,588 (4,376,007) 10,000 10,000 8,286,231
Net income...... -- -- -- -- -- -- -- -- -- -- 2,613,815
Shareholder
distributions.. -- -- -- -- -- -- -- -- -- -- (450,000)
Purchase and
retirement of
stock.......... (5,412) (54,120) (1,581) (16) -- -- -- -- -- -- (89,317)
Issuance of
common stock... -- -- -- -- 4,092 41 179,989 -- -- -- --
Advances to
Stockholders... (137,164)
------- ---------- ------- ------ ------ ---- ---------- ----------- ------ ------- -----------
Balance at April
2, 1997........ 686,493 6,864,950 274,816 2,748 22,375 224 749,577 (4,513,171) 10,000 10,000 10,360,729
Net income...... -- -- -- -- -- -- -- -- -- -- 9,086,411
Shareholder
distributions.. -- -- -- -- -- -- -- -- -- -- (650,000)
Purchase and
retirement of
stock.......... (71,441) (714,410) (23,668) (237) -- -- -- -- -- -- (1,169,855)
Issuance of
common stock... -- -- -- -- 3,972 39 270,086 -- -- -- --
Advances to
Stockholders... (155,882)
------- ---------- ------- ------ ------ ---- ---------- ----------- ------ ------- -----------
Balance at April
1, 1998........ 615,052 $6,150,540 251,148 $2,511 26,347 $263 $1,019,663 $(4,669,053) 10,000 $10,000 $17,627,285
======= ========== ======= ====== ====== ==== ========== =========== ====== ======= ===========
<CAPTION>
Total
------------
<S> <C>
Balance at March
29, 1995....... $ 9,845,629
Net income...... 2,197,548
Shareholder
distributions.. (105,000)
Purchase and
retirement of
stock.......... (96,015)
Issuance of
common stock... 105,313
Advances to
Stockholders... (535,646)
------------
Balance at March
27, 1996....... 11,411,829
Net income...... 2,613,815
Shareholder
distributions.. (450,000)
Purchase and
retirement of
stock.......... (143,453)
Issuance of
common stock... 180,030
Advances to
Stockholders... (137,164)
------------
Balance at April
2, 1997........ 13,475,057
Net income...... 9,086,411
Shareholder
distributions.. (650,000)
Purchase and
retirement of
stock.......... (1,884,502)
Issuance of
common stock... 270,125
Advances to
Stockholders... (155,882)
------------
Balance at April
1, 1998........ $20,141,209
============
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-99
<PAGE>
MILLER ENTERPRISES, INC. AND
PENINSULAR PETROLEUM COMPANY
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 27, 1996, APRIL 2, 1997, AND APRIL 1, 1998,
AND FOR THE NINE MONTHS ENDED DECEMBER 25, 1997, AND DECEMBER 30, 1998
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
-------------------------------------- --------------------------
March 27, April 2, April 1, December 25, December 30,
1996 1997 1998 1997 1998
----------- ----------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income............. $ 2,197,548 $ 2,613,815 $ 9,086,411 $ 8,383,983 $ 1,009,256
----------- ----------- ------------ ------------ -----------
Adjustments to
reconcile net income
to net cash provided
by (used in )
operating activities:
Depreciation and
amortization........ 3,327,063 3,276,034 3,153,420 2,284,203 2,552,342
Deferred income tax
(benefit)
provision........... (622,904) (169,655) 1,119,392 1,475,811 543,451
Gain on sales of
assets.............. (425,219) (97,229) (10,639,819) (10,639,819) --
Loss on investment in
Eli Witt Company.... -- 743,757 -- -- --
Stock issued as
compensation........ 105,313 180,030 270,125 -- --
Changes in assets and
liabilities:
Accounts and notes
receivable........ 269,538 (1,462,545) (1,031,643) 1,289,534 (628,939)
Inventories........ (616,684) (402,283) 417,273 227,096 (1,203,010)
Prepaid expenses
and other assets.. (10,376) 361,022 (250,447) (1,284,745) (2,397,682)
Accounts payable... 847,906 2,029,929 (3,136,223) (4,415,711) 2,337,566
Accrued expenses
and other
liabilities....... 2,128,656 (830,598) (691,580) (466,093) 2,941,115
----------- ----------- ------------ ------------ -----------
Total
adjustments...... 5,003,293 3,628,462 (10,789,502) (11,529,724) 4,144,843
----------- ----------- ------------ ------------ -----------
Net cash provided
by (used in)
operating
activities....... 7,200,841 6,242,277 (1,703,091) (3,145,741) 5,154,099
----------- ----------- ------------ ------------ -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Proceeds from sales of
assets................ 1,161,579 768,010 15,225,292 15,018,477 11,833
Purchases of property
and equipment......... (6,497,411) (2,332,016) (11,382,933) (6,492,767) (9,749,027)
Proceeds from sale of
investment in Eli Witt
Company............... -- 750,000 -- -- --
----------- ----------- ------------ ------------ -----------
Net cash (used in)
provided by
investing
activities....... (5,335,832) (814,006) 3,842,359 8,525,710 (9,737,194)
----------- ----------- ------------ ------------ -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal payments on
long-term debt........ (3,517,902) (2,552,850) (1,071,131) (6,013,846) (119,379)
Borrowings on long-term
debt.................. 3,738,944 2,382,978 -- -- 3,571,034
Shareholder
distributions......... (105,000) (450,000) (650,000) (650,000) (375,000)
Purchase and retirement
of stock.............. (96,015) (143,453) (1,884,502) (1,884,502) --
Advances to
Stockholders.......... (535,646) (137,164) (155,882) (102,873) (127,781)
