- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 24, 1999
COMMISSION FILE NUMBER 33-72574
THE PANTRY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 56-1574463
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
1801 DOUGLAS DRIVE, SANFORD, NORTH CAROLINA
(Address of principal executive offices)
27330
(Zip Code)
(919) 774-6700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
COMMON STOCK, $0.01 PAR VALUE 18,111,478 SHARES
<S> <C>
(Class) (Outstanding at August 2, 1999)
</TABLE>
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- --------------------------------------------------------------------------------
<PAGE>
THE PANTRY, INC.
FORM 10-Q
JUNE 24, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I -- FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets ...................................................... 2
Consolidated Statements of Operations ............................................ 4
Consolidated Statements of Cash Flows ............................................ 5
Notes to Consolidated Financial Statements. ...................................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of 27
Operations
PART II -- OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds ..................................... 38
ITEM 4. Submission of Matters to a Vote of Security Holders ........................... 39
ITEM 6. Exhibits and Reports on Form 8-K. ............................................. 39
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 24, JUNE 24,
1998 1999
--------------- ------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 34,404 $ 61,211
Receivables (net of allowances for doubtful accounts of $280 at September 24, 1998 and
$380 at June 24, 1999)................................................................. 9,907 18,682
Inventories (Note 3) .................................................................... 47,809 65,822
Income taxes receivable ................................................................. 488 --
Prepaid expenses ........................................................................ 2,216 3,086
Property held for sale .................................................................. 3,761 114
Deferred income taxes, net .............................................................. 3,988 5,776
-------- --------
Total current assets .................................................................. 102,573 154,691
-------- --------
Property and equipment, net .............................................................. 300,978 396,404
-------- --------
Other assets:
Goodwill (net of accumulated amortization of $11,940 at September 24, 1998 and $15,574
at June 24, 1999) ..................................................................... 120,025 169,033
Deferred lease costs (net of accumulated amortization of $9,001 at September 24, 1998 and
$9,035 at June 24, 1999)............................................................... 269 235
Deferred financing cost (net of accumulated amortization of $4,871 at September 24, 1998
and $6,294 at June 24, 1999)........................................................... 14,545 13,122
Environmental receivables (Note 4) ...................................................... 13,187 13,750
Other noncurrent assets ................................................................. 3,243 8,565
-------- --------
Total other assets .................................................................... 151,269 204,705
-------- --------
Total assets ............................................................................. $554,820 $755,800
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 24, JUNE 24,
1998 1999
--------------- ------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 5) ........................................... $ 45 $ 5,431
Current maturities of capital lease obligations ......................................... 1,240 1,240
Accounts payable:
Trade ................................................................................. 49,559 75,890
Money orders .......................................................................... 5,181 4,823
Accrued interest ........................................................................ 11,712 4,027
Accrued compensation and related taxes. ................................................. 6,719 7,904
Income tax payable ...................................................................... -- 924
Other accrued taxes ..................................................................... 7,007 11,951
Accrued insurance ....................................................................... 5,745 9,534
Other accrued liabilities ............................................................... 24,348 31,288
--------- ---------
Total current liabilities ............................................................. 111,556 153,012
--------- ---------
Long-term debt (Note 5) .................................................................. 327,269 425,270
--------- ---------
Other noncurrent liabilities:
Environmental reserves (Note 4) ......................................................... 17,137 18,024
Deferred income taxes ................................................................... 20,366 23,419
Capital lease obligations ............................................................... 12,129 11,190
Employment obligations .................................................................. 934 657
Accrued dividends on preferred stock .................................................... 4,391 --
Other noncurrent liabilities ............................................................ 21,734 27,533
--------- ---------
Total other noncurrent liabilities .................................................... 76,691 80,823
--------- ---------
Commitments and contingencies (Notes 4 and 5) ............................................ -- --
Shareholders' equity (Note 6 and 7):
Preferred stock, $.01 par value, 150,000 shares authorized; 17,500 issued and
outstanding at
September 24, 1998 and no shares issued and outstanding as of June 24, 1999 ........... -- --
Common stock, $.01 par value, 50,000,000 shares authorized; 11,704,857 issued and
outstanding at September 24, 1998 and 18,111,478 issued and outstanding at June 24,
1999 .................................................................................. 117 181
Additional paid in capital .............................................................. 68,939 126,328
Shareholder loans ....................................................................... (215) (937)
Accumulated deficit ..................................................................... (29,537) (28,877)
--------- ---------
Total shareholders' equity ............................................................ 39,304 96,695
--------- ---------
Total liabilities and shareholders' equity ............................................... $ 554,820 $ 755,800
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- --------------------------
JUNE 25, JUNE 24, JUNE 25, JUNE 24,
1998 1999 1998 1999
------------ ------------ ------------ -------------
(13 WEEKS) (13 WEEKS) (39 WEEKS) (39 WEEKS)
<S> <C> <C> <C> <C>
Revenues:
Merchandise sales ...................................... $123,108 $ 199,085 $ 316,873 $ 503,047
Gasoline sales ......................................... 127,780 250,816 343,498 611,733
Commissions ............................................ 3,689 6,803 10,047 17,323
-------- --------- --------- ----------
Total revenues ....................................... 254,577 456,704 670,418 1,132,103
-------- --------- --------- ----------
Cost of sales:
Merchandise ............................................ 80,400 133,633 207,265 338,458
Gasoline ............................................... 113,812 222,640 304,136 537,273
-------- --------- --------- ----------
Total cost of sales .................................. 194,212 356,273 511,401 875,731
-------- --------- --------- ----------
Gross profit ............................................ 60,365 100,431 159,017 256,372
-------- --------- --------- ----------
Operating expenses:
Store expenses ......................................... 35,582 56,851 97,435 152,066
General and administrative expenses .................... 7,874 13,094 23,406 35,450
Depreciation and amortization .......................... 6,750 10,946 18,525 28,776
-------- --------- --------- ----------
Total operating expenses ............................. 50,206 80,891 139,366 216,292
-------- --------- --------- ----------
Income from operations .................................. 10,159 19,540 19,651 40,080
-------- --------- --------- ----------
Other income (expense):
Interest ............................................... (7,502) (10,707) (20,353) (29,580)
Miscellaneous .......................................... 479 286 1,253 414
-------- --------- --------- ----------
Total other expense .................................. (7,023) (10,421) (19,100) (29,166)
-------- --------- --------- ----------
Income before income taxes and extraordinary item ....... 3,136 9,119 551 10,914
Income tax expense ...................................... (916) (3,882) -- (4,600)
-------- --------- --------- ----------
Income before extraordinary item ........................ 2,220 5,237 551 6,314
Extraordinary item, net of taxes ........................ 289 (27) (6,511) (3,584)
-------- --------- --------- ----------
Net income (loss) ....................................... 2,509 5,210 (5,960) 2,730
Preferred dividends ..................................... (667) (624) (2,253) (2,070)
Premium on redemption of preferred stock ................ -- (613) -- (613)
-------- --------- --------- ----------
Net income (loss) applicable to common shareholders ..... $ 1,842 $ 3,973 $ (8,213) $ 47
======== ========= ========= ==========
Earnings per share (Note 7):
Basic:
Income (loss) before extraordinary item .............. $ 0.16 $ 0.31 $ (0.19) $ 0.30
Extraordinary item ................................... 0.03 -- (0.71) (0.29)
-------- --------- --------- ----------
Net income (loss) .................................... $ 0.19 $ 0.31 $ (0.90) $ 0.01
======== ========= ========= ==========
Diluted:
Income (loss) before extraordinary item .............. $ 0.15 $ 0.28 $ (0.19) $ 0.27
Extraordinary item ................................... 0.03 -- (0.71) (0.27)
-------- --------- --------- ----------
Net income (loss) .................................... $ 0.18 $ 0.28 $ (0.90) $ 0.00
======== ========= ========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
JUNE 25, JUNE 24,
1998 1999
------------ -------------
(39 WEEKS) (39 WEEKS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................................................... $ (5,960) $ 2,730
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Extraordinary loss .................................................................... 6,511 3,405
Depreciation and amortization ......................................................... 18,525 28,776
Provision for deferred income taxes ................................................... (514) (1,518)
(Gain) loss on sale of property and equipment ......................................... 350 (170)
Reserves for environmental expenses ................................................... 92 887
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables ............................................................................. (4,885) (1,238)
Inventories ............................................................................. (2,866) (9,072)
Prepaid expenses ........................................................................ 737 (470)
Other noncurrent assets ................................................................. 4,192 (1,754)
Accounts payable ........................................................................ 4,159 14,379
Other current liabilities and accrued expenses .......................................... (681) (6,614)
Employment obligations .................................................................. (277) (277)
Accrued dividends ....................................................................... -- (6,461)
Other noncurrent liabilities ............................................................ 7,727 2,143
---------- ----------
Net cash provided by operating activities ................................................ 27,110 24,746
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ..................................................... (4,187) (125)
Additions to property and equipment ..................................................... (32,923) (33,452)
Proceeds from sale of property held for sale ............................................ 3,245 1,495
Proceeds from sale of property and equipment ............................................ 1,521 11,163
Acquisitions of related businesses, net of cash acquired ................................ (165,799) (131,230)
---------- ----------
Net cash used in investing activities .................................................... (198,143) (152,149)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases ............................................... (907) (939)
Principal repayments of long-term debt .................................................. (57,044) (173,307)
Proceeds from issuance of long-term debt ................................................ 228,042 275,301
Redemption of series B preferred stock .................................................. -- (17,500)
Net proceeds from initial public offering ............................................... -- 72,984
Net proceeds from other equity issues ................................................... 31,936 1,247
Other financing costs ................................................................... (12,891) (3,576)
---------- ----------
Net cash provided by financing activities ................................................ 189,136 154,210
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................................ 18,103 26,807
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......................................... 3,347 34,404
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................... $ 21,450 $ 61,211
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------
JUNE 25, JUNE 24,
1998 1999
------------ -----------
(39 WEEKS) (39 WEEKS)
<S> <C> <C>
Cash paid during the year:
Interest ................ $19,986 $37,265
======= =======
Taxes ................... $ 687 $ 75
======= =======
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During 1998, The Pantry entered into several business acquisitions and
divestitures (see Note 2 -- Business Acquisitions). 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.
On June 8, 1999, the Company redeemed all of its preferred stock
outstanding for $17.5 million and paid accrued dividends on the preferred stock
of $6.5 million. As of June 24, 1999, the Company has no preferred stock issued
or outstanding. In connection with this redemption, the Company recognized a
dividend of $0.6 million.
6
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND RECENT DEVELOPMENTS
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements include the accounts of
The Pantry, Inc. and its wholly-owned subsidiaries, Lil' Champ Food Stores,
Inc. ("Lil' Champ") and Lil' Champ's wholly-owned subsidiary Miller
Enterprises, Inc., Sandhills, Inc., Global Communications, Inc. and PH Holding
Corporation ("PH") and PH's wholly-owned subsidiaries, TC Capital Management,
Inc., and Pantry Properties, Inc. All intercompany transactions and balances
have been eliminated in consolidation. See "Note 8 -- Supplemental Guarantor
Information."
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The
interim consolidated financial statements have been prepared from the
accounting records of The Pantry, Inc. and its subsidiaries and all amounts at
June 24, 1999 and for the three and nine months ended June 24, 1999 and June
25, 1998 are unaudited. References herein to "The Pantry" or "the Company"
shall include all subsidiaries. Pursuant to Regulation S-X, certain information
and note disclosures normally included in annual financial statements have been
condensed or omitted. The information furnished reflects all adjustments which
are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented, and which are of a normal, recurring
nature.
We suggest that these interim financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in
The Pantry's Annual Report on Form 10-K/A for the fiscal year ended September
24, 1998, The Pantry's Registration Statement on Form S-1 (No. 333-74221), as
amended, and The Pantry's Quarterly Report on Form 10-Q/A for the period ended
March 25, 1999, as amended.
Our results of operations for the three and nine months ended June 24,
1999 and June 25, 1998 are not necessarily indicative of results to be expected
for the full fiscal year. Our results of operations and comparisons with prior
and subsequent quarters 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 -- Business Acquisitions."
Furthermore, the 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, we have achieved higher
revenues and earnings in our third and fourth quarters. The Pantry operates on
a 52-53 week fiscal year ending on the last Thursday in September. The
Company's 1999 fiscal year ends on September 30, 1999 and is a 53 week year
while our 1998 fiscal year was 52 weeks. Our 2000 fiscal year will be a 52 week
year.
THE PANTRY
As of June 24, 1999, The Pantry operated approximately 1,135 convenience
stores located in Florida, North Carolina, South Carolina, Tennessee, Kentucky,
Indiana and Virginia. The Pantry's stores offer a broad selection of products
and services designed to appeal to the convenience needs of our customers,
including gasoline, car care products and services, tobacco products, beer,
soft drinks, self-service fast food and beverages, publications, dairy
products, groceries, health and beauty aids, video games and money orders. In
our Florida, Kentucky, Virginia and Indiana stores, we also sell lottery
products. Self-service gasoline is sold at 1,070 locations, 884 of which sell
gasoline under brand names including Amoco, British Petroleum, Chevron, Citgo,
Exxon, Fina, Shell, and Texaco. During the last three fiscal years, merchandise
revenues (including commissions from services) and gasoline revenues have
averaged approximately 49% and 51% of total revenues, respectively.
RECENT DEVELOPMENTS
On June 8, 1999, we offered and sold 6,250,000 shares of common stock in
the Company's initial public offering (the "IPO"). The initial offering price
was $13.00 per share and the Company received $75.6 million in net proceeds,
before expenses. The net proceeds were used: (i) to repay $19.0 million in
indebtedness under our 1999 bank credit facility (as defined); (ii) to redeem
$17.5 million in outstanding preferred stock; and (iii) to pay accrued
dividends on the preferred stock of $6.5 million. Of the remaining $32.6
million, $30.2 million was used to fund acquisitions closed subsequent to the
fiscal quarter ended June 24, 1999 and $2.4 million was reserved to pay fees
and expenses associated with the IPO (see "Note 6 -- Shareholders' Equity,"
"Note 9 -- Subsequent Events," and "Part II -- Item 2. Changes in Securities
and Use of Proceeds").
7
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- THE COMPANY AND RECENT DEVELOPMENTS -- Continued
On June 8, 1999, we redeemed all our preferred stock for $17.5 million and
paid accrued dividends on the preferred stock of $6.5 million. As of June 24,
1999, the Company has no preferred stock issued or outstanding. See "Note 6 --
Shareholders' Equity."
On June 8, 1999, our 1999 bank credit facility lenders amended several
covenants in our Amended and Restated Credit Facility (the "1999 bank credit
facility"). See "Note 5 -- Long-Term Debt" and "Part I -- Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation --
Liquidity and Capital Resources."
On June 3, 1999, the Company adopted a new 1999 stock option plan
providing for the grant of incentive stock options to our officers, directors,
employees and consultants. See "Note 6 -- Stockholders' Equity" and "Note 7 --
Earnings Per Share."
NOTE 2 -- BUSINESS ACQUISITIONS:
During the nine months ended June 24, 1999, The Pantry acquired the
businesses described below (the "1999 acquisitions"). These acquisitions were
accounted for by the purchase method of accounting:
FISCAL 1999 ACQUISITIONS
<TABLE>
<CAPTION>
DATE ACQUIRED TRADE NAME LOCATIONS STORES
- --------------------- -------------- ---------- -------
<S> <C> <C> <C>
February 25, 1999 ETNA North Carolina, Virginia 60
January 28, 1999 Handy Way North-central Florida 121
November 5, 1998 Express Stop Southeast North Carolina and Eastern South Carolina 22
October 22, 1998 Dash-N East-central North Carolina 10
</TABLE>
During fiscal 1998, The Pantry acquired and disposed of the businesses
described below (the "1998 acquisitions"). These acquisitions were accounted
for by the purchase method of accounting:
FISCAL 1998 ACQUISITIONS
<TABLE>
<CAPTION>
DATE ACQUIRED TRADE NAME LOCATIONS STORES
- ------------------- ------------ ---------- -------
<S> <C> <C> <C>
July 15, 1998 Zip Mart Central North Carolina, Virginia 42
July 2, 1998 Quick Stop Southeast North Carolina and Coastal South Carolina 75
May 2, 1998 Sprint Gainesville, Florida 10
March 19, 1998 Kwik Mart Eastern North Carolina 23
October 23, 1997 Lil' Champ Northeast Florida 440(a)
</TABLE>
With the exception of the Lil' Champ acquisition and the March 19, 1998
and May 2, 1998 acquisitions, the purchase price allocations are preliminary
estimates, based on available information and certain assumptions management
believes are reasonable. Accordingly, the purchase price allocations are
subject to finalization. Goodwill associated with the 1999 and 1998
acquisitions is being amortized over 30 years using the straight-line method.
8
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- BUSINESS ACQUISITIONS: -- Continued
Purchase prices of 1999 acquisitions have been allocated to the assets
purchased and the liabilities assumed based on the fair values on the dates of
the acquisitions as follows (amounts in thousands):
<TABLE>
<S> <C>
ASSETS ACQUIRED:
Receivables ............................................. $ 7,509
Inventories ............................................. 8,941
Prepaid expenses ........................................ 400
Property and equipment .................................. 94,111
Other noncurrent assets ................................. 3,565
--------
Total assets ............................................ 114,526
--------
LIABILITIES ASSUMED:
Accounts payable ........................................ 11,620
Other current liabilities and accrued expenses .......... 16,437
Long-term debt .......................................... 1,393
Deferred income taxes ................................... 2,783
Other noncurrent liabilities ............................ 3,708
--------
Total liabilities ....................................... 35,941
--------
Net tangible assets acquired ............................ 78,585
Goodwill ................................................ 52,645
--------
Total consideration paid, including direct costs, net
of cash acquired ........................................ $131,230
========
</TABLE>
The following unaudited pro forma information presents a summary of
consolidated results of operations of The Pantry and acquired businesses as if
the transactions occurred at the beginning of the fiscal year for each of the
periods presented (amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
JUNE 25, JUNE 24,
1998 1999
------------- -------------
<S> <C> <C>
Total revenues .......................... $1,250,150 $1,262,627
Income before extraordinary loss ........ $ 924 $ 4,274
Net income (loss) ....................... $ (5,588) $ 690
Net loss applicable to common shareholders $ (7,841) $ (1,993)
Earnings per share applicable
to common shareholders:
Basic:
Loss before extraordinary item ......... $ (0.15) $ 0.13
Extraordinary item ..................... (0.71) (0.29)
---------- ----------
Net loss ............................... $ (0.86) $ (0.16)
========== ==========
Diluted:
Income (loss) before extraordinary item $ (0.15) $ 0.12
Extraordinary item ..................... (0.71) (0.27)
---------- ----------
Net loss ............................... $ (0.86) $ (0.15)
========== ==========
</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 1998 or fiscal 1999,
or of future operations of the combined companies.
9
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- INVENTORIES
Inventories are stated at the lower of last-in, first-out (LIFO) cost or
market. Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 24, JUNE 25,
1998 1999
--------------- -----------
<S> <C> <C>
Inventories at FIFO cost:
Merchandise ...................... $ 41,967 $ 59,318
Gasoline ......................... 11,510 16,108
-------- --------
53,477 75,426
Less adjustment to LIFO cost:
Merchandise ...................... (5,668) (9,295)
Gasoline ......................... -- (309)
-------- --------
Inventories at LIFO cost ......... $ 47,809 $ 65,822
======== ========
</TABLE>
Total inventories at September 24, 1998 and June 24, 1999 include $5.2
million and $6.8 million of gasoline inventories held by Lil' Champ and Miller
(June 24, 1999 only) that are recorded under the FIFO method, respectively.
Inventories are net of estimated obsolescence reserves of approximately
$200,000 at September 24, 1998 and June 24, 1999.
NOTE 4 -- ENVIRONMENTAL LIABILITIES AND OTHER CONTINGENCIES
As of June 24, 1999, The Pantry was contingently liable for outstanding
letters of credit in the amount of $13.9 million related primarily to several
self-insured programs, regulatory requirements, and vendor contract terms. The
letters of credit are not to be drawn against unless The Pantry defaults on the
timely payment of related liabilities.
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 $5.0 million, for the
periods February 1, 1992 to September 26, 1996. In December 1998, The Pantry
reached a tentative settlement with the State of North Carolina, which is
pending final approval by the state. Under the 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 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 its financial condition or financial statements.
The Pantry is involved in certain legal actions arising in the normal
course of business. In the opinion of management, based on a review of such
legal proceedings, the ultimate outcome of these actions will not have a
material effect on the consolidated financial statements.
ENVIRONMENTAL LIABILITIES AND CONTINGENCIES
The 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 (i) installing
underground storage tank systems, (ii) upgrading underground storage tank
systems, (iii) taking corrective action in response to releases, (iv) closing
underground storage tank systems, (v) keeping appropriate records, (vi)
maintaining evidence of financial responsibility for taking corrective action
and (vii) 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
10
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- ENVIRONMENTAL LIABILITIES AND OTHER CONTINGENCIES -- Continued
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:
o 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.
o 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.
o Overfill/Spill Prevention: The 1988 EPA regulations require that all
sites have overfill/spill prevention devices by December 22, 1998. The Pantry
has installed spill/overfill equipment on all company-owned underground storage
tank systems to meet these regulations.
In addition to the technical standards, The Pantry is required by federal
and state regulations to maintain evidence of financial responsibility for
taking corrective action and compensating third parties in the event of a
release from its underground storage tank systems. In order to comply with this
requirement, The Pantry maintains surety bonds in the aggregate amount of
approximately $900,000 in favor of state environmental enforcement agencies in
the states of North Carolina, Virginia and South Carolina and a letter of
credit in the aggregate amount of approximately $1.1 million issued by a
commercial bank in favor of state environmental enforcement agencies in the
states of Florida, Tennessee, Indiana and Kentucky and relies on reimbursements
from applicable state trust funds. In Florida, The Pantry meets such financial
responsibility requirements by state trust fund coverage through December 31,
1998 and will meet such requirements thereafter through private commercial
liability insurance. The Pantry has sold all of its Georgia stores but has
retained responsibility for pre-closing environmental remediation. The costs of
such remediation and third party claims should be covered by the state trust
fund, subject to applicable deductibles and caps on reimbursements.
All states in which The Pantry operates or has operated underground
storage tank systems have established trust funds for the sharing, recovering,
and reimbursing of certain cleanup costs and liabilities incurred as a result
of releases from underground storage tank systems. These trust funds, which
essentially provide insurance coverage for the cleanup of environmental damages
caused by the operation of underground storage tank systems, are funded by a
underground storage tank registration fee and a tax on the wholesale purchase
of motor fuels within each state. The Pantry has paid underground storage tank
registration fees and gasoline taxes to each state where it operates to
participate in these programs and has filed claims and received reimbursement
in North Carolina, South Carolina, Kentucky, Indiana, Florida, Georgia, and
Tennessee. The coverage afforded by each state fund varies but generally
provides from $150,000 to $1.0 million per site or occurrence for the cleanup
of environmental contamination, and most provide coverage for third party
liabilities.
Costs for which The Pantry does not receive reimbursement include but are
not limited to, the per-site deductible, costs incurred in connection with
releases occurring or reported to trust funds prior to their inception, removal
and disposal of underground storage tank systems, and costs incurred in
connection with sites otherwise ineligible for reimbursement from the trust
funds. The trust funds require The Pantry to pay deductibles ranging from
$10,000 to $100,000 per occurrence depending on the upgrade status of its
underground storage tank system, the date the release is discovered/reported
and the type of cost for which reimbursement is sought. The Florida trust fund
will not cover releases first reported after December 31, 1998. The Pantry will
meet Florida financial responsibility requirements for remediation and third
party claims arising out of releases reported after December 31, 1998 through a
combination of private insurance and a letter of credit. In addition to
material amounts to be spent by The Pantry, a substantial amount will be
expended for remediation on behalf of
11
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- ENVIRONMENTAL LIABILITIES AND OTHER CONTINGENCIES -- Continued
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 $17.1 million and $18.0 million as of September
24, 1998 and June 24, 1999, respectively, represent estimates for future
expenditures for remediation, tank removal and litigation associated with 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 June
24, 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 Pantry anticipates that it will be reimbursed for a significant
portion of these expenditures from state insurance funds and private insurance.
As of September 24, 1998, and June 24, 1999, these anticipated reimbursements
of $13.2 million and $13.8 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 costs for
contaminated sites and The Pantry's 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 The
Pantry's environmental reserve until a final closure notice is received.
12
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- LONG-TERM DEBT
At September 24, 1998 and June 24, 1999, long-term debt consisted of the
following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 24, JUNE 24,
1998 1999
--------------- -----------
<S> <C> <C>
Senior notes payable; due November 15, 2000; interest payable
semi-annually at 12% ................................................... $ 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
(5.03% at June 24, 1999) plus 3.0%; principal due in quarterly
installments beginning April 30, 1999 through January 31, 2004 ......... -- 71,531
Term loan facility -- Tranche B; interest payable monthly at LIBOR
(5.03% at June 24, 1999) plus 3.5%; principal due in quarterly
installments beginning April 30, 1999 through January 31, 2006 ......... -- 157,194
Acquisition facility; interest payable monthly at LIBOR (5.03% at June 24,
1999) plus 3.0%; principal due in quarterly installments beginning
April 30, 2001 through January 31, 2004 ................................ 78,000 --
Notes payable to McLane Company, Inc.; zero (0.0%) interest, with
principal due in annual installments through February 26, 2003 ......... -- 1,694
Other notes payable; various interest rates and maturity dates ........... 319 282
-------- --------
327,314 430,701
Less -- current maturities ............................................... (45) (5,431)
-------- --------
$327,269 $425,270
======== ========
</TABLE>
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 all subsidiary guarantors. See "Note 8 --
Supplemental Guarantor Information." On January 28, 1999, The Pantry
repurchased $49.0 million in principal amount of senior notes plus 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 1999
bank credit facility and cash on hand.
On January 28, 1999, The Pantry entered into the 1999 bank credit facility
consisting of: (i) a $45.0 million revolving credit facility available for
working capital financing, general corporate purposes and issuing commercial
and standby letters of credit; (ii) a $50.0 million acquisition facility
available to finance acquisition of related businesses; and (iii) term loan
facilities with outstanding borrowings of $240.0 million. As of June 24, 1999,
total outstanding borrowings under the 1999 bank credit facility were $228.7
million.
The Pantry used the proceeds of the term loan facility and a $5.0 million
initial draw under the revolving credit facility, along with cash on hand, to:
(i) finance the Miller Enterprises acquisition; (ii) refinance $94.0 million
outstanding under the 1998 bank credit facility; (iii) redeem the outstanding
senior notes in the aggregate principal amount of $49.0 million; and (iv) pay
related transaction costs.
The annual maturities of notes payable are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended September:
<S> <C>
1999 .................... $ 2,896
2000 .................... 10,686
2001 .................... 17,939
2002 .................... 20,943
2003 .................... 37,931
Thereafter .............. 340,306
--------
$430,701
========
</TABLE>
13
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- LONG-TERM DEBT -- Continued
As of June 24, 1999, The Pantry was in compliance with all covenants and
restrictions relating to all its outstanding borrowings.
As of June 24, 1999, substantially all of The Pantry's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
For the three months and nine months ended June 25, 1998, the Company
incurred an extraordinary item related to the costs of the redemption of $51.0
million of senior notes. For the three months and nine months ended June 24,
1999, the Company incurred an extraordinary item related to the costs of the
redemption of the remaining $49.0 million of senior notes.
NOTE 6 -- SHAREHOLDERS' EQUITY
On June 8, 1999, the Company offered and sold 6,250,000 shares of common
stock, $0.01 par value per share, in the Company's IPO. The initial offering
price was $13.00 per share and the Company received $75.6 million in net
proceeds, before expenses. The net proceeds were used: (i) to repay $19.0
million in indebtedness under our 1999 bank credit facility; (ii) to redeem
$17.5 million in outstanding preferred stock; and (iii) to pay accrued
dividends on the preferred stock of $6.5 million. Of the remaining $32.6
million, $30.2 million was used to fund acquisitions closed subsequent to the
fiscal quarter ended June 24, 1999 and $2.4 million was reserved to pay fees
and expenses associated with the IPO. See "Note 9 -- Subsequent Events" and
"Part II -- Item 2. Changes in Securities and Use of Proceeds."
On June 4, 1999 and in connection with the IPO, The Pantry effected a
51-for-1 stock split of its common stock. The accompanying financial statements
reflect the 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.
On June 3, 1999, the Company adopted a new 1999 stock option plan
providing for the grant of incentive stock options to our officers, directors,
employees and consultants. An aggregate of 3,825,000 shares of common stock is
reserved for issuance under the 1999 stock option plan. On June 8, 1999, the
Pantry granted 200,000 shares to officers and directors. These options will
vest in three annual installments, expire in seven years and are exercisable at
the IPO price of $13.00 per share. See "Note 7 -- Earnings Per Share."
On August 31, 1998, The Pantry adopted the 1998 Stock Subscription Plan.
The Stock Subscription Plan allows us 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. During the nine months ended June 24, 1999,
134,436 shares, net of repurchases of 6,273 shares were issued under the Stock
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 8.8%, due August 31, 2003.