----------- ----------- ------------ ------------ -----------
Net cash provided
by (used in)
financing
activities....... (515,619) (900,489) (3,761,515) (8,651,221) 2,948,874
----------- ----------- ------------ ------------ -----------
NET INCREASE (DECREASE)
IN CASH................ 1,349,390 4,527,782 (1,622,247) (3,271,252) (1,634,221)
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 8,027,872 9,377,262 13,905,044 13,905,044 12,282,797
----------- ----------- ------------ ------------ -----------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 9,377,262 $13,905,044 $ 12,282,797 $ 10,633,792 $10,648,576
=========== =========== ============ ============ ===========
SUPPLEMENTAL
DISCLOSURES:
Income taxes paid...... $ 990,219 $ 2,446,000 $ 4,815,500 $ 3,165,500 $ 1,424,000
=========== =========== ============ ============ ===========
Interest paid.......... $ 490,067 $ 403,499 $ 392,714 $ 295,941 $ 222,563
=========== =========== ============ ============ ===========
NONCASH INVESTING
ACTIVITY:
Purchase of property
and equipment for note
payable............... $ -- $ -- $ 195,000 $ 195,000 $ --
=========== =========== ============ ============ ===========
Sale of property and
equipment for note
receivable............ $ 108,028 $ -- $ -- $ -- $ 1,272,595
=========== =========== ============ ============ ===========
</TABLE>
F-100
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
March 27, 1996, April 2, 1997, and April 1, 1998
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description and Principles of Combination
These financial statements are the combined financial statements of
Miller Enterprises, Inc. and Peninsular Petroleum Company (an S corporation).
These entities are combined as they are under common control by a group of
related parties. Miller Enterprises, Inc. currently owns and operates
convenience stores throughout central Florida. Peninsular Petroleum Company
operates a petroleum-shipping business, where approximately 95% of its shipping
is derived from the convenience stores owned by Miller Enterprises. All
intercompany transactions are eliminated in the combination. On January 28,
1999, the shareholders of Miller Enterprises and Peninsular Petroleum sold the
stock of Miller Enterprises and Peninsular Petroleum and certain real property
owned by other related entities to Lil' Champ Food Stores, Inc., a subsidiary
of The Pantry, a convenience store company headquartered in Sanford, North
Carolina (Note 11).
Fiscal Year-Ends and Combined Periods
Miller Enterprises operates under a 52- to 53-week fiscal year. The
fiscal years ended March 27, 1996, April 2, 1997, and April 1, 1998 were
comprised of 52 weeks, 53 weeks, and 52 weeks, respectively. Peninsular
operates on a calendar year basis. For purposes of the combination, the
calendar years ended December 31, 1995, 1996, and 1997 were combined with
Miller Enterprises's fiscal years ended March 27, 1996, April 2, 1997, and
April 1, 1998, respectively.
Unaudited Financial Statements
In the opinion of management, the unaudited statements of income and cash
flows for the nine months ended December 25, 1997 and December 30, 1998 and the
unaudited balance sheet as of December 30, 1998 include all adjustments (which
include only normal recurring adjustments) necessary to present the financial
position and results of operations and cash flows for those periods in
accordance with generally accepted accounting principles.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash held at banks and
money market instruments with original maturity dates of less than three
months.
F-101
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
Inventories
Inventories are stated at the lower of cost or market, which is defined
as net realizable value. Cost is determined using the last-in, first-out
("LIFO") method for merchandise inventories and the first-in, first-out
("FIFO") method for gasoline and other inventories. Such inventory value is
approximately $4,800,000 and $2,596,000 for merchandise inventories and
$2,602,000 and $2,063,000 for gasoline and other inventories as of April 2,
1997 and April 1, 1998, respectively. Merchandise inventories would have been
$3,442,000 and $2,254,000 higher if the FIFO method was used in 1997 and 1998
respectively. Net income of approximately $814,000, was recorded in fiscal 1998
as a result of the liquidation of LIFO inventory quantities.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on the following useful lives:
<TABLE>
<S> <C>
Buildings............................... 15-30 years
Furniture and equipment................. 7-10 years
Leasehold improvements, equipment under Shorter of initial lease term or
lease.................................. estimated useful life of asset
</TABLE>
The cost and accumulated depreciation of assets sold or retired are
removed from the respective accounts, and any gain or loss from sale or
retirement of property and equipment is recognized in the accompanying
statements of income. Maintenance and repair costs are charged to expense as
incurred, and major renewals and betterments are capitalized.