14
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- EARNINGS PER SHARE
The Pantry computes earnings per share data in accordance with the
requirements of SFAS No. 128, EARNINGS PER SHARE. Basic earnings per share is
computed on the basis of the weighted average number of common shares
outstanding. Diluted earnings per share is computed on the basis of the
weighted average number of common shares outstanding plus the effect of
outstanding warrants and stock options using the "treasury stock" method. The
following table reflects the calculation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ------------------------
JUNE 25, JUNE 24, JUNE 25, JUNE 24,
1998 1999 1998 1999
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net income (loss) applicable to common shareholders:
Income before extraordinary item ............................... $ 2,220 $ 5,237 $ 551 $ 6,314
Dividends on preferred stock ................................... (667) (624) (2,253) (2,070)
Premium on redemption of preferred stock ....................... -- (613) -- (613)
------- ------- -------- --------
Income (loss) applicable to common shareholders before
extraordinary item ............................................ 1,553 4,000 (1,702) 3,631
Extraordinary item ............................................. 289 (27) (6,511) (3,584)
------- ------- -------- --------
Net income (loss) applicable to common shareholders ............ $ 1,842 $ 3,973 $ (8,213) $ 47
======= ======= ======== ========
Earnings per share -- basic:
Weighted-average shares outstanding ............................ 9,487 12,960 9,111 12,225
======= ======= ======== ========
Income (loss) before extraordinary item per share -- basic ..... $ 0.16 $ 0.31 $ (0.19) $ 0.30
Extraordinary item per share -- basic .......................... 0.03 -- (0.71) (0.29)
------- ------- -------- --------
Net Income (loss) per share -- basic ............................ $ 0.19 $ 0.31 $ (0.90) $ 0.01
======= ======= ======== ========
Earnings per share -- diluted:
Weighted-average shares outstanding ............................ 9,487 12,960 9,111 12,225
Dilutive impact of options and warrants outstanding ............ 1,145 1,166 -- 1,163
------- ------- -------- --------
Weighted-average shares and potential dilutive shares
outstanding ................................................... 10,632 14,126 9,111 13,388
======= ======= ======== ========
Income (loss) before extraordinary item per
share -- diluted .............................................. $ 0.15 $ 0.28 $ (0.19) $ 0.27
Extraordinary item per share -- diluted ........................ 0.03 -- (0.71) (0.27)
------- ------- -------- --------
Net income (loss) per share -- diluted ......................... $ 0.18 $ 0.28 $ (0.90) $ --
======= ======= ======== ========
</TABLE>
For the nine months ended June 1998, potential common dilutive shares have
been excluded from the denominator because such earnings per share amounts for
income from continuing operations available to common shareholders would be
antidilutive.
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION
Lil' Champ, Sandhills, Inc. and Global Communications, Inc. (the
"Guarantors") jointly and severally, unconditionally guarantee, on an unsecured
senior subordinated basis, the full and prompt performance of The Pantry's
obligations under its senior subordinated notes indenture and its 1999 bank
credit facility.
Management has determined that separate financial statements of the
Guarantors would not provide significant additive information to investors and
in lieu of such separate financial statements, The Pantry has presented
supplemental combining information. This supplemental combining information
includes the consolidated financial statements of the Company's unrestricted
subsidiary, PH and PH's wholly-owned subsidiaries, TC Capital Management, Inc.,
and Pantry Properties, Inc. (together, the "Non-Guarantor"). Accordingly, the
following supplemental combining information presents information regarding The
Pantry, the Guarantors, the Non-Guarantor, and related consolidating entries.
15
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
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 consolidating entries eliminate investments in subsidiaries and
intercompany balances and transactions.
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
YEAR ENDED SEPTEMBER 24, 1998
<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 .............. $ 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, net ............. 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 noncurrent assets ................ 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>
16
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
YEAR ENDED SEPTEMBER 24, 1998
<TABLE>
<CAPTION>
THE PANTRY GUARANTOR
(ISSUER) SUBSIDIARIES
------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Current maturities of long-term debt ........................ $ 17 $ 10
Current maturities of capital lease obligations ............. 213 1,027
Accounts payable:
Trade ..................................................... 28,563 20,996
Money orders .............................................. 4,112 1,069
Accrued interest ............................................ 11,564 1,283
Accrued compensation and related taxes ...................... 4,366 2,352
Other accrued taxes ......................................... 3,108 3,899
Accrued insurance ........................................... 3,188 2,557
Other accrued liabilities ................................... 11,118 18,877
--------- --------
Total current liabilities ................................ 66,249 52,070
--------- --------
Long-term debt ............................................... 188,151 139,000
--------- --------
Other noncurrent liabilities:
Environmental reserves ...................................... 13,487 3,650
Deferred income taxes ....................................... (36) 22,001
Capital lease obligations ................................... 1,534 10,595
Employment obligations ...................................... 934 --
Accrued dividends on preferred stock ........................ 4,391 --
Intercompany notes payable .................................. 50,705 20,822
Other noncurrent liabilities ................................ 15,325 5,737
--------- --------
Total other noncurrent liabilities ....................... 86,340 62,805
--------- --------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock ............................................. -- --
Common stock ................................................ 117 1
Additional paid-in capital .................................. 68,939 6,758
Shareholder loans ........................................... (215) --
Accumulated earnings (deficit) .............................. (29,537) 56,802
--------- --------
Total shareholders' equity (deficit) ..................... 39,304 63,561
--------- --------
Total liabilities and shareholders' equity (deficit) ......... $ 380,044 $317,436
========= ========
</TABLE>
<TABLE>
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS TOTAL
-------------- ---------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Current maturities of long-term debt ........................ $ 18 $ -- $ 45
Current maturities of capital lease obligations ............. -- -- 1,240
Accounts payable:
Trade ..................................................... -- -- 49,559
Money orders .............................................. -- -- 5,181
Accrued interest ............................................ 1 (1,136) 11,712
Accrued compensation and related taxes ...................... 1 -- 6,719
Other accrued taxes ......................................... -- -- 7,007
Accrued insurance ........................................... -- -- 5,745
Other accrued liabilities ................................... 122 (5,769) 24,348
------ --------- ---------
Total current liabilities ................................ 142 (6,905) 111,556
------ --------- ---------
Long-term debt ............................................... 118 -- 327,269
------ --------- ---------
Other noncurrent liabilities:
Environmental reserves ...................................... -- -- 17,137
Deferred income taxes ....................................... -- (1,599) 20,366
Capital lease obligations ................................... -- -- 12,129
Employment obligations ...................................... -- -- 934
Accrued dividends on preferred stock ........................ -- -- 4,391
Intercompany notes payable .................................. -- (71,527) --
Other noncurrent liabilities ................................ 38 634 21,734
------ --------- ---------
Total other noncurrent liabilities ....................... 38 (72,492) 76,691
------ --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock ............................................. -- -- --
Common stock ................................................ -- (1) 117
Additional paid-in capital .................................. 5,001 (11,759) 68,939
Shareholder loans ........................................... -- -- (215)
Accumulated earnings (deficit) .............................. (325) (56,477) (29,537)
------ ----------- ---------
Total shareholders' equity (deficit) ..................... 4,676 (68,237) 39,304
------ ----------- ---------
Total liabilities and shareholders' equity (deficit) ......... $4,974 $(147,634) $ 554,820
====== =========== =========
</TABLE>
17
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
JUNE 24, 1999
<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 .......... $ 40,655 $ 16,243 $4,313 $ -- $ 61,211
Receivables, net ................... 24,563 36,962 1,030 (43,873) 18,682
Inventories ........................ 33,838 31,984 -- -- 65,822
Prepaid expenses ................... 2,160 920 6 -- 3,086
Property held for sale ............. 114 -- -- -- 114
Deferred income taxes, net ......... 1,978 3,798 -- -- 5,776
-------- -------- ------ ---------- --------
Total current assets ............. 103,308 89,907 5,349 (43,873) 154,691
-------- -------- ------ ---------- --------
Investment in subsidiaries .......... 85,366 866 -- (86,232) --
-------- -------- ------ ---------- --------
Property and equipment, net ......... 149,427 246,641 336 -- 396,404
-------- -------- ------ ---------- --------
Other assets:
Goodwill, net ...................... 97,861 71,172 -- -- 169,033
Deferred lease cost, net ........... 235 -- -- -- 235
Deferred financing cost, net ....... 13,122 -- -- -- 13,122
Environmental receivables, net ..... 12,566 1,184 -- -- 13,750
Intercompany notes receivable ...... 249,006 49,705 -- (298,711) --
Other noncurrent assets ............ 3,128 4,571 -- 866 8,565
-------- -------- ------ ---------- --------
Total other assets ............... 375,918 126,632 -- (297,845) 204,705
-------- -------- ------ ---------- --------
Total assets ........................ $714,019 $464,046 $5,685 $ (427,950) $755,800
======== ======== ====== ========== ========
</TABLE>
18
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
JUNE 24, 1999
<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
Accounts payable:
Trade ................................................ 45,345 30,571 -- (26) 75,890
Money orders ......................................... 490 4,333 -- -- 4,823
Accrued interest ....................................... 8,814 -- 1 (4,788) 4,027
Accrued compensation and related taxes ................. 4,160 3,743 1 -- 7,904
Income taxes payable ................................... 3,621 6,239 596 9,532 924
Other accrued taxes .................................... 3,384 8,567 -- -- 11,951
Accrued insurance ...................................... 3,439 6,095 -- -- 9,534
Other accrued liabilities .............................. 31,590 23,394 121 (23,817) 31,288
--------- -------- ------ ---------- ---------
Total current liabilities ............................ 106,173 84,265 737 (38,163) 153,012
--------- -------- ------ ---------- ---------
Long-term debt .......................................... 423,768 1,398 104 -- 425,270
--------- -------- ------ ---------- ---------
Other noncurrent liabilities:
Environmental expenses ................................. 14,428 3,596 -- -- 18,024
Deferred income taxes .................................. (457) 23,876 -- -- 23,419
Capital lease obligations .............................. 1,360 9,830 -- -- 11,190
Employment obligations ................................. 657 -- -- -- 657
Intercompany notes payable ............................. 51,705 252,656 -- (304,361) --
Other noncurrent liabilities ........................... 19,690 7,807 36 -- 27,533
--------- -------- ------ ---------- ---------
Total other noncurrent liabilities ................... 87,383 297,765 36 (304,361) 80,823
--------- -------- ------ ---------- ---------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock ........................................ -- -- -- -- --
Common stock ........................................... 181 1 5,001 (5,002) 181
Additional paid-in capital ............................. 126,328 6,882 -- (6,882) 126,328
Shareholder loans ...................................... (937) -- -- -- (937)
Accumulated earnings (deficit) ......................... (28,877) 73,735 (193) (73,542) (28,877)
--------- -------- ------ ---------- ---------
Total shareholders' equity (deficit) ................. 96,695 80,618 4,808 (85,426) 96,695
--------- -------- ------ ---------- ---------
Total liabilities and shareholders equity (deficit) ..... $ 714,019 $464,046 $5,685 $ (427,950) $ 755,800
========= ======== ====== ========== =========
</TABLE>
19
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 25, 1998
<TABLE>
<CAPTION>
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales .................................. $ 60,595 $ 62,513 $ -- $ -- $123,108
Gasoline sales ..................................... 61,408 66,372 -- -- 127,780
Commissions ........................................ 1,698 1,991 -- -- 3,689
-------- -------- ---- -------- --------
Total revenues ................................... 123,701 130,876 -- -- 254,577
-------- -------- ---- -------- --------
Cost of sales:
Merchandise ........................................ 39,752 40,648 -- -- 80,400
Gasoline ........................................... 55,001 58,811 -- -- 113,812
-------- -------- ---- -------- --------
Total cost of sales .............................. 94,753 99,459 -- -- 194,212
-------- -------- ---- -------- --------
Gross profit ........................................ 28,948 31,417 -- -- 60,365
-------- -------- ---- -------- --------
Operating expenses:
Store expenses ..................................... 21,197 18,137 (61) (3,691) 35,582
General and administrative expenses ................ 4,185 3,685 4 -- 7,874
Depreciation and amortization ...................... 3,456 3,292 2 -- 6,750
-------- -------- ---- -------- --------
Total operating expenses ......................... 28,838 25,114 (55) (3,691) 50,206
-------- -------- ---- -------- --------
Income from operations .............................. 110 6,303 55 3,691 10,159
-------- -------- ---- -------- --------
Equity in earnings of subsidiaries .................. 7,171 -- -- (7,171) --
-------- -------- ---- -------- --------
Other income (expense):
Interest ........................................... (4,248) (4,283) (3) 1,032 (7,502)
Miscellaneous ...................................... 103 5,093 7 (4,724) 479
-------- -------- ------ -------- --------
Total other income (expense) ..................... (4,145) 810 4 (3,692) (7,023)
-------- -------- ------ -------- --------
Income (loss) before income taxes and extraordinary
item ............................................... 3,136 7,113 59 (7,172) 3,136
Income tax benefit (expense) ........................ (916) (2,087) (60) 2,147 (916)
-------- -------- ------ -------- --------
Net income (loss) before extraordinary item ......... 2,220 5,026 (1) (5,025) 2,220
Extraordinary item, net of taxes .................... 289 -- -- -- 289
-------- -------- ------ -------- --------
Net income (loss) ................................... 2,509 5,026 (1) (5,025) 2,509
Preferred dividends ................................. (667) -- -- -- (667)
-------- -------- ------ -------- --------
Net income (loss) applicable to common
shareholders ....................................... $ 1,842 $ 5,026 $ (1) $ (5,025) $ 1,842
======== ======== ====== ======== ========
</TABLE>
20
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 24, 1999
<TABLE>
<CAPTION>
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales ..................................... $104,222 $94,863 $ -- $ -- $ 199,085
Gasoline sales ........................................ 143,565 107,251 -- -- 250,816
Commissions ........................................... 3,967 2,836 -- -- 6,803
-------- ------- ---- --------- ---------
Total revenues ...................................... 251,754 204,950 -- -- 456,704
-------- ------- ---- --------- ---------
Cost of sales:
Merchandise ........................................... 70,063 63,570 -- -- 133,633
Gasoline .............................................. 128,137 94,503 -- -- 222,640
-------- ------- ---- --------- ---------
Total cost of sales ................................. 198,200 158,073 -- -- 356,273
-------- ------- ---- --------- ---------
Gross profit ........................................... 53,554 46,877 -- -- 100,431
-------- ------- ---- --------- ---------
Operating expenses:
Store expenses ........................................ 38,184 26,173 (61) (7,445) 56,851
General and administrative expenses ................... 6,262 6,828 4 -- 13,094
Depreciation and amortization ......................... 6,096 4,849 1 -- 10,946
-------- ------- ---- --------- ---------
Total operating expenses ............................ 50,542 37,850 (56) (7,445) 80,891
-------- ------- ---- --------- ---------
Income from operations ................................. 3,012 9,027 56 7,445 19,540
-------- ------- ---- --------- ---------
Equity in earnings of subsidiaries ..................... 11,871 (9) -- (11,862) --
-------- ---------- ---- --------- ---------
Other income (expense):
Interest expense ...................................... (5,803) (6,038) (3) 1,137 (10,707)
Miscellaneous ......................................... 39 8,800 38 (8,591) 286
-------- --------- ------ --------- ---------
Total other income (expense) ........................ (5,764) 2,762 35 (7,454) (10,421)
-------- --------- ------ --------- ---------
Income (loss) before income taxes and extraordinary
item .................................................. 9,119 11,780 91 (11,871) 9,119
Income tax benefit (expense) ........................... (3,882) (3,605) (45) 3,650 (3,882)
-------- --------- ------ --------- ---------
Net income (loss) before extraordinary item ............ 5,237 8,175 46 (8,221) 5,237
Extraordinary item, net of taxes ....................... (27) -- -- -- (27)
-------- --------- ------ --------- ---------
Net income (loss) ...................................... 5,210 8,175 46 (8,221) 5,210
Preferred dividends .................................... (624) -- -- -- (624)
Premium on redemption of Series B Preferred Stock ...... (613) -- -- -- (613)
-------- --------- ------ --------- ---------