Property and equipment and other long-lived assets are evaluated
periodically for other than temporary impairment. If circumstances suggest that
their values may be impaired and the related write-downs would be material, an
assessment of recoverability is performed prior to any write-down of the asset.
Investment in Eli Witt Company
Miller Enterprises owned 139,393 shares (17.6%) of Series A nonvoting
preferred stock and 139,393 shares (17.6%) of Series C nonvoting preferred
stock of Eli Witt Company, a subsidiary of Culbro Corporation. This investment
was accounted for on the cost method of accounting. The Company recorded no
income or loss on this investment until the fiscal year ended April 2, 1997
when on April 24, 1996, the Company sold 75,272 shares of the Series A
preferred stock to a third party for $750,000, resulting in a gain of $45,755.
Subsequently, later that year Eli Witt went bankrupt and the remaining
investment was written off resulting in a loss of $743,757.
Income Taxes
Miller records deferred tax assets and liabilities based on the
differences between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes, referred to as temporary differences.
Deferred tax assets or liabilities at the end of each period are determined
using the currently enacted tax rates to apply to taxable income in the periods
in which the particular deferred tax asset or liability is expected to be
settled or realized.
F-102
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
Peninsular Petroleum is an S corporation, and accordingly, does not
provide for federal or state income taxes. Each shareholder in this entity
reports their share of the profits and losses, and federal and state income
taxes are computed on each shareholders' total income from all sources.
Pro forma income tax expense is disclosed on the combined income statement
assuming the same effective rate as Miller Enterprises.
Excise and Use Taxes
Miller Enterprises collects and remits various federal, state and county
excise and use taxes on petroleum products. Sales and cost of sales included
approximately $40,880,000, $45,700,000 and $50,490,000 for the years ended
March 27, 1996, April 3, 1997 and April 1, 1998, respectively. Sales and cost
of sales included approximately $37,030,000 and $43,610,000 of such taxes
respectively, for the nine months ended December 25, 1997 and December 30,
1998.
Self-Insurance Reserves
Miller Enterprises is partially self-insured for workers' compensation
and has included reserves estimated by a third-party administrator and a
third-party actuary, in current and other noncurrent liabilities in the
accompanying combined balance sheets of approximately $1,981,000, and
$1,637,000 for 1997 and 1998, respectively. Miller Enterprises also has
related receivables, included in accounts and notes receivable in the
accompanying combined balance sheets, from the State of Florida Disability
Fund in the amounts of approximately $647,000 and $818,000 for 1997 and 1998,
respectively.
Advertising Costs
Miller Enterprises expenses all advertising costs as incurred.
Advertising costs expensed for the three fiscal years ended March 27, 1996,
April 2, 1997 and April 1, 1998 were approximately $590,000, $700,000 and
$590,000 respectively.
Fair Market Value of Financial Instruments
The carrying value of Miller's financial instruments, including cash and
cash equivalents, short-term accounts and notes receivable, and accounts
payable, approximate their fair value due to the short-term nature of these
assets and liabilities. The carrying value of long-term debt approximates fair
value as the related interest rates are based on the prime rate. The carrying
value of the note receivable from related party approximates its fair value
due to its original maturity period of 13 months and the fact that it was
distributed to selling shareholders in January 1999 (see Note 12).
Reclassifications
Certain 1996 and 1997 amounts have been reclassified to conform with the
1998 presentation. Also, previously issued financial statements were restated
to reclassify receivables due from stockholders from other assets to a
deduction of stockholders' equity. (See Note 5.)
F-103
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of April 2, 1997 and
April 1, 1998:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Land.............................................. $ 1,616,671 $ 4,521,630
Buildings......................................... 535,950 523,455
Equipment and fixtures............................ 22,902,401 21,619,208
Construction in progress.......................... 1,591,983 2,662,241
Leasehold improvements............................ 15,583,644 15,298,319
----------- -----------
42,230,649 44,624,853
Less accumulated depreciation and amortization.... (23,183,642) (19,728,258)
----------- -----------
$19,047,007 $24,896,595
=========== ===========
</TABLE>
3. NOTE RECEIVABLE FROM RELATED PARTY
The note receivable from related party was a note for certain real
estate assets sold at book value which management estimates to be fair value
to a real estate partnership in which the selling shareholders are Partners.
The note calls for full payment of the principal balance on September 30, 1999
and charges interest to the partnership of 5.35% per annum.
4. LONG-TERM DEBT
At April 2, 1997 and April 1, 1998, long-term debt consisted of the
following (the prime rate at April 1, 1998 was 8.5%):
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Revolving line of credit payable to bank with
interest at prime, providing borrowings up to
$5,000,000, maturing April 30, 1999, unsecured..... $5,000,000 $5,000,000
Notes payable to a bank in equal monthly
installments aggregating $66,223, including
interest ranging from the prime rate to the prime
rate plus .75%, collateralized by equipment........ 2,298,544 1,618,322
Other notes, generally due in monthly installments
of principal plus variable interest rates ranging
from the prime rate to the prime rate plus .5% or a
fixed interest rate of 8.75%....................... 1,418,701 1,222,792
---------- ----------
8,717,245 7,841,114
Less current maturities............................. (1,071,270) (1,238,976)
---------- ----------
$7,645,975 $6,602,138
========== ==========
</TABLE>
F-104
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
Peninsular Petroleum has an unsecured line of credit of $500,000.
Interest on the unpaid balance accrues at the bank's prime rate and is paid
monthly. No amount was outstanding at April 1, 1998 and April 2, 1997.
Certain of Miller Enterprises' and Peninsular Petroleum's debt agreements
contain restrictive financial covenants, including minimum current ratio,
tangible net worth, debt to net worth, and debt service coverage, all as
defined in the agreements.
The scheduled annual maturities of long-term debt are as follows as of
April 1, 1998:
<TABLE>
<S> <C>
1999.......................................................... $1,238,976
2000.......................................................... 5,820,805
2001.......................................................... 494,481
2002.......................................................... 105,072
2003.......................................................... 79,273
Thereafter.................................................... 102,507
----------
Total....................................................... $7,841,114
==========
</TABLE>
5. STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
At April 2, 1997 and April 1, 1998, individual equity and capital
accounts of Miller Enterprises and Peninsular Petroleum were as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Miller Enterprises, Inc.:
Preferred stock, $10 par value; 760,000 shares
authorized, 686,493 and 615,052 shares issued and
outstanding in 1997 and 1998, respectively........ $ 6,864,950 $ 6,150,540
Class A common stock, $.01 par value; 2,500,000
shares authorized, 274,816 and 251,148 shares
issued and outstanding in 1997 and 1998,
respectively...................................... 2,748 2,511
Class B common stock, $.01 par value; 2,500,000
shares authorized, and 22,375 and 26,347 shares
issued and outstanding in 1997 and 1998,
respectively...................................... 224 263
Additional paid-in capital......................... 749,577 1,019,663
Retained earnings.................................. 9,819,653 17,345,741
Receivables due from stockholders.................. (4,513,171) (4,669,053)
----------- -----------
$12,923,981 $19,849,665
=========== ===========
Peninsular Petroleum Company:
Common stock, $1 par value; 10,000 shares
authorized, issued and outstanding................ $ 10,000 $ 10,000
Retained earnings.................................. 541,076 281,544
----------- -----------
$ 551,076 $ 291,544
=========== ===========
Total combined stockholders' equity.............. $13,475,057 $20,141,209
=========== ===========
</TABLE>
Receivables from stockholders are classified as a deduction from
stockholders' equity, as there were no repayment terms and these receivables
were subsequently distributed to stockholders. (See Note 12.)
F-105
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
6. INCOME TAXES
The components of income tax expense (benefit) for the years ended March
27, 1996, April 2, 1997, and April 1, 1998 are summarized below:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................. $1,544,691 $1,394,429 $3,720,658
State................................... 264,419 238,698 632,807
---------- ---------- ----------
1,809,110 1,633,127 4,353,465
---------- ---------- ----------
Deferred:
Federal................................. (531,718) (144,858) 966,463
State................................... (91,186) (24,797) 152,929
---------- ---------- ----------
(622,904) (169,655) 1,119,392
---------- ---------- ----------
$1,186,206 $1,463,472 $5,472,857
========== ========== ==========
</TABLE>
As of April 2, 1997 and April 1, 1998, deferred tax (liabilities) assets
are comprised of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Depreciation...................................... $ (736,986) $ (986,025)
Deferred gain on sale of assets................... -- (961,060)
Other............................................. (343,079) (204,839)
----------- -----------
Deferred tax liabilities........................ (1,080,065) (2,151,924)
----------- -----------
Accrued compensation.............................. 376,645 469,445
Insurance reserves................................ 626,667 422,226
Environmental expenses............................ 59,856 113,857
Other............................................. 60,456 70,563
----------- -----------
Deferred tax assets............................. 1,123,624 1,076,091
----------- -----------
$ 43,559 $(1,075,833)
=========== ===========
</TABLE>
As of April 2, 1997 and April 1, 1998, net current deferred income tax
assets totaled $700,963 and $490,686, respectively, and net noncurrent deferred
income tax liabilities totaled $(657,404) and $(1,566,519), respectively. All
deferred tax assets are considered to be realizable due to projected future
taxable income; thus, no valuation allowance has been recorded.
F-106
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
Reconciliation of income taxes at the federal statutory rate (34%) to
actual taxes for the years ended March 27, 1996, April 2, 1997 and April 1,
1998 provided are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Tax provision at federal statutory
rate.................................. $1,150,476 $1,386,277 5,095,744
Tax provision at state rate, net of
federal income tax benefit............ 122,830 148,006 492,467
Effect of S corporation income......... (103,739) (108,100) (150,330)
Permanent differences:
Other................................ 16,637 37,289 34,976
---------- ---------- ----------
$1,186,206 $1,463,472 $5,472,857
========== ========== ==========
</TABLE>
7. OPERATING LEASES
Miller Enterprises leases all of its convenience stores, of which
approximately 60% are leased from related parties. Lease terms generally range
up to 15 years, with options to renew for additional 5-year periods. Certain of
the leases provide for contingent rentals based on sales in excess of
stipulated amounts or based on increases in the costs of insurance or taxes.