Net income (loss) applicable to common shareholders..... $ 3,973 $ 8,175 $ 46 $ (8,221) $ 3,973
======== ========= ====== ========= =========
</TABLE>
21
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 25, 1998
<TABLE>
<CAPTION>
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales .................................... $ 160,208 $ 156,665 $ -- $ -- $ 316,873
Gasoline sales ....................................... 166,874 176,624 -- -- 343,498
Commissions .......................................... 4,613 5,434 -- -- 10,047
--------- --------- ----- --------- ---------
Total revenues ..................................... 331,695 338,723 -- -- 670,418
--------- --------- ----- --------- ---------
Cost of sales:
Merchandise .......................................... 104,126 103,139 -- -- 207,265
Gasoline ............................................. 148,985 155,151 -- -- 304,136
--------- --------- ----- --------- ---------
Total cost of sales ................................ 253,111 258,290 -- -- 511,401
--------- --------- ----- --------- ---------
Gross profit .......................................... 78,584 80,433 -- -- 159,017
--------- --------- ----- --------- ---------
Operating expenses:
Store expenses ....................................... 59,159 48,349 (180) (9,893) 97,435
General and administrative expenses .................. 12,666 10,724 16 -- 23,406
Depreciation and amortization ........................ 9,643 8,877 5 -- 18,525
--------- --------- ----- --------- ---------
Total operating expenses ........................... 81,468 67,950 (159) (9,893) 139,366
--------- --------- ----- --------- ---------
Income (loss) from operations ......................... (2,884) 12,483 159 9,893 19,651
--------- --------- ----- --------- ---------
Equity in earnings of subsidiaries .................... 15,242 -- -- (15,242) --
--------- --------- ----- --------- ---------
Other income (expense):
Interest ............................................. (12,373) (11,068) (9) 3,097 (20,353)
Miscellaneous ........................................ 566 13,655 22 (12,990) 1,253
--------- --------- ------- --------- ---------
Total other income (expense) ....................... (11,807) 2,587 13 (9,893) (19,100)
--------- --------- ------- --------- ---------
Income (loss) before income taxes and extraordinary
item ................................................. 551 15,070 172 (15,242) 551
Income tax benefit (expense) .......................... -- (4,842) (192) 5,034 --
--------- --------- ------- --------- ---------
Net income (loss) before extraordinary item ........... 551 10,228 (20) (10,208) 551
Extraordinary item, net of taxes ...................... (6,511) -- (6,511)
--------- --------- ---------
Net income (loss) ..................................... (5,960) 10,228 (20) (10,208) (5,960)
Preferred dividends ................................... (2,253) -- -- -- (2,253)
--------- --------- ------- --------- ---------
Net income (loss) applicable to common stock .......... $ (8,213) $ 10,228 $ (20) $ (10,208) $ (8,213)
========= ========= ======= ========= =========
</TABLE>
22
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JUNE 24, 1999
<TABLE>
<CAPTION>
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales .................................... $ 274,519 $ 228,528 $ -- $ -- $ 503,047
Gasoline sales ....................................... 355,751 255,982 -- -- 611,733
Commissions .......................................... 10,261 7,062 -- -- 17,323
--------- --------- ----- --------- ----------
Total revenues ..................................... 640,531 491,572 -- -- 1,132,103
--------- --------- ----- --------- ----------
Cost of sales:
Merchandise .......................................... 185,774 152,684 -- -- 338,458
Gasoline ............................................. 314,692 222,581 -- -- 537,273
--------- --------- ----- --------- ----------
Total cost of sales ................................ 500,466 375,265 -- -- 875,731
--------- --------- ----- --------- ----------
Gross profit .......................................... 140,065 116,307 -- -- 256,372
--------- --------- ----- --------- ----------
Operating expenses:
Store expenses ....................................... 103,819 67,331 (182) (18,902) 152,066
General and administrative expenses .................. 18,111 17,324 15 -- 35,450
Depreciation and amortization ........................ 15,215 13,557 4 -- 28,776
--------- --------- ----- --------- ----------
Total operating expenses ........................... 137,145 98,212 (163) (18,902) 216,292
--------- --------- ----- --------- ----------
Income from operations ................................ 2,920 18,095 163 18,902 40,080
--------- --------- ----- --------- ----------
Equity in earnings of subsidiaries .................... 25,548 7 -- (25,555) --
--------- --------- ----- --------- ----------
Other income (expense):
Interest expense ..................................... (17,367) (15,857) (8) 3,652 (29,580)
Miscellaneous ........................................ (187) 23,037 110 (22,546) 414
--------- --------- ------- --------- ----------
Total other income (expense) ....................... (17,554) 7,180 102 (18,894) (29,166)
--------- --------- ------- --------- ----------
Income (loss) before income taxes and extraordinary
item ................................................. 10,914 25,282 265 (25,547) 10,914
Income tax benefit (expense) .......................... (4,600) (8,322) (134) 8,456 (4,600)
--------- --------- ------- --------- ----------
Net income (loss) before extraordinary item ........... 6,314 16,960 131 (17,091) 6,314
Extraordinary item, net of taxes ...................... (3,584) -- -- -- (3,584)
--------- --------- ------- --------- ----------
Net income (loss) ..................................... 2,730 16,960 131 (17,091) 2,730
Preferred dividends ................................... (2,070) -- -- -- (2,070)
Premium on redemption of Series B Preferred Stock...... (613) -- -- -- (613)
--------- --------- ------- --------- ----------
Net income (loss) applicable to common
shareholders ......................................... $ 47 $ 16,960 $ 131 $ (17,091) $ 47
========= ========= ======= ========= ==========
</TABLE>
23
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 25, 1998
<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) ........................................ $ (5,960) $ 10,228 $(20) $ (10,208) $ (5,960)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Extraordinary loss ...................................... 6,511 -- -- -- 6,511
Depreciation and amortization ........................... 9,652 8,869 4 -- 18,525
Change in deferred income taxes ......................... (498) -- (16) -- (514)
Loss on sale of property and equipment .................. 144 206 -- -- 350
Reserves for environmental issues ....................... 92 -- -- -- 92
Equity earnings of affiliates ........................... (10,208) -- -- 10,208 --
Changes in operating assets and liabilities, net:
Receivables ............................................. (5,761) (14,094) 26 14,944 (4,885)
Inventories ............................................. 1,583 (4,449) -- -- (2,866)
Prepaid expenses ........................................ 460 280 (3) -- 737
Other noncurrent assets ................................. (387) 530 -- 4,049 4,192
Accounts payable ........................................ 2,555 1,604 -- -- 4,159
Other current liabilities and accrued expenses .......... 5,491 8,541 194 (14,907) (681)
Employment obligations .................................. (277) -- -- -- (277)
Other noncurrent liabilities ............................ 5,867 1,861 (1) -- 7,727
--------- --------- ------- --------- ----------
Net cash provided by operating activities ................ 9,264 13,576 184 4,086 27,110
--------- --------- ------ --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ..................... (4,187) -- -- (4,187)
Additions to property and equipment ..................... (18,956) (13,967) -- -- (32,923)
Proceeds from sale of property held for sale ............ 3,245 -- -- -- 3,245
Proceeds from sale of property and equipment ............ 720 801 -- -- 1,521
Intercompany notes receivable (payable) ................. (16,289) 20,401 (26) (4,086) --
Acquisitions of related businesses, net of cash
acquired ............................................... (9,500) (156,299) -- -- (165,799)
--------- --------- ------ --------- ----------
Net cash used in investing activities .................... (44,967) (149,064) (26) (4,086) (198,143)
--------- --------- ------ --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases ............... (227) (680) -- -- (907)
Principal repayments of long-term debt .................. (57,025) (6) (13) -- (57,044)
Proceeds from issuance of long-term debt ................ 82,287 145,755 -- -- 228,042
Net proceeds from equity issue .......................... 31,936 -- -- -- 31,936
Other financing costs ................................... (12,891) -- -- -- (12,891)
--------- ----------- ------ --------- ----------
Net cash provided by (used in) financing activities ...... 44,080 145,069 (13) -- 189,136
--------- ----------- ------ --------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................ 8,377 9,581 145 -- 18,103
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........... 2,247 279 821 -- 3,347
--------- ----------- ------ --------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................. $ 10,624 $ 9,860 $966 $ -- $ 21,450
========= =========== ====== ========= ==========
</TABLE>
24
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 24, 1999
<TABLE>
<CAPTION>
THE PANTRY GUARANTOR
(ISSUER) SUBSIDIARIES
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ............................................. $ 2,730 $ 16,960
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss ........................................... 3,405 --
Depreciation and amortization ................................ 15,215 13,557
Change in deferred income taxes .............................. 462 (1,980)
(Gain) loss on sale of property and equipment ................ (621) 451
Reserves for environmental issues ............................ 941 (54)
Equity earnings of affiliates ................................ (17,128) --
Changes in operating assets and liabilities, net:
Receivables .................................................. (13,710) (21,421)
Inventories .................................................. (5,343) (3,729)
Prepaid expenses ............................................. (907) 440
Other noncurrent assets ...................................... (132) (1,629)
Accounts payable ............................................. 13,120 1,259
Other current liabilities and accrued expenses ............... 21,664 184
Employment obligations ....................................... (277) --
Accrued dividends ............................................ (6,461) --
Other noncurrent liabilities ................................. 4,364 (1,586)
----------- ----------
Net cash provided by operating activities ..................... 17,322 2,452
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale .......................... (125) --
Additions to property and equipment .......................... (18,746) (14,706)
Proceeds from sale of property held for sale ................. 1,495 --
Proceeds from sale of property and equipment ................. 535 10,628
Intercompany notes receivable (payable) ...................... 6,378 92,834
Acquisitions of related businesses, net of cash acquired ..... (144,933) (80,791)
----------- ----------
Net cash provided by (used in) investing activities ........... (155,396) 7,965
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases .................... (174) (765)
Principal repayments of long-term debt ....................... (173,283) (10)
Proceeds from issuance of long-term debt ..................... 275,000 301
Redemption of series B preferred stock ....................... (17,500) --
Net proceeds from initial public offering .................... 72,984 --
Net proceeds from other equity issues ........................ 1,247 --
Other financing costs ........................................ (3,576) --
----------- ----------
Net cash provided by (used in) financing activities ........... 154,698 (474)
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................... 16,624 9,943
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................ 24,031 6,300
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................... $ 40,655 $ 16,243
=========== ==========
<CAPTION>
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS TOTAL
-------------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ............................................. $ 131 $ (17,091) $ 2,730
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss ........................................... -- -- 3,405
Depreciation and amortization ................................ 4 -- 28,776
Change in deferred income taxes .............................. -- -- (1,518)
(Gain) loss on sale of property and equipment ................ -- -- (170)
Reserves for environmental issues ............................ -- -- 887
Equity earnings of affiliates ................................ -- 17,128 --
Changes in operating assets and liabilities, net:
Receivables .................................................. 18 33,875 (1,238)
Inventories .................................................. -- -- (9,072)
Prepaid expenses ............................................. (3) -- (470)
Other noncurrent assets ...................................... -- 7 (1,754)
Accounts payable ............................................. -- -- 14,379
Other current liabilities and accrued expenses ............... 106 (28,568) (6,614)
Employment obligations ....................................... -- -- (277)
Accrued dividends ............................................ -- -- (6,461)
Other noncurrent liabilities ................................. (2) (633) 2,143
-------- --------- -----------
Net cash provided by operating activities ..................... 254 4,718 24,746
------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale .......................... -- -- (125)
Additions to property and equipment .......................... -- -- (33,452)
Proceeds from sale of property held for sale ................. -- -- 1,495
Proceeds from sale of property and equipment ................. -- -- 11,163
Intercompany notes receivable (payable) ...................... -- (99,212) --
Acquisitions of related businesses, net of cash acquired ..... -- 94,494 (131,230)
------- --------- -----------
Net cash provided by (used in) investing activities ........... -- (4,718) (152,149)
------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases .................... -- -- (939)
Principal repayments of long-term debt ....................... (14) -- (173,307)
Proceeds from issuance of long-term debt ..................... -- -- 275,301
Redemption of series B preferred stock ....................... -- -- (17,500)
Net proceeds from initial public offering .................... -- -- 72,984
Net proceeds from other equity issues ........................ -- -- 1,247
Other financing costs ........................................ -- -- (3,576)
------- --------- -----------
Net cash provided by (used in) financing activities ........... (14) -- 154,210
------- --------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................... 240 -- 26,807
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................ 4,073 -- 34,404
------- --------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................... $4,313 $ -- $ 61,211
======= ========= ===========
</TABLE>
25
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9 -- SUBSEQUENT EVENTS
On July 22, 1999, the Company acquired 100% of the outstanding capital
stock of R & H Maxxon, Inc. for $49 million, subject to certain working capital
and other adjustments. R & H Maxxon, Inc. is a leading operator of convenience
stores in South Carolina and northern Georgia, operating 53 stores under the
name "Depot Food Stores." On July 15, 1999, the Company acquired certain
operating assets of Dilmar Oil Company. Dilmar Oil Company is a leading
operator of convenience stores in eastern South Carolina, operating 28 stores
under the name "Food Chief." The purchase price and the fees and expenses
associated with these acquisitions were financed with proceeds from the IPO,
$12 million in borrowings under the 1999 bank credit facility and cash on hand.
26
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's discussion and analysis should be read in conjunction with
the financial statements and notes thereto. Further information is contained in
our Annual Report on Form 10-K/A for the year ended September 24, 1998, our
Registration Statement on Form S-1 (File No. 333-74221) and our Quarterly
Reports on Form 10-Q and 10-Q/A for the periods ended December 24, 1998 and
March 25, 1999. This Quarterly Report on Form 10-Q contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements include without limitation the words "believes,"
"anticipates," "estimates," "intends," "expects," and words of similar import.
All statements other than statements of historical fact included in statements
under "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation" include forward-looking information and may reflect
certain judgments by management. These forward-looking statements, which are
subject to numerous risks, uncertainties, and assumptions about The Pantry,
include, among other things (i) our anticipated acquisition and growth
strategies, (ii) anticipated trends in our businesses, (iii) future
expenditures for capital projects including the cost of environmental
compliance, (iv) our ability to pass along cigarette price increases to our
customers without a decrease in cigarette sales, (v) our ability to
successfully deal with Year 2000 issues that may arise in our or third party
operations and (vi) 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 dependence on gasoline and
tobacco sales, our acquisition strategy, our rapid growth since 1996, our
dependence on one principal wholesaler, the intense competition in the
convenience store and retail gasoline industries, our dependence on favorable
weather conditions in spring and summer months, the concentration of our stores
in the southeastern United States, our history of losses, extensive
environmental regulation of our business, governmental regulation, control of
The Pantry by one principal stockholder, our dependence on senior management,
the failure of The Pantry and others to be year 2000 compliant and other risk
factors identified in our Registration Statement relating to our IPO under the
caption "Risk Factors." As a result of these risks actual results may differ
from these forward-looking statements included in this Quarterly Report. The
Pantry disclaims any obligation to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
INTRODUCTION
The Pantry is a leading convenience store operator in the southeastern
United States. 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 grown through a combination of management initiatives and strategic
acquisitions.