Future minimum rental commitments under noncancelable operating leases as
of April 1, 1998 are as follows:
<TABLE>
<CAPTION>
Total Lease Net Lease
Obligations Subleases Obligations
----------- ---------- -----------
<S> <C> <C> <C>
1999...................................... $ 7,788,946 $ 340,463 $ 7,448,483
2000...................................... 8,008,866 266,023 7,742,843
2001...................................... 6,231,174 250,023 5,981,151
2002...................................... 5,540,094 246,526 5,293,568
Thereafter................................ 27,251,519 806,290 26,445,229
----------- ---------- -----------
$54,820,599 $1,909,325 $52,911,274
=========== ========== ===========
</TABLE>
For the fiscal years ended March 27, 1996, April 2, 1997, and April 1,
1998, total rental expense included in store expenses was approximately
$6,711,636, $7,970,000, and $8,666,000, respectively. Rental expense paid to
related parties and stockholders was approximately $3,050,000, $4,480,000, and
$4,872,000 in 1996, 1997, and 1998, respectively.
8. EMPLOYEE BENEFIT PLANS
Retirement Plans
Miller Enterprises sponsors a 401(k) and profit-sharing plan and an
employee stock ownership plan covering eligible employees. With respect to
employer contributions, participants in the plans vest after five years of
service. On December 18, 1997, the trustees approved the termination and
liquidation of the employee stock ownership plan and the purchase by Miller
Enterprises of all capital stock owned by the employee stock ownership plan at
its fair value. Miller Enterprises purchased 71,441 shares of its preferred
stock and 23,668 shares of its Class A common
F-107
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
stock in connection with the termination and liquidation of the ESOP. Miller
Enterprises purchased the preferred stock and the Class A common stock based on
fair value as determined by independent appraisal. The amount of the repurchase
price of the shares in excess of par value was recorded as a reduction of
retained earnings. Miller matches 50% of employee contributions to the 401(k)
up to 6% of the employee's salary. Miller Enterprises contributed approximately
$208,000, $252,000, and $271,000 for the years ended March 27, 1996, April 2,
1997, and April 1, 1998, respectively. Peninsular Petroleum also sponsors a
401(k) plan covering eligible employees. Matching contributions to this plan
were not significant.
Incentive Cash/Restricted Stock Bonus Plan
Miller Enterprises sponsors an annual achievement based incentive
cash/restricted stock bonus plan whereby Miller Enterprises may award cash or
Class B (restricted voting rights) common stock to key employees based on a
percentage of earnings each year, as defined in the bonus plan. Miller
Enterprises applies the provisions of Accounting Principles Board Opinion No.
25, Accounting for Stock issued to Employees, in accounting for its stock based
awards. Accordingly, for the three years ended March 27, 1996, April 2, 1997
and April 1, 1998, Miller Enterprises issued 2,633, 4,092 and 3,972 shares of
Class B common stock under the provisions of this plan at no cost to the
employees and recorded expense for all shares issued of approximately $105,000,
$180,000, and $270,000, based on fair value of the stock as valued by
independent appraisal of $40, $44 and $68 per share at March 27, 1996, April 2,
1997 and April 1, 1998, respectively. As of the years ended April 2, 1997 and
April 1, 1998, Miller Enterprises had awarded 22,375 and 26,347 shares of
Class B stock under the provisions of this plan. Subsequent to year end, on
January 26, 1999 all shares in this plan were repurchased at fair value based
on the purchase price by the Company and retired. In connection with this
transaction approximately $2.0 million of compensation expense was recognized
which represents the difference between the fair value on January 26, 1999 and
the original compensation cost for shares outstanding under this plan that were
still restricted.
9. ENVIRONMENTAL COMPLIANCE
The ownership and/or operation of underground gasoline storage tanks is
subject to federal, state, and local laws and regulations.
Miller Enterprises meets federal and state financial responsibility
requirements through the retention of third-party insurance coverage. In
addition, Miller Enterprises' facilities are generally covered under the State
of Florida's superfund. Miller Enterprises has an agreement with an
environmental consulting and engineering firm whereby the firm will make
contamination assessments, prepare contamination reports, and manage site
remediation activities and required agency coordination for the Miller
Enterprises' properties. The Firm will provide all labor, materials, supplies,
equipment, transportation, and supervision required to perform the
rehabilitation services. Under the terms of the agreement, the firm is paid
solely by reimbursement from the State of Florida's superfund.
For situations not covered by this agreement, Miller Enterprises
determines its liability on a site by site basis and records a liability at the
time when it is probable and can be reasonably
F-108
<PAGE>
MILLER ENTERPRISES, INC. AND PENINSULAR PETROLEUM COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
March 27, 1996, April 2, 1997, and April 1, 1998
estimated. The estimated liability is not discounted. As of March 27, 1996,
April 2, 1997 and April 1, 1998 Miller Enterprises had recorded liabilities of
approximately $394,000, $460,000, and $300,000 related to environmental
remediation and tank closure costs on approximately 15 to 20 sites not covered
by this agreement that are included in other accrued expenses and liabilities
on the balance sheet.