Specific elements of our operating strategy include (i) enhancing our
merchandising to increase same store merchandise sales growth and margins, (ii)
improving our gasoline offering in order to increase customer traffic and same
store gasoline volume growth, (iii) reducing expenses through strengthened
vendor relationships and tightened expense controls, (iv) increasing
expenditures for facilities improvement and store automation and (v) 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. Subsequent to June 24, 1999, we completed two acquisitions
bringing our store count as of August 2, 1999 to 1,215 stores making us the
10th largest convenience store operator and the second largest independent
operator in the United States.
On June 8, 1999, the Company offered and sold 6,250,000 shares of common
stock in its IPO. The IPO price was $13.00 per share and the Company received
$75.6 million in net proceeds, before expenses. The net proceeds were used: (i)
to repay $19.0 million in indebtedness under our 1999 bank credit facility;
(ii) to redeem $17.5 million in outstanding preferred stock; and (iii) to pay
accrued dividends on the preferred stock of $6.5 million. Of the remaining
$32.6 million, $30.2
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million was used to fund acquisitions closed subsequent to the quarter ended
June 24, 1999 and $2.4 million was reserved to pay fees and expenses associated
with the IPO.
ACQUISITION HISTORY
Our acquisition strategy focuses on acquiring convenience stores within or
contiguous to our existing market areas. We believe acquiring locations with
demonstrated revenue volumes involves lower risk and is an economically
attractive alternative to traditional site selection and new store development.
The table below provides information concerning the Company's 1999 and
1998 acquisitions with store count exceeding ten (10) stores:
<TABLE>
<CAPTION>
NUMBER OF
DATE ACQUIRED TRADE NAME LOCATIONS STORES
- -------------------------- ------------------- ---------------------------------- ------------
<S> <C> <C> <C>
Fiscal 1999 Acquisitions:
- --------------------------
July 22, 1999 Depot Food Stores South Carolina, Georgia 53(a)
July 15, 1999 Food Chief Eastern South Carolina 28(a)
February 25, 1999 ETNA North Carolina, Virginia 60
January 28, 1999 Handy Way North-central Florida 121
November 5, 1998 Express Stop Southeast North Carolina, 22
Eastern South Carolina
Fiscal 1998 Acquisitions:
- --------------------------
October 22, 1998 Dash-N East-central North Carolina 10
July 15, 1998 Zip Mart Central North Carolina, Virginia 42
July 2, 1998 Quick Stop Southeast North Carolina, 75
Coastal South Carolina
May 2, 1998 Sprint Gainesville, Florida 10
March 19, 1998 Kwik Mart Eastern North Carolina 23
October 23, 1997 Lil' Champ Northeast Florida 440(b)
</TABLE>
- ---------
(a) These stores were acquired subsequent to June 24, 1999.
(b) Net of the disposition of 48 convenience stores located throughout eastern
Georgia.
IMPACT OF ACQUISITIONS. The acquisitions highlighted above and related
transactions have had a significant impact on our financial condition and
results of operations since their respective transaction dates. All of these
acquisitions were accounted for under the purchase method and as a result the
consolidated statements of operations herein include the results of operations
of acquired stores from the date of acquisition only. Moreover, the
consolidated balance sheet as of September 24, 1998 does not include the assets
and liabilities relating to those acquisitions consummated after September 24,
1998. As a result, comparisons to prior operating results and prior balance
sheets are materially impacted. Subsequent to the quarter ended June 24, 1999,
the Company acquired 81 stores in two separate transactions. These transactions
were funded with proceeds from our IPO borrowings under the 1999 bank credit
facility and cash on hand. See "PART I. -- Financial Information -- Item 1.
Financial Statements -- Notes to Consolidated Financial Statements -- Note 2 --
Business Acquisitions."
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 24, 1999 COMPARED TO THE NINE MONTHS ENDED JUNE 25,
1998
TOTAL REVENUE. Total revenue for the nine months ended June 24, 1999 was
$1.1 billion compared to $670.4 million during the nine months ended June 25,
1998, an increase of $461.7 million or 68.9%. The increase in total revenue is
primarily attributable to the revenue from stores acquired or opened since June
26, 1998 of $378.7 million, as well as an additional month of Lil' Champ
revenue of $38.0 million and same store merchandise sales growth of 10.4% (or
$15.7 million). Our total revenue increase was partially offset by a lower
average retail gasoline price of $1.03 for the nine months ended June 24, 1999
compared to $1.12 for the nine months ended June 25, 1998.
MERCHANDISE REVENUE. Merchandise revenue for the nine months ended June
24, 1999 was $503.0 million compared to $316.9 million during the nine months
ended June 25, 1998, an increase of $186.1 million or 58.7%. The increase in
merchandise revenue is primarily attributable to the revenue from stores
acquired or opened since June 26, 1998 of $141.5 million, as well as an
additional month of Lil' Champ merchandise revenue of $17.3 million and same
store merchandise sales growth of $15.7 million. Same store merchandise revenue
for the nine months ended June 24, 1999 increased 10.4% over the nine months
ended June 25, 1998. The increase in same store merchandise revenue is
primarily attributable to increased
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<PAGE>
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 nine months ended
June 24, 1999 was $611.7 million compared to $343.5 million during the nine
months ended June 25, 1998, an increase of $268.2 million or 78.1%. The
increase in gasoline revenue is primarily attributable to the revenue from
stores acquired or opened since June 26, 1998 of $232.3 million, as well as an
additional month of Lil' Champ gasoline revenue of $20.1 million. Gasoline
revenue growth was partially offset by a $0.09 or 8.0% decrease in average
gasoline gallon retail prices compared to the nine months ended June 25, 1998.
The revenue impact of the average retail price decline was approximately $47.1
million.
In the nine months ended June 24, 1999, gasoline gallons sold were 592.6
million compared to 307.1 million during the nine months ended June 25, 1998,
an increase of 285.5 million gallons or 93.0%. The increase is primarily
attributable to the gasoline gallons sold by stores acquired or opened since
June 26, 1998 of 229.8 million, as well as an additional month of Lil' Champ
gasoline gallons of 18.5 million and same store gallon growth of 9.2 million.
Same store gasoline gallon sales for the nine months ended June 24, 1999
increased 6.4% over the nine months ended June 25, 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 nine months ended June 24,
1999 was $17.3 million compared to $10.0 million during the nine months ended
June 25, 1998, an increase of $7.3 million or 73.0%. The increase in commission
revenue is primarily attributable to the revenue from stores acquired or opened
since June 26, 1998 of $4.9 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.
TOTAL GROSS PROFIT. Total gross profit for the nine months ended June 24,
1999 was $256.4 million compared to $159.0 million for the nine months ended
June 25, 1998, an increase of $97.4 million or 61.3%. The increase in gross
profit is primarily attributable to the profits from stores acquired or opened
since June 26, 1998 of $76.7 million, as well as an additional month of Lil'
Champ gross profit of approximately $8.7 million and same store gross profit
increases. The total gross profit increases were achieved despite a decrease in
total gross margin to 22.6% for the nine months ended June 24, 1999 from 23.7%
for the nine months ended June 25, 1998. The decrease in total gross margin is
attributable to the decreases in merchandise and gasoline gross margins
discussed below.
MERCHANDISE GROSS PROFIT AND MARGIN. Merchandise gross profit was $164.6
million for the nine months ended June 24, 1999 compared to $109.6 million for
the nine months ended June 25, 1998, an increase of $55.0 million or 50.2%.
This increase is primarily attributable to the profits from stores acquired or
opened since June 26, 1998 of $50.0 million, as well as an additional month of
Lil' Champ merchandise gross profit of $5.9 million and same store profit
increases. The decline in merchandise gross margin to 32.7% for the nine months
ended June 24, 1999 from 34.6% for the nine months ended June 25, 1998 is
attributable to the addition of stores acquired or opened since June 26, 1998
which, on average reported merchandise margins of 32.5% for the nine months
ended June 24, 1999 and the impact of product cost increases in our tobacco
category.
GASOLINE GROSS PROFIT AND PER GALLON MARGIN. Gasoline gross profit was
$74.5 million for the nine months ended June 24, 1999 compared to $39.4 million
for the nine months ended June 25, 1998, an increase of $35.1 million or 89.1%.
This increase is primarily attributable to the profits from stores acquired or
opened since June 26, 1998 of $25.8 million, as well as an additional month of
Lil' Champ gasoline gross profit of $2.2 million and same store profit
increases. The gasoline gross profit per gallon was $0.126 for the nine months
ended June 24, 1999 compared to $0.128 for the nine months ended June 25, 1998,
a 1.6% decrease in gasoline margin per gallon.
STORE OPERATING AND GENERAL AND ADMINISTRATIVE EXPENSES. Store operating
expenses for the nine months ended June 24, 1999 were $152.1 million compared
to $97.4 million for the nine months ended June 25, 1998, an increase of $54.7
million or 56.2%. The increase in store operating expenses is primarily
attributable to the personnel and lease expenses associated with the stores
acquired or opened since June 26, 1998 of $44.3 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 13.4% in the
nine months ended June 24, 1999 from 14.5% in the nine months ended June 25,
1998.
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<PAGE>
General and administrative expenses for the nine months ended June 24,
1999 were $35.5 million compared to $23.4 million during the nine months ended
June 25, 1998, an increase of $12.1 million or 51.7%. The increase in general
and administrative expenses is attributable to increased administrative
expenses associated with the stores acquired or opened since June 26, 1998 of
$8.8 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 3.1% in the nine months ended
June 24, 1999 from 3.5% in the nine months ended June 25, 1998.
INCOME FROM OPERATIONS. Income from operations was $40.1 million for the
nine months ended June 24, 1999 compared to $19.7 million during the nine
months ended June 25, 1998, an increase of $20.4 million or 103.6%. The
increase in operating income was partially offset by a $10.3 million increase
in depreciation and amortization. The increase in depreciation and amortization
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 3.5% in the nine months ended June
24, 1999 from 2.9% in the nine months ended June 25, 1998.
EBITDA. EBITDA represents income from operations before depreciation,
amortization and extraordinary and unusual items. EBITDA for the nine months
ended June 24, 1999 was $68.9 million compared to $38.2 million for the nine
months ended June 25, 1998, an increase of $30.7 million or 80.4%. 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.
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 1999 and 1998 bank credit facilities
and our previously outstanding senior notes. Interest expense for the nine
months ended June 24, 1999 was $29.6 million compared to $20.4 million for the
nine months ended June 25, 1998, an increase of $9.2 million or 45.1%. 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 1999 and 1998 bank credit facilities of $5.9 million.
INCOME TAX EXPENSE. The income tax expense for the nine months ended June
24, 1999 was $4.6 million compared to no income tax expense for the nine months
ended June 25, 1998. This increase was primarily attributable to the increase
in income before income taxes. Income tax expense is recorded net of changes in
a valuation allowance to reduce federal and state deferred tax assets to a net
amount which we believe more likely than not will be realized, based on
estimates of future earnings and the expected timing of temporary difference
reversals.
EXTRAORDINARY ITEM. In the nine months ended June 24, 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 replacement of our
1998 bank credit facility with the 1999 bank credit facility. The loss was the
sum, net of taxes, of a $1.2 million call premium, and the write-off of
deferred financing costs associated with the senior notes and 1998 bank credit
facility of $2.4 million.
In the nine months ended June 25, 1998, we recognized an extraordinary
loss, net of taxes, of approximately $6.5 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 loss was the sum, net of taxes, of the premium paid for the early
redemption of $51.0 million in principal amount of the senior notes, the
respective portion of the consent fees paid, and the write-off of a respective
portion of the deferred financing cost associated with the senior notes.
NET INCOME (LOSS). The net income for the nine months ended June 24, 1999
was $2.7 million compared to a net loss of $6.0 million for the nine months
ended June 25, 1998. In the nine months ended June 24, 1999 and June 26, 1998,
we recognized extraordinary losses as discussed above. The Pantry's income
before extraordinary loss was $6.3 million for the nine months ended June 24,
1999 compared to $0.6 million during the nine months ended June 25, 1998, an
increase of $5.7 million.
30
<PAGE>
THREE MONTHS ENDED JUNE 24, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 25,
1998
TOTAL REVENUE. Total revenue for the three months ended June 24, 1999 was
$456.7 million compared to $254.6 million for the three months ended June 25,
1998, an increase of $202.1 million or 79.4%. The increase in total revenue is
primarily attributable to the revenue from stores acquired or opened since June
26, 1998 of $181.7 million and same store merchandise sales and gallon growth.
In the three months ended June 24, 1999, total revenue increases were partially
offset by a lower average retail gasoline gallon price of $0.96 for the three
months ended June 24, 1999 compared to $1.10 for the three months ended June
25, 1998.
MERCHANDISE REVENUE. Merchandise revenue for the three months ended June
24, 1999 was $199.1 million compared to $123.1 million during the three months
ended June 25, 1998, an increase of $76.0 million or 61.7%. The increase in
merchandise revenue is primarily attributable to the revenue from stores
acquired or opened since June 26, 1998 of $68.3 million and same store
merchandise sales growth.
Same store merchandise revenue for the three months ended June 24, 1999
increased 12.8% over the three months ended June 25, 1998. The increase in same
store merchandise revenue is primarily attributable to the November increase in
cigarette prices (see "Inflation"), increased customer traffic, higher average
transaction size and general economic and market conditions. The increases in
store traffic and average transaction size are primarily attributable to store
merchandising, more competitive gasoline pricing, enhanced store appearance and
increased in-store promotional activity.
GASOLINE REVENUE AND GALLONS. Gasoline revenue for the three months ended
June 24, 1999 was $250.8 million compared to $127.8 million during the three
months ended June 25, 1998, an increase of $123.0 million or 96.2%. The
increase in gasoline revenue is primarily attributable to the revenue from
stores acquired or opened since June 26, 1998 of $111.3 million and same store
gallon sales growth. The gasoline revenue increase for the three months ended
June 24, 1999 was partially impacted by a $0.02 or 1.8% increase in average
gasoline retail prices compared to three months ended June 25, 1998.
In the three months ended June 24, 1999, gasoline gallons sold were 227.3
million compared to 117.9 million during the three months ended June 25, 1998,
an increase of 109.4 million gallons or 92.8%. The increase is primarily
attributable to the gasoline sold by stores acquired or opened since June 26,
1998 of 103.2 million and same store gallon growth. Same store gasoline gallon
sales for the three months ended June 24, 1999 increased 8.1% over the three
months ended June 25, 1998. The same store gallon increase is primarily
attributable to increased customer traffic resulting from more competitive
gasoline pricing, rebranding and promotional activity, enhanced store
appearance and general economic and market conditions.
COMMISSION REVENUE. Commission revenue for the three months ended June 24,
1999 was $6.8 million compared to $3.7 million during the three months ended
June 25, 1998, an increase of $3.1 million or 83.8%. The increase is primarily
attributable to the revenue from stores acquired or opened since June 26, 1998
of $2.1 million and same store commission revenue increases.
TOTAL GROSS PROFIT. Total gross profit for the three months ended June 24,
1999 was $100.4 million compared to $60.4 million during the three months ended
June 25, 1998, an increase of $40.0 million or 66.2%. The increase in gross
profit is primarily attributable to the profits from stores acquired or opened
since June 26, 1998 of $36.6 million and same store gross profit increases.
MERCHANDISE GROSS PROFIT AND MARGIN. Merchandise gross profit was $65.5
million for the three months ended June 24, 1999 compared to $42.7 million for
the three months ended June 25, 1998, an increase of $22.8 million or 53.4%.
This increase is primarily attributable to the profits from stores acquired or
opened since June 26, 1998 of $22.9 million and same store profit increases.
The decline in merchandise gross margin to 32.9% for the three months ended
June 24, 1999 from 34.7% for the three months ended June 25, 1998 is
attributable to the addition of several lower margin stores acquired or opened
since June 26, 1998 and lower gross margin on cigarettes. See " -- Inflation."
GASOLINE GROSS PROFIT AND PER GALLON MARGIN. Gasoline gross profit was
$28.2 million for the three months ended June 24, 1999 compared to $14.0
million for the three months ended June 25, 1998, an increase of $14.2 million
or 101.4%. This increase is primarily attributable to the profits from stores
acquired or opened since June 26, 1998 of $11.7 million and same store profit
increases. The gasoline gross profit per gallon was $0.124 in the three months
ended June 24, 1999 compared to $0.119 for the three months ended June 25,
1998.
STORE OPERATING AND GENERAL AND ADMINISTRATIVE EXPENSES. Store operating
expenses for the three months ended June 24, 1999 totaled $56.9 million
compared to store operating expenses of $35.6 million for the three months
ended
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June 25, 1998, an increase of $21.3 million or 59.8%. The increase in store
expenses is primarily attributable to the operating and lease expenses
associated with the stores acquired or opened since June 26, 1998 of $20.0
million. As a percentage of total revenue, store operating expenses decreased
to 12.5% in the three months ended June 24, 1999 from 14.0% in the three months
ended June 25, 1998.
General and administrative expenses for the three months ended June 24,
1999 was $13.1 million compared to $7.9 million during the three months ended
June 25, 1998, an increase of $5.2 million or 65.8%. The increase in general
and administrative expenses is attributable to increased administrative
expenses associated with the stores acquired or opened since June 26, 1998 of
$4.0 million. As a percentage of total revenue, general and administrative
expenses decreased 1998 to 2.9% in the three months ended June 24, 1999 from
3.1% in the three months ended June 26, 1998.
INCOME FROM OPERATIONS. Income from operations totaled $19.5 million for
the three months ended June 24, 1999 compared to $10.2 million during the three
months ended June 25, 1998, an increase of $9.3 million or 91.2%. The increase
is attributable to the factors discussed above and is partially reduced by the
$4.1 million increase in depreciation and amortization.
EBITDA. EBITDA for the three months ended June 24, 1999 totaled $30.5
million compared to EBITDA of $16.9 million during the three months ended June
25, 1998, an increase of $13.6 million or 80.5%. The increase is attributable
to the items discussed above.
INTEREST EXPENSE. Interest expense is primarily interest on our senior
subordinated notes, borrowing under our 1999 and 1998 bank credit facilities
and our senior notes. Interest expense for the three months ended June 24, 1999
totaled $10.7 million compared to $7.5 million for the three months ended June
25, 1998, an increase of $3.2 million or 42.7%. The increase in interest
expense is attributable to increased borrowings under our 1999 bank credit
facility, which is partially offset by the interest savings related to the
repurchase of $49.0 million in principal amount of senior notes at the lower
interest rates associated with our 1999 bank credit facility. See "PART I. --
Financial Information -- Item 1. Financial Statements -- Notes to Consolidated
Financial Statements -- Note 1 -- Recent Developments" and "Note 5 -- Long-Term
Debt."
INCOME TAX EXPENSE. Income tax expense totaled $3.9 million for the three
months ended June 24, 1999 compared to $0.9 million for the three months ended
June 25, 1998. The increase in income tax expense was primarily attributable to
the increase in income before income taxes, and is offset by the income tax
benefit associated with the extraordinary loss discussed above. Income tax
expense is recorded net of changes 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.
NET INCOME. The net income for three months ended June 24, 1999 was $5.2
million compared to a net income of $2.5 million for the three months ended
June 25, 1998, an increase of $2.7 million or 108.0%. In the three months ended
June 25, 1998, the Company recognized extraordinary gain as discussed above.
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 facilities, 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 decreased to $24.7 million for the nine months ended June 24, 1999
from $27.1 million for the nine months ended June 25, 1998, due to increases in
inventory and receivables and a decrease in accrued interest. We had $61.2
million of cash and cash equivalents on hand at June 24, 1999.
FISCAL 1999 ACQUISITIONS. For the nine months ended June 24, 1999, we have
acquired a total of 214 convenience stores in five transactions for
approximately $131.2 million, net of cash acquired. These acquisitions were
funded with borrowings under our bank credit facility and cash on hand.
Subsequent to June 24, 1999, the Company acquired 81 additional convenience
stores in two transactions for approximately $57.0 million, which were funded
with proceeds from our IPO, borrowings under our 1999 bank credit facility and
cash on hand.
CAPITAL EXPENDITURES. Capital expenditures (excluding all acquisitions)
were approximately $33.6 million in the nine months ended June 24, 1999 and
approximately $37.1 million in the nine months ended June 25, 1998. 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.
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<PAGE>
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. The 1999 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
$10.5 million during the nine months ended June 24, 1999.
In the nine months ended June 24, 1999, we received approximately $16.1
million from sale-leaseback proceeds, asset dispositions, and vendor
reimbursements for capital improvements. Net capital expenditures, excluding
all acquisitions, for the nine months ended June 24, 1999 were $17.5 million.
We anticipate capital expenditures for fiscal 1999 will be approximately $46.0
million, of which $33.6 million has been expended to date.
LONG-TERM DEBT. As of August 2, 1999, our long-term debt consisted
primarily of $200.0 million of senior subordinated notes and $240.7 million
outstanding under the 1999 bank credit facility (as of June 24, 1999, we had
$228.7 outstanding under our 1999 bank credit facility). We are currently in
compliance with our debt covenants.
In January 1999, we restructured and expanded our 1998 bank credit
facility in connection with the Miller acquisition and the redemption of our
senior notes. Our 1999 bank credit facility consists of: (i) a $45.0 million
revolving credit facility available for working capital financing, general
corporate purposes and issuing commercial and standby letters of credit; (ii) a
$79.1 million Tranche A term loan facility and a $159.9 million Tranche B term
loan facility, both of which are borrowed; and (iii) a $50.0 million
acquisition term facility which is available through January 31, 2001 to
finance acquisitions of related businesses. As of August 2, 1999, we had $13.9
million in letters of credit outstanding and $31.1 million available for
borrowing or additional letters of credit under the revolving credit facility
and $38.0 million available for borrowing under the acquisition term facility.
The interest rates we pay on borrowings under the 1999 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 facility, and our Tranche A
term loan facility. For the Tranche B term loan facility, the Company pays 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, the acquisition term facility, and the 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.
On January 31, 2001, all amounts then outstanding under the acquisition
term facility convert into a three year term loan. The Tranche A and
acquisition term 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 1999 bank credit facility as follows
(i) with net proceeds from asset sales, subject to exceptions for
sale-leaseback transactions, (ii) with 50% of the proceeds from the issuance of
any of our equity securities other than sales of our equity securities to our
management employees, (iii) with all of the proceeds from the issuance of new
debt other than debt of the types permitted under our 1999 bank credit facility
and (iv) with 50% of our excess cash flow.
The loans under the 1999 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 1999 bank
credit
33
<PAGE>
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.
With the successful completion of our IPO, the 1999 bank credit facility
lenders agreed to amend the facility to (i) permit the use of offering proceeds
to redeem our outstanding preferred stock (and pay related accrued dividends),
(ii) permit us to use up to $50.5 of offering proceeds for acquisitions during
the nine month period after the offering, (iii) permit the repayment of $19.0
million outstanding under the acquisition term facility and maintain the
acquisition term facility at $50.0 million in available borrowings, (iii)
permit the authorization of preferred stock, (iv) amend the debt to pro forma
EBITDA ratio from 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 and (iii) increase our maximum permitted capital
expenditures to $46.0 million for fiscal 1999 and $40.0 million in fiscal 2000
and thereafter.
The 1999 bank credit facility contains covenants restricting or limiting
our ability to, among other things, (i) declare dividends or redeem or
repurchase capital stock, (ii) prepay, redeem or purchase debt, (iii) incur
liens, (iv) make loans and investments, (v) engage in transactions with
affiliates and (vi) engage in mergers, acquisitions or asset sales, except that
(a) we may sell assets with a fair market value that do not exceed $10.0
million, (b) we may engage in sale/leaseback transactions, (c) we may make
acquisitions so long as the consideration we pay does not exceed $50.0 million,
including any assumption of debt, (d) 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.
Our 1999 bank credit facility also provides that our revenues and assets
related to gaming may not exceed 4% of our total revenues. Also, our 1999 bank
credit facility limits our capital expenditures to $46.0 million in fiscal 1999
and $40.0 million each year thereafter. It also prohibits us from incurring
debt other than under the bank credit facility itself except for (i) up to $3.0
million for contingent obligations, (ii) up to $30.0 million for capital leases
used or debt incurred to acquire, construct or improve our business assets,
(iii) intercompany debt, (iv) $0.7 million of pre-existing debt, (v) up to
$200.0 million of debt under our senior subordinated notes, (vi) up to $50.0
million for other similar subordinated debt we may wish to incur in the future
and (vii) up to $5.0 million in any type of debt.
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 (i) pay dividends or make distributions, (ii) issue stock of
subsidiaries, (iii) make investments in non-affiliated entities, (iv)
repurchase stock, (v) incur liens not securing debt permitted under the senior
subordinated notes, (vi) enter into transactions with affiliates, (vii) enter
into sale-leaseback transactions or (viii) engage in mergers or consolidations.
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 1999 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 replacement of our 1998 bank
credit facility and the write-off of deferred financing costs.
CASH FLOWS FROM FINANCING ACTIVITIES. During the nine months ended June
24, 1999, we financed (i) our fiscal 1999 acquisitions, (iii) the redemption of
$49.0 million of senior notes, (iii) the redemption of $17.5 million of
preferred stock, (iv) the payment of $6.5 million in preferred dividends and
(v) the related fees and expenses with (a) proceeds from our 1999 bank credit
facility, (b) proceeds from our IPO, (c) cash on hand and (d) the net proceeds
of approximately $1.2 million from the sale of common stock to employees under
our stock subscription plan.
CASH REQUIREMENTS. We believe that cash on hand, 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 June 24, 1999, our shareholders' equity
totaled $96.7 million. The $57.4 million increase in shareholders' equity is
attributed to $73.0 million in net proceeds from our IPO and our net income of
$2.7 and is partially offset by the redemption of $17.5 million in preferred
stock.
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<PAGE>
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 June 24, 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 August 2, 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 a letter of credit in the 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 credit (described above). In addition to up to $4.3
million that we may expend for remediation, we estimate 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 $18.0 million as of June 24, 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 June 24,
1999, amounts which are probable of reimbursement (based on our experience)
from those sources total $13.8 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
35
<PAGE>
contamination at other locations where we currently operate or have operated
stores, any such releases or contamination could require substantial
remediation expenditures, some or all of which may not be eligible for
reimbursement from state trust funds.
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 following discussion about the implementation of our Year 2000
program, the costs expected to be associated with the program and the results
we expect to achieve constitute forward-looking information. As noted below,
there are many uncertainties involved with the Year 2000 issue, including the
extent to which we will be able to adequately provide for contingencies that
may arise, as well as the broader scope of the Year 2000 issue as it may affect
third parties and our trading partners. Accordingly, the costs and results of
our Year 2000 program and the extent of any impact on our results of operations
could vary materially from that stated herein.
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year in respective date
fields. We use a combination of hardware devices run by computer programs at
our support centers and retail locations to process transactions and other data
which are essential to our business operations. The Year 2000 issue and its
impact on data integrity could result in system interruptions, miscalculations
or failures causing disruption of operations.
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 August 2, 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 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 85%
of our applications requiring remediation have been tested and implemented and
80% of the systems being replaced have been implemented and are in use.
We have initiated communications with our significant vendors, suppliers
and financial institutions to determine the extent to which we are vulnerable
to those third parties' failure to be Year 2000 compliant. To date, 85% of
those surveyed have responded. The replies indicate that they will be Year 2000
compliant before the end of the calendar year. Specifically, our grocery
wholesaler, McLane, has stated in their "Year 2000 Readiness Disclosure" that
they are "committed to identifying and correcting all business critical Year
2000 problems by June 1, 1999." Based on these communications and presently
available information, we do not anticipate any material effects related to
vendor, supplier, 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.
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<PAGE>
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 general, the systems and suppliers of acquired
companies are the same as those used in our existing operations.
STATE OF READINESS AS OF AUGUST 2, 1999
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
PERCENT COMPLETION
PHASE COMPLETE DATE(A)
- ---------------------------------- ----------- ----------------
<S> <C> <C>
Awareness .................... 95% December, 1999
Assessment ................... 99% August, 1999
Remediation .................. 85% September, 1999
Replacement .................. 80% September, 1999
Testing ...................... 75% October, 1999
Contingency Planning ......... 5% November, 1999
</TABLE>
- ---------
(a) Indicates month when 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
approximately $200,000. We anticipate spending for the remainder of the fiscal
year to be approximately $200,000.
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 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 certain 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. In June 1999, the Statement of Financial
Accounting Standards No. 133 was amended to defer the effective date to the
first fiscal quarter of fiscal 2001. As of June 24, 1999, we have not
determined the effect of Statement of Financial Accounting Standards No. 133 on
our consolidated financial statements, however, we do not believe adoption of
this accounting standard will have a material impact on our financial
condition.
INFLATION
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 nine
months ended June 24, 1999, the consumer price index increased approximately
1.6%. 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 nine months ended
June 24, 1999, the consumer price index for the category labeled "cigarettes"
increased approximately 21.9%. For the same period, the producer price index
for the category labeled "cigarettes" increased approximately 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
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<PAGE>
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 the 1999 bank credit
facility.
On March 2, 1999, we entered into an interest rate swap arrangement with
respect to $45.0 million of borrowings under our outstanding Tranche A and
Tranche B term loan facilities. The interest rate swap arrangement fixes the
interest rate on these borrowings at 8.62% for the Tranche A facility and 9.12%
for the Tranche B facility for approximately two years.
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 August 2, 1999.