10. LITIGATION
In the normal course of conducting business, Miller Enterprises and
Peninsular Petroleum are involved in various routine claims, disputes, and
litigation. In the opinion of management, the resolution of these claims,
disputes, and litigation as of period-end will not have a material adverse
effect on the financial position, results of operations, or liquidity of Miller
Enterprises and Peninsular Petroleum.
11. GAIN ON SALE OF ASSETS
On September 24, 1997, Miller Enterprises reached an agreement to sell
certain store assets consisting primarily of inventory and property and
equipment to SuperValu Operations, Inc. for net cash proceeds of $15.1 million,
resulting in a pre-tax gain of approximately $10.5 million. The net book value
of these assets was approximately $4.1 million. Revenues of approximately $54.9
million, $55.8 million, and $25.5 million, gross profit of approximately $12.2
million, $13.2 million, and $6.3 million, and operating income (including
depreciation expense) of approximately $2.3 million, $2.8 million, and $1.3
million relating to these stores are included in the results of operations of
Miller Enterprises, Inc. included in the combined statements of income for the
years ended March 27, 1996, April 2, 1997, and April 1, 1998, respectively.
12. SUBSEQUENT EVENT
On January 28, 1999, the shareholders of Miller Enterprises and
Peninsular Petroleum sold the stock of Miller Enterprises and Peninsular
Petroleum and certain real property owned by other related entities to Lil'
Champ Food Stores, Inc., a subsidiary of The Pantry, a convenience store
company headquartered in Sanford, North Carolina, for $82,000,000, subject to
adjustment in accordance with the terms of the purchase agreement. Per the
purchase agreement, certain assets amounting to approximately $7,700,000 were
distributed to the shareholders of Miller Enterprises prior to the transaction
and all of the outstanding debt of Miller Enterprises and the debt related to
the real property purchased from the other related entities was repaid. The
assets distributed to the shareholders of Miller Enterprises prior to the sale
of the stock of Miller Enterprises to Lil' Champ Food Stores consisted of
receivables due from stockholders, life insurance policies and the note
receivable from a related real estate partnership.
F-109
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
The Pantry, Inc.
Sanford, North Carolina
We have audited the accompanying statement of net assets acquired from
Miller Brothers and Circle Investments, Ltd. as of Janaury 28, 1999, by The
Pantry, Inc. This statement is the responsibility of The Pantry, Inc.'s
management. Our responsibility is to express an opinion on the statement based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the accompanying statement of net assets acquired
presents fairly, in all material respects, the net assets acquired as of
January 28, 1999 by The Pantry, Inc. from Miller Brothers and Circle
Investments, Ltd., in conformity with generally accepted principles.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
March 30, 1999
F-110
<PAGE>
THE PANTRY, INC.
STATEMENT OF NET ASSETS ACQUIRED FROM
MILLER BROTHERS AND CIRCLE INVESTMENTS, LTD.
As of January 28, 1999
(in thousands)
<TABLE>
<S> <C>
Assets acquired:
Land................................................................. $19,608
Buildings............................................................ 29,060
--------
Total assets acquired.................................................. 48,668
Deferred income taxes.................................................. 2,218
--------
Net assets acquired.................................................... $ 46,450
========
</TABLE>
See accompanying notes to statement of assets acquired.
F-111
<PAGE>
THE PANTRY, INC.
NOTES TO STATEMENT OF NET ASSETS ACQUIRED
As of January 28, 1999
1. Background
On January 28, 1999, The Pantry, Inc. acquired the real estate assets of
Miller Brothers and Circle Investments, Ltd., in connection with the
acquisition of 100% of the outstanding capital stock of Miller Enterprises,
Inc. Miller Enterprises, Inc. is a leading operator of convenience stores,
operating 121 stores located in central Florida and operated under the name
"Handy Way". The assets acquired from Miller Brothers and Circle Investments,
Ltd., represent real estate, including land and buildings, leased to and used
in the convenience store operations of Miller Enterprises, Inc.
The accompanying statement relates solely to the net assets acquired by
The Pantry and is not intended to represent the complete financial position of
Miller Brothers and Circle Investments.
2. Summary of Significant Accounting Policies
The Miller acquisition, including the net assets acquired from Miller
Brothers and Circle Investments, has been accounted for using purchase
accounting. In accordance with Accounting Principles Board Opinion No. 16,
Business Combinations ("APB 16"), the acquired assets have been recorded at
their fair values at the date of acquisition, utilizing internal and third-
party appraisals.
Deferred income taxes have been provided for the difference between the
tax basis of the assets ($43,124,000, as established in the acquisition
agreement) and the fair value of the assets determined in accordance with APB
16.
The preliminary purchase price allocation for the Miller acquisition
results in estimated goodwill of $19,760,000. Such estimate is subject to
change pending completion of appraisals and other final allocations related to
Miller Enterprises, Inc. For purposes of the accompanying statement of net
assets acquired, no goodwill has been allocated, pending the finalization of
the fair values of the assets and liabilities acquired of Miller Enterprises,
Inc.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements.