EXPECTED MATURITY DATE
(AS OF JUNE 24, 1999)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL FISCAL FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
----------- ------------ ------------ ------------ ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt ......... $ 2,896 $ 10,686 $ 17,939 $ 20,943 $ 37,931 $ 340,306 $ 430,701 $428,701
Weighted average
Interest rate ......... 9.18% 9.20% 9.25% 9.31% 9.38% 9.46% 9.17%
</TABLE>
QUALITATIVE DISCLOSURES. Our primary exposure relates to: (i) interest
rate risk on long-term and short-term borrowings; (ii) our ability to pay or
refinance long-term borrowings at maturity at market rates; (iii) the impact of
interest rate movements on our ability to meet interest expense requirements
and exceed financial covenants; and (iv) 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 cannot predict or manage our ability to refinance
existing debt or the impact interest rate movements will have on our existing
debt, management evaluates our financial position on an ongoing basis.
PART II -- OTHER INFORMATION.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On June 8, 1999, pursuant to an effective Registration Statement on Form
S-1 (File No. 333-74221, declared effective on June 8, 1999), the Company
offered and sold 6,250,000 shares of its common stock, $0.01 par value per
share, in an initial public offering. The aggregate offering price was
$81,250,000 ($13.00 per share) and the Company received $75.6 million in net
proceeds (net of $5.7 million in underwriting discounts), before expenses. The
net proceeds were used: (i) to repay $19.0 million in indebtedness under our
1999 bank credit facility; (ii) to redeem $17.5 million in outstanding
preferred stock; and (iii) to pay accrued dividends on the preferred stock of
$6.5 million. Of the remaining $32.6 million, $30.2 million was used to fund
acquisitions closed subsequent to the fiscal quarter ended June 24, 1999 and
$2.4 million used to pay fees and expenses associated with the IPO. The
lead underwriters of the IPO were Merrill Lynch & Co., Banc of America
Securities LLC and Goldman, Sachs & Co.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 1, 1999, stockholders holding a majority of the outstanding common
stock of the Company (11,711,049 shares, as adjusted for the Company's June 4,
1999 stock split) and stockholders holding all of the outstanding preferred
stock of the Company (17,500 shares), executed a written consent authorizing
(i) the amendment of the Company's certificate of incorporation, (ii) the
amendment of the Company's bylaws, and (iii) the adoption of the Company's 1999
Stock Option Plan. A form of the Company's Amended and Restated Certificate of
Incorporation, the Company's Amended and Restated Bylaws and the Company's 1999
Stock Option Plan were each filed with the Commission as an exhibit to the
Company's Registration Statement on Form S-1.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<S> <C>
(a) Exhibits
10.33 First Amendment to Amended Credit Agreement dated as of April 30, 1999 among
the Company, the Lenders listed therein, First Union National Bank, Canadian Imperial Bank
of Commerce and NationsBank, N.A.
10.34 Amendment No. 1 to Employment Agreement between the Company and
Peter J. Sodini.
10.35 Amendment No. 1 to the Amended and Restated Stockholders' Agreement dated
as of June 1, 1999 among the Company, FS Equity Partners III, L.P., FS Equity Partners IV,
L.P., FS Equity Partners International, L.P., Chase Manhattan Capital, L.P., CB Capital
Investors, L.P., Baseball Partners and Peter J. Sodini.
10.36 Amendment No. 1 to the Amended and Restated Registration Rights Agreement
dated as of June 1, 1999 among the Company, FS Equity Partners III, L.P., FS Equity
Partners IV, L.P., FS Equity Partners International, L.P., Chase Manhattan Capital, L.P., CB
Capital Investors, L.P., Baseball Partners and Peter J. Sodini.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
(1) On August 6, 1999, The Pantry filed a Current Report on Form 8-K announcing its
acquisition of 100% of the outstanding stock of R&H Maxxon, Inc.
</TABLE>
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PANTRY, INC.
<TABLE>
<S> <C>
Date: August 9, 1999
By: /s/ WILLIAM T. FLYG
-------------------------------------
WILLIAM T. FLYG
SENIOR VICE PRESIDENT FINANCE AND SECRETARY
(AUTHORIZED OFFICER AND PRINCIPAL FINANCIAL OFFICER)
</TABLE>
40
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
------------- -------------------------
<S> <C>
10.33 First Amendment to Amended Credit Agreement.
10.34 Amendment No. 1 to Employment Agreement between the Company and
Peter J. Sodini.
10.35 Amendment No. 1. to the Amended and Restated Stockholders' Agreement.
10.36 Amendment No. 1. to the Amended and Restated Registration Rights Agreement.
27.1 Financial Data Schedule.
</TABLE>
41
THE PANTRY, INC.
FIRST AMENDMENT
TO CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated
as of April 30, 1999 and entered into by and among THE PANTRY, INC., a Delaware
corporation ("Company"), the financial institutions listed on the signature
pages hereof ("Lenders"), FIRST UNION NATIONAL BANK, as administrative agent for
Lenders (in such capacity, the "Administrative Agent"), CANADIAN IMPERIAL BANK
OF COMMERCE, as syndication agent for Lenders (in such capacity, the
"Syndication Agent"), and NATIONSBANK, N.A., as documentation agent for Lenders
(in such capacity, the "Documentation Agent"), and, for purposes of Section 5
hereof, the Credit Support Parties (as defined in Section 5 hereof) listed on
the signature pages hereof, and is made with reference to that certain Amended
and Restated Credit Agreement dated as of January 28, 1999 (the "Credit
Agreement"), by and among Company, Lenders, Administrative Agent, Syndication
Agent and Documentation Agent. Capitalized terms used herein without definition
shall have the same meanings herein as set forth in the Credit Agreement.
RECITALS
WHEREAS, Company has commenced an initial public offering (the
"IPO") of shares of the Common Stock of Company and Company desires (1) to use
not more than $17,500,000 of the net Cash proceeds from such IPO (the "Net IPO
Proceeds") to redeem Company Preferred Stock and to use not more than $7,000,000
of such proceeds to pay accrued dividends thereon, (2) to use not more than
$19,000,000 of the Net IPO Proceeds to voluntarily prepay all Acquisition Term
Loans outstanding as of the close of the IPO and to increase the Acquisition
Term Loan Commitments by the amount of Acquisition Term Loans so prepaid so as
to permit Company to borrow the original $50,000,000 available under the
Acquisition Term Loan Commitments after such repayment, and (3) to retain up to
$50,500,000 of the remaining amount of Net IPO Proceeds (the "Retained IPO
Proceeds") for the purpose of making Permitted Acquisitions during the
nine-month period after the close of the IPO; and
WHEREAS, Company and Lenders desire to amend the Credit Agreement to
(i) permit the transactions described above, (ii) amend certain of the defined
terms contained therein, (iii) amend certain of the financial covenants
contained therein and (iv) make certain other amendments as set forth below:
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
1
<PAGE>
Section 1. AMENDMENTS TO THE CREDIT AGREEMENT
1.1 Amendments to Section 1: Provisions Relating to Defined Terms
A. Amendments to Existing Definitions. Subsection 1.1 of the Credit
Agreement is hereby amended by deleting the definitions "Acquisition Term Loan
Commitment Termination Date" and "Acquisition Term Notes" in their entirety and
substituting the following therefor:
"'Acquisition Term Loan Commitment Termination Date' means the date
which is the two-year anniversary of the First Amendment Effective Date.
'Acquisition Term Notes' means (i) the promissory notes of Company
issued pursuant to subsection 2.1E(i)(a) on the Effective Date or on the
First Amendment Effective Date and (ii) any promissory notes issued by
Company pursuant to the last sentence of subsection 10.1B(i) in connection
with assignments of the Acquisition Term Loan Commitments or Acquisition
Term Loans of any Lenders, in each case substantially in the form of
Exhibit IV annexed hereto, as they may be amended, supplemented or
otherwise modified from time to time."
B. Addition of New Definitions. Subsection 1.1 of the Credit
Agreement is hereby further amended by adding thereto the following definitions,
which shall be inserted in proper alphabetical order:
"'First Amendment Effective Date' means the date on which that
certain First Amendment to Credit Agreement dated as of April 30, 1999 by
and among Company, Lenders, Administrative Agent, Syndication Agent and
Documentation Agent becomes effective in accordance with its terms, which
date shall be specified in a written notice from Administrative Agent to
Company and Lenders and shall be no later than July 15, 1999.
'IPO' means the initial public offering of common stock of
Company.
'Net IPO Proceeds' means the Cash proceeds (net of underwriting
discounts and commissions and other reasonable costs and expenses
associated therewith) from the issuance of the common stock of Company
pursuant to the IPO.
'Retained IPO Proceeds' has the meaning assigned to that term in
subsection 2.4B(iii)(b)."
1.2 Amendments to Section 2: Amounts and Terms of Commitments and
Loans
A. Acquisition Term Loans. Subsection 2.1A(i) of the Credit
Agreement is hereby amended by deleting it in its entirety and substituting
the following therefor:
"(i) Acquisition Term Loans. Each Lender having an Acquisition Term
Loan Commitment severally agrees, subject to the provisions set forth in
subsection 7.7(vi), to
2
<PAGE>
lend to Company from time to time during the period from and after the
earlier to occur of (i) Company's delivery of an Officers' Certificate to
Administrative Agent certifying that Company has utilized or will utilize,
together with the proceeds of any requested borrowing of Acquisition Term
Loans, all of the Retained IPO Proceeds for Permitted Acquisitions or (ii)
Company's delivery of an Officers' Certificate pursuant to subsection
6.1(xix) on the nine-month anniversary of the First Amendment Effective
Date and the occurrence of the related prepayment of Loans and/or
permanent reduction of Revolving Loan Commitments and/or Acquisition Term
Loan Commitments required pursuant to subsection 2.4B(iii)(b), to but
excluding the Acquisition Term Loan Commitment Termination Date an amount
not exceeding its Pro Rata Share of the aggregate amount of the
Acquisition Term Loan Commitments to be used for the purposes identified
in subsection 2.5A. The amount of each Lender's Acquisition Term Loan
Commitment as of the First Amendment Effective Date is set forth opposite
its name on Schedule 2.1 annexed hereto (as amended on the First Amendment
Effective Date) and the aggregate amount of the Acquisition Term Loan
Commitments as of the First Amendment Effective Date is $50,000,000;
provided that the Acquisition Term Loan Commitments of Lenders shall be
adjusted to give effect to any assignments of the Acquisition Term Loan
Commitments pursuant to subsection 10.1B; and provided, further that the
amount of the Acquisition Term Loan Commitment of any Lender shall be
reduced from time to time by the amount of any Acquisition Term Loan made
by such Lender and shall be further reduced from time to time by the
amount of any reductions thereto made pursuant to subsections 2.4B(ii) and
2.4B(iii). Each Lender's Acquisition Term Loan Commitment shall expire on
the Acquisition Term Loan Commitment Termination Date and all outstanding
Acquisition Term Loans on such date shall be repaid in accordance with
subsection 2.4A. Amounts borrowed under this subsection 2.1A(i) and
subsequently repaid or prepaid may not be reborrowed."
B. Scheduled Payments of Acquisition Term Loans. Subsection
2.4A(i) of the Credit Agreement is hereby amended by deleting it in its
entirety and substituting the following therefor:
"(i) Scheduled Payments of Acquisition Term Loans. Company shall
make principal payments on the Acquisition Term Loans in installments on
each January 31, April 30, July 31 and October 31, commencing on July 31,
2001, in an amount equal to 9.0%, or 10.0% with respect to the installment
payable on January 31, 2004, of the aggregate amount of the Acquisition
Term Loans outstanding on the Acquisition Term Loan Commitment Termination
Date; provided that the scheduled installments of principal of the
Acquisition Term Loans shall be reduced in connection with any voluntary
or mandatory prepayments of the Acquisition Term Loans in accordance with
subsection 2.4B(iv); and provided, further that the Acquisition Term Loans
and all other amounts owed hereunder with respect to the Acquisition Term
Loans shall be paid in full no later than January 31, 2004, and the final
installment payable by Company in respect of the Acquisition Term Loans on
such date shall be in an amount, if such amount is different from that
specified above, sufficient to repay all amounts owing by Company under
this Agreement with respect to the Acquisition Term Loans."
3
<PAGE>
C. Prepayments and Reductions Due to Issuance of Equity Securities.
Subsection 2.4B(iii)(b) of the Credit Agreement is hereby amended by deleting it
in its entirety and substituting the following therefor:
"(b) Prepayments and Reductions Due to Issuance of Equity
Securities. No later than the first Business Day after the date of receipt
by Company of the Cash proceeds (any such proceeds, net of underwriting
discounts and commissions and other reasonable costs and expenses
associated therewith, including reasonable legal fees and expenses, being
"Net Securities Proceeds") from the issuance of any equity Securities of
Company after the Effective Date (other than issuances of equity to
management employees pursuant to agreements or stock option plans
permitted under subsection 7.11), Company shall prepay the Loans and/or
the Revolving Loan Commitments and/or the Acquisition Term Loan
Commitments shall be permanently reduced in an aggregate amount equal to
50% of such Net Securities Proceeds; provided, however, that, in the event
Company voluntarily prepays all of the Acquisition Term Loans outstanding
immediately prior to the First Amendment Effective Date from the Net IPO
Proceeds pursuant to subsection 2.4B(i), the remaining Net IPO Proceeds
received by Company shall be excluded from the requirements of this
subsection 2.4B(iii)(b) to the extent: (1) not more than $24,500,000 of
such Net IPO Proceeds are used for the redemption of not more than
$17,500,000 of Preferred Stock and the payment of approximately $7,000,000
of accrued dividends thereon, in each case within five (5) Business Days
of the First Amendment Effective Date as permitted under subsection 7.5;
and (2) after such voluntary prepayment of Acquisition Term Loans and
redemption of Preferred Stock and payment of dividends thereon from such
Net IPO Proceeds, the remaining amount of Net IPO Proceeds are retained
for the exclusive purpose of making Permitted Acquisitions (the "Retained
IPO Proceeds") during the nine-month period after the First Amendment
Effective Date; provided that the aggregate amount of such Retained IPO
Proceeds shall not exceed $50,500,000, and in the event that the aggregate
amount of such Net IPO Proceeds less the amount of Net IPO Proceeds
applied in accordance with the preceding clauses (1) and (2) exceeds
$50,500,000, then Company shall prepay the Loans and/or the Revolving Loan
Commitments and/or the Acquisition Term Loan Commitments shall be
permanently reduced in an aggregate amount equal to such excess amount in
accordance with subsection 2.4B(iv)(b); provided, further that pending
application of such Retained IPO Proceeds to the making of Permitted
Acquisitions, such Retained IPO Proceeds shall be held in an interest
bearing blocked account with Administrative Agent (the "Blocked Account")
and such Retained IPO Proceeds shall only be released by Administrative
Agent to Company (i) upon Company's delivery of an Officers' Certificate
to Administrative Agent certifying that such Retained IPO Proceeds will be
applied by Company, immediately upon such release, to the making of a
Permitted Acquisition or (ii) upon the nine-month anniversary of the First
Amendment Effective Date; and provided, further that on such nine-month
anniversary Company shall prepay the Loans and/or the Revolving Loan
Commitments and/or the Acquisition Term Loan Commitments shall be
permanently reduced in an aggregate amount equal to such unused portion of
such Retained IPO Proceeds in accordance with subsection 2.4B(iv)(b)."