Actual amounts could differ from these estimates.
F-112
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Taylor Oil Company
We have audited the accompanying statement of assets sold of Taylor Oil
Company as of December 31, 1998 and the related statements of income from
retail operations and cash flows from retail operations for the three years
ended December 31, 1998. These statements are the responsibility of Taylor Oil
Company. Our responsibility is to express an opinion on these statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying statements were prepared to present the assets of Taylor
Oil Company as of December 31, 1998 which were sold to The Pantry, Inc. on
February 25, 1999, pursuant to the purchase agreement described in Note 4, and
the income and cash flows from the retail operations of Taylor Oil Company for
the three years ended December 31, 1998. These statements are not intended to
be a complete presentation of the financial position, results of operations and
cash flows of Taylor Oil Company.
In our opinion, the accompanying statement of assets sold presents
fairly, in all material respects, the assets of Taylor Oil Company as of
December 31, 1998 which were sold to The Pantry, Inc. on February 25, 1999, and
the income and cash flows from retail operations for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ Edwards, Falls & Renegar, P.L.L.C.
Winston-Salem, North Carolina
February 12, 1999
F-113
<PAGE>
TAYLOR OIL COMPANY
STATEMENT OF ASSETS SOLD
December 31, 1998
<TABLE>
<S> <C>
Current assets:
Cash............................................................... $ 70,350
Receivables........................................................ 702,068
Inventories (Note 2)............................................... 2,706,987
Prepaid expenses................................................... 60,676
----------
Total current assets............................................. 3,540,081
----------
Equipment, net (Note 3).............................................. 5,398,019
----------
Total assets sold.................................................... $8,938,100
==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-114
<PAGE>
TAYLOR OIL COMPANY
STATEMENTS OF INCOME FROM RETAIL OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Merchandise sales...................... $ 22,707,097 $ 22,661,868 $ 25,586,745
Petroleum sales........................ 104,428,629 96,059,829 83,054,192
Commissions............................ 137,711 142,569 267,518
------------ ------------ ------------
Total revenues....................... 127,273,437 118,864,266 108,908,455
------------ ------------ ------------
Cost of sales
Merchandise............................ 15,874,846 15,453,283 17,022,253
Petroleum.............................. 94,458,961 85,047,451 72,855,822
------------ ------------ ------------
Total cost of sales.................. 110,333,807 100,500,734 89,878,075
------------ ------------ ------------
Gross profit............................. 16,939,630 18,363,532 19,030,380
------------ ------------ ------------
Operating expenses
Store expenses......................... 11,142,200 9,777,086 9,946,725
Store expenses--related parties........ 1,196,982 1,187,408 1,188,978
General and administrative expenses.... 1,887,641 1,932,235 1,926,520
Impairment of long-lived assets........ 261,319 -- 187,761
Depreciation........................... 1,139,265 1,365,436 1,399,534
------------ ------------ ------------
Total operating expenses............. 15,627,407 14,262,165 14,649,518
------------ ------------ ------------
Net income from retail operations........ $ 1,312,223 $ 4,101,367 $ 4,380,862
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-115
<PAGE>
TAYLOR OIL COMPANY
STATEMENTS OF CASH FLOWS FROM RETAIL OPERATIONS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1997 1998
---------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income from retail operations........ $1,312,223 $ 4,101,367 $4,380,862
Adjustments to reconcile net income to
net cash provided by retail operations
Impairment of long-lived assets......... 261,319 -- 187,761
Depreciation............................ 1,139,265 1,365,436 1,399,534
(Gain) loss on sale of equipment........ (23,799) 34,848 7,283
Provision for environmental expenses.... 65,708 2,415 42,803
Changes in operating assets and
liabilities
Receivables and prepaids................ (76,707) 211,697 94,905
Inventories............................. (623,352) 470,145 501,096
Accounts payable........................ 1,063,344 (1,002,313) (784,605)
Accrued expenses........................ (995,384) 684,334 224,769
---------- ----------- ----------
Net cash provided by retail operations... $2,122,617 $ 5,867,929 $6,054,408
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-116
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation:
The balance sheet as presented includes only the assets of Taylor Oil as
of December 31, 1998, which were sold to The Pantry, Inc. on February 25, 1999
(see Note 4). The accompanying statements of income and cash flows include only
items applicable to the retail operations which were sold. Because not all of
Taylor Oil's assets, liabilities, income, expenses and sources and uses of cash
are included, these statements are not intended to be a complete presentation
of the financial position, results of operations and cash flows of Taylor Oil
in accordance with generally accepted accounting principles.
Organization:
Taylor Oil Company is engaged primarily in retail sales of petroleum
products and convenience items through stores located in North Carolina and
Virginia.
Cash equivalents:
Taylor Oil Company considers all highly liquid debt instruments with a
maturity of three months or less to be cash equivalents.
Inventories:
Inventories are valued at the lower of cost or market with cost
determined by the last-in, first-out (LIFO) method.
Depreciation:
Depreciation expense is computed using the straight-line method over the
estimated useful lives of five to seven years.
Long-lived assets:
In accordance with SFAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, assets held and used by
Taylor Oil Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of particular assets may not be
recoverable. For purposes of evaluating the recoverability of long-lived
assets, the recoverability test is performed using undiscounted net cash flows
of the individual stores and consolidated undiscounted net cash flows for long
lived assets not identifiable to individual stores.
Environmental cleanup matters:
Taylor Oil Company expenses environmental expenditures related to
existing conditions resulting from past or current operations and from which no
current or future benefit is discernible. Expenditures which extend the life of
the related property or mitigate or prevent future environmental contamination
are capitalized. Taylor Oil determines its liability on a site by site basis
and records an undiscounted liability when it is probable and can be reasonably
estimated. Estimated costs are reduced by anticipated reimbursements from state
administered trust funds.
F-117
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2--INVENTORIES
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Inventories at FIFO cost
Merchandise................................................. $2,171,856
Petroleum products.......................................... 1,218,674
----------
3,390,530
Less adjustment to LIFO cost
Merchandise................................................. (229,360)
Petroleum products.......................................... (454,183)
----------
Inventories at LIFO cost...................................... $2,706,987
==========
</TABLE>
NOTE 3--EQUIPMENT SOLD
<TABLE>
<CAPTION>
December
31, 1998
-----------
<S> <C>
Original cost................................................. $16,519,068
Less accumulated depreciation................................. 11,121,049
-----------
$ 5,398,019
===========
</TABLE>
NOTE 4--CONCENTRATIONS OF CREDIT RISK AND CONTINGENT LIABILITIES
Financial instruments which potentially subject the company to credit
risk consist of temporary cash investments, trade accounts receivable and notes
receivable. Taylor Oil Company regularly maintains cash balances in excess of
federally insured limits only with financial institutions of high credit
standing. Credit risk with respect to retail accounts receivable is limited due
to the large number of customers in different industries and localities, all of
whom are regularly reviewed for credit worthiness. Wholesale accounts
receivable risk is minimized by performing ongoing credit evaluations of each
customers financial condition. Risk of loss from notes receivable, which
generally arise from the sale of company properties, is limited by maintaining
a deed of trust on the underlying property.
Taylor Oil Company is contingently liable as a guarantor of a $1,000,000
line of credit and two letters of credit totalling $750,000 for related
corporations.
Historically, the Companys credit losses have been insignificant.
NOTE 5--CONVENIENCE STORE LEASES
As of December 31, 1998, the Taylor Oil leases 38 convenience store
properties, of which 30 are owned by Taylor Oil Company shareholders or other
related parties. Two other ancillary properties are leased by Taylor Oil, one
of which is subleased.
F-118
<PAGE>
TAYLOR OIL COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
Total net rent expense for 1996, 1997 and 1998 was $1,308,267, $1,361,498
and $1,369,278 respectively. Of these totals, related parties were paid
$1,196,982 in 1996, $1,187,408 in 1997 and $1,188,978 in 1998.
NOTE 6--EMPLOYEE PROFIT SHARING PLAN
Taylor Oil maintains a combination 401(k)/profit sharing plan for the
benefit of all employees meeting age and length of service requirements. Under
the plan, for each $1 of salary deferred by plan participants, up to three
percent of total compensation, Taylor Oil will contribute $1. Taylor Oil makes
additional contributions for the benefit of all eligible employees, with
discretionary contributions allocated based on participant compensation. Total
retirement plan expense was $300,000 for 1996, $338,000 for 1997 and $388,000
for 1998.
NOTE 7--SUBSEQUENT EVENT
On February 25, 1999, Taylor Oil sold its retail operation to The Pantry,
Inc. The specific assets and the prices for which they were sold are as
follows:
<TABLE>
<S> <C>
Cash (change fund)............................................ $ 69,600
Receivables................................................... 551,949
Inventories................................................... 3,173,811
Prepaid expenses.............................................. 47,296
Property and equipment........................................ 4,750,000
Goodwill...................................................... 13,300,000
Non-compete agreement......................................... 950,000
-----------
$22,842,656
===========
</TABLE>
All real estate used in Taylor Oil's operations will continue to be owned
by Taylor Oil, its shareholders or outside third parties.
Taylor Oil or its affiliates will continue to own the real property at 52
of the 60 former Taylor Oil locations transferred to The Pantry. These
properties will be leased to The Pantry under operating lease agreements with
terms of fifteen years and aggregate minimum annual rentals totaling
approximately $3,396,000. These leases expire through March 31, 2014, and
contain renewal clauses allowing The Pantry to extend the leases for four
additional five-year periods. The leases also contain rental escalation clauses
which provide for increases in the base rents every five years of the initial
term, based on increases in the consumer price index for the five-year period,
not to exceed 7.5%.
F-119
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,250,000 Shares
The Pantry, Inc.
Common Stock
-----------
PROSPECTUS
-----------
Merrill Lynch & Co.
Banc of America Securities LLC
Goldman, Sachs & Co.
June 8, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