4
<PAGE>
1.3 Amendments to Section 6: Company's Affirmative Covenants
A. Monthly Financials. Subsection 6.1 of the Credit Agreement
is hereby amended by deleting clause (i) of such subsection 6.1 in its
entirety and substituting the following therefor:
"(i) [INTENTIONALLY OMITTED]"
B. Retained IPO Proceeds Certificate. Subsection 6.1 of the Credit
Agreement is hereby further amended by (a) deleting the reference to "and"
immediately after clause (xviii) of such subsection 6.1, (b) renumbering clause
(xix) as the new clause (xx) of such subsection 6.1, and (c) adding as the new
clause (xix) of such subsection 6.1 the following:
"(xix) Retained IPO Proceeds Certificate: on the nine-month
anniversary of the First Amendment Effective Date, an Officers'
Certificate summarizing in reasonable detail the uses of the Retained IPO
Proceeds during the prior nine-month period and the amount of any
unutilized Retained IPO Proceeds as of the nine-month anniversary of the
First Amendment Effective Date; and"
1.4 Amendments to Section 7: Company's Negative Covenants
A. Restricted Junior Payments. Subsection 7.5 of the Credit
Agreement is hereby amended by deleting it in its entirety and substituting
the following therefor:
"7.5 Restricted Junior Payments.
Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, declare, order, pay, make or set
apart any sum for any Restricted Junior Payment; provided that (i) Company
may make regularly scheduled payments of interest in respect of the Senior
Subordinated Notes and of any Subordinated Indebtedness issued in
accordance with subsection 7.1(vii) hereof in accordance with the terms
of, and only to the extent required by, and subject to the subordination
provisions contained in, the Senior Subordinated Indenture or the
indenture pursuant to which such other Subordinated Indebtedness is
issued, as the case may be, in each case, as such indenture may be amended
from time to time to the extent permitted under subsection 7.14B, (ii)
Company may make Restricted Junior Payments pursuant to and in accordance
with stock option plans, stock purchase plans or other benefit plans for
management or employees of Company or any Subsidiary including the
redemption or purchase of shares of common stock of Company held by former
employees of Company or any Subsidiary following the termination of their
employment, in an amount not to exceed $500,000 (net of any amounts
received by Company after the Effective Date and prior to making such
Restricted Junior Payment from the issuance of additional shares of its
common stock to members of management or employees of Company and its
Subsidiaries), and (iii) subject to subsection 2.4B(iii)(b), Company may
use (x) not more than $17,500,000 of the Net IPO Proceeds to redeem
Company Preferred Stock within five (5) Business Days of the First
Amendment Effective Date and (y) not more than $7,000,000 of the Net IPO
5
<PAGE>
Proceeds to pay the accrued dividends on such Company Preferred Stock
within five (5) Business Days of the First Amendment Effective Date."
B. Minimum Consolidated Pro Forma Leverage Ratio. Subsection 7.6B of
the Credit Agreement is hereby amended by deleting the table contained therein
in its entirety and substituting the following therefor:
Maximum Consolidated Pro
"Period Forma Leverage Ratio
------- ---------------------
As of the last day of the second, third and
fourth Fiscal Quarters in Fiscal Year 1999 4.75:1.00
As of the last day of each Fiscal Quarter in
Fiscal Year 2000 4.75:1.00
As of the last day of each Fiscal Quarter in
Fiscal Year 2001 4.25:1.00
As of the last day of each Fiscal Quarter in
Fiscal Year 2002 4.00:1.00
As of the last day of each Fiscal Quarter in
Fiscal Year 2003 3.50:1.00
As of the last day of each Fiscal Quarter in
Fiscal Year 2004, and as of the last day of
each Fiscal Quarter thereafter 3.25:1.00"
C. Restriction on Fundamental Changes; Asset Sales and Acquisitions.
Subsection 7.7 of the Credit Agreement is hereby amended by deleting the "." at
the end of clause (vii) of such subsection 7.7 and substituting the following
therefor:
"; and
(viii) Company may amend its Certificate of Incorporation (x) to
authorize the issuance of "blank check" preferred stock of Company and (y)
to create and issue classes or series of preferred stock pursuant thereto;
provided that any class or series of preferred stock issued under such
authorized "blank check" preferred stock shall be in form and substance
satisfactory to Requisite Lenders."
D. Consolidated Capital Expenditures. Subsection 7.8 of the
Credit Agreement is hereby amended by deleting the table contained therein in
its entirety and substituting the following therefor:
6
<PAGE>
Maximum Consolidated
"Period Capital Expenditures
------- --------------------
Fiscal Year 1999 $46,000,000
Fiscal Year 2000 and each
Fiscal Year thereafter $40,000,000"
1.5 Substitution of Schedule
Schedule 2.1 to the Credit Agreement is hereby amended by deleting
said Schedule 2.1 in its entirety and substituting in place thereof a new
Schedule 2.1 in the form of Annex A annexed hereto.
Section 2. CONDITIONS TO EFFECTIVENESS
Section 1 of this Amendment shall become effective only upon the
satisfaction of all of the following conditions precedent (the date of
satisfaction of such conditions, which shall be specified in a written notice
from Administrative Agent to Company and Lenders, being referred to herein as
the "First Amendment Effective Date"):
A. Company Documents. On or before the First Amendment Effective
Date, Company shall deliver to Lenders (or to Administrative Agent for Lenders
with sufficient originally executed copies, where appropriate, for each Lender
and its counsel) the following, each, unless otherwise noted, dated the First
Amendment Effective Date:
1. Resolutions of its Board of Directors approving and authorizing
the execution, delivery, and performance of this Amendment and the new
Acquisition Term Notes (the "New Notes"), substantially in the form of
Annex B annexed hereto, drawn to the order of each applicable Lender and
with appropriate insertions, such resolutions certified as of the First
Amendment Effective Date by its corporate secretary or an assistant
secretary as being in full force and effect without modification or
amendment;
2. Signature and incumbency certificates of its officers executing
this Amendment and the New Notes; and
3. Executed copies of this Amendment and the New Notes.
B. Execution of Amendment by Lenders; Exchange of Existing
Acquisition Term Notes. On or before the First Amendment Effective Date, all
Lenders shall have executed and delivered copies of this Amendment to
Administrative Agent. On or before the First Amendment Effective Date, each
Lender holding an outstanding Acquisition Term Note (each an "Existing Note" and
collectively the "Existing Notes") shall have delivered to Administrative Agent
its Existing Note for cancellation and, promptly upon receipt, Administrative
Agent shall cancel all Existing Notes. Promptly after receipt of the duly
executed New Notes, Administrative Agent shall deliver such New Notes to the
applicable Lenders.
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<PAGE>
C. IPO and Net IPO Proceeds. On or before the First Amendment
Effective Date, Company shall have consummated the IPO and received not less
than $65,000,000 in Net IPO Proceeds from the IPO and Administrative Agent shall
have received an Officers' Certificate, in form and substance reasonably
satisfactory to Agents, to such effect and (i) in the event Company has applied
Net IPO Proceeds to the voluntary prepayment of all outstanding Acquisition Term
Loans pursuant to subsection 2.4B(i), together with accrued and unpaid interest
thereon, Company shall deposit the Retained IPO Proceeds in a blocked account
with Administrative Agent and (ii) in the event Company has not applied the Net
IPO Proceeds to the voluntary prepayment of the outstanding Acquisition Term
Loans, the Net IPO Proceeds shall be applied to the mandatory prepayment of the
Loans and/or the permanent reduction of the Revolving Loan Commitments and/or
the Acquisition Term Loan Commitments as required pursuant to subsection
2.4B(iii)(b) of the Credit Agreement.
D. Legal Opinions. On or before the First Amendment Effective Date,
Lenders shall have received originally executed copies of one or more favorable
written opinions of counsel for Company, substantially in the form of Annex C
annexed hereto, dated as of the First Amendment Effective Date, and as to such
other matters as Agents acting on behalf of Lenders may reasonable request.
E. Fees. On or before the First Amendment Effective Date, Company
shall pay (x) to each Lender which executes and delivers this Amendment on or
before the First Amendment Effective Date an amendment fee equal to 0.100% of
the sum of such Lender's Tranche A Term Loan Exposure, Tranche B Term Loan
Exposure, Acquisition Term Loan Exposure (after giving effect to this Amendment)
and Revolving Loan Exposure, all such amendment fees to be paid to
Administrative Agent for distribution to Lenders, and (y) to each Agent such
fees as have been agreed upon in writing among Agents and Company.
F. Other Proceedings. On or before the First Amendment Effective
Date, all corporate and other proceedings taken or to be taken in connection
with the transactions contemplated hereby and all documents incidental thereto
not previously found acceptable by Agents, acting on behalf of Lenders, shall be
reasonably satisfactory in form and substance to Agents, and Agents shall have
received all such counterpart originals or certified copies of such documents as
Agents may reasonably request.
Section 4. COMPANY'S REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to amend
the Credit Agreement in the manner provided herein, Company represents and
warrants to each Lender that the following statements are true, correct and
complete:
A. Corporate Power and Authority. Company has all requisite
corporate power and authority to enter into this Amendment, to issue the New
Notes and to carry out the transactions contemplated by, and perform its
obligations under, the Credit Agreement as amended by this Amendment (the
"Amended Agreement") and the New Notes.
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<PAGE>
B. Authorization of Agreements. The execution and delivery of this
Amendment and the New Notes, the performance of the Amended Agreement and the
New Notes and the payment of the New Notes have been duly authorized by all
necessary corporate action on the part of Company.
C. No Conflict. The execution and delivery by Company of this
Amendment and the New Notes and the performance by Company of the Amended
Agreement and the New Notes do not and will not (i) violate any provision of any
law or any governmental rule or regulation applicable to Company or any of its
Subsidiaries, the Certificate or Articles of Incorporation or Bylaws of Company
or any of its Subsidiaries or any order, judgment or decree of any court or
other agency of government binding on Company or any of its Subsidiaries, (ii)
conflict with, result in a breach of or constitute (with due notice or lapse of
time or both) a default under any Contractual Obligation of Company or any of
its Subsidiaries, (iii) result in or require the creation or imposition of any
Lien upon any of the properties or assets of Company or any of its Subsidiaries
(other than Liens created under any of the Loan Documents in favor of
Administrative Agent on behalf of Lenders), or (iv) require any approval of
stockholders or any approval or consent of any Person under any Contractual
Obligation of Company or any of its Subsidiaries, except for such approvals or
consents which will be obtained on or before the First Amendment Effective Date
and disclosed in writing to Lenders.
D. Governmental Consents. The execution and delivery by Company of
this Amendment and the New Notes and the performance by Company of the Amended
Agreement and the New Notes do not and will not require any registration with,
consent or approval of, or notice to, or other action to, with or by, any
federal, state or other governmental authority or regulatory body.
E. Binding Obligation. This Amendment, the New Notes and the Amended
Agreement have been duly executed and delivered by Company and are the legally
valid and binding obligations of Company, enforceable against Company in
accordance with their respective terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or limiting
creditors' rights generally or by equitable principles relating to
enforceability.
F. Incorporation of Representations and Warranties From Credit
Agreement. The representations and warranties contained in Section 5 of the
Credit Agreement are and will be true, correct and complete in all material
respects on and as of the First Amendment Effective Date to the same extent as
though made on and as of that date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they were
true, correct and complete in all material respects on and as of such earlier
date.
G. Absence of Default. No event has occurred and is continuing or
will result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default or a Potential Event of
Default.
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<PAGE>
Section 5. ACKNOWLEDGEMENT AND CONSENT
Company is a party to a Collateral Account Agreement and a certain
Company Security Agreement, Company Pledge Agreement, Company Trademark Security
Agreement and Mortgages pursuant to which Company has created Liens in favor of
Administrative Agent on certain Collateral to secure the Obligations. Each
Subsidiary Guarantor is a party to a Subsidiary Guaranty and certain Subsidiary
Security Agreements, Subsidiary Pledge Agreements, Subsidiary Trademark Security
Agreements and Mortgages pursuant to which such Subsidiary Guarantors have (i)
guarantied the Obligations and (ii) created Liens in favor of Administrative
Agent on certain Collateral to secure the obligations of such Subsidiary
Guarantors under the Subsidiary Guaranty. Company and Subsidiary Guarantors are
collectively referred to herein as the "Credit Support Parties", and the
Subsidiary Guaranty and all such Collateral Documents referred to above are
collectively referred to herein as the "Credit Support Documents".
Each Credit Support Party hereby acknowledges that it has reviewed
the terms and provisions of the Credit Agreement and this Amendment and consents
to the amendment of the Credit Agreement effected pursuant to this Amendment.
Each Credit Support Party hereby confirms that each Credit Support Document to
which it is a party or otherwise bound and all Collateral encumbered thereby
will continue to guarantee or secure, as the case may be, to the fullest extent
possible the payment and performance of all "Obligations," "Guarantied
Obligations" and "Secured Obligations," as the case may be (in each case as such
terms are defined in the applicable Credit Support Document), including without
limitation the payment and performance of all such "Obligations," "Guarantied
Obligations" or "Secured Obligations," as the case may be, in respect of the
Obligations of Company and the Subsidiary Guarantors now or hereafter existing
under or in respect of the Amended Agreement. Without limiting the generality of
the foregoing, each Credit Support Party hereby acknowledges and confirms the
understanding and intent of such party that, upon the effectiveness of this
Amendment, and as a result thereof, the definition of "Obligations" contained in
the Amended Agreement includes the obligations of Company under the New Notes.
Each Credit Support Party acknowledges and agrees that any of the
Credit Support Documents to which it is a party or otherwise bound shall
continue in full force and effect and that all of its obligations thereunder
shall be valid and enforceable and shall not be impaired or limited by the
execution or effectiveness of this Amendment. Each Credit Support Party
represents and warrants that all representations and warranties contained in the
Amended Agreement and the Credit Support Documents to which it is a party or
otherwise bound are true, correct and complete in all material respects on and
as of the First Amendment Effective Date to the same extent as though made on
and as of that date, except to the extent such representations and warranties
specifically relate to an earlier date, in which case they were true, correct
and complete in all material respects on and as of such earlier date.
Each Credit Support Party (other than Company) acknowledges and
agrees that (i) notwithstanding the conditions to effectiveness set forth in
this Amendment, such Credit Support Party is not required by the terms of the
Credit Agreement or any other Loan Document to consent to the amendments to the
Credit Agreement effected pursuant to this Amendment and (ii) nothing in the
Credit Agreement, this Amendment or any other Loan Document shall be
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<PAGE>
deemed to require the consent of such Credit Support Party to any future
amendments to the Credit Agreement.
Section 6. MISCELLANEOUS
A. Reference to and Effect on the Credit Agreement and the
Other Loan Documents.
(i) On and after the First Amendment Effective Date, each reference
in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Credit Agreement, and
each reference in the other Loan Documents to the "Credit Agreement",
"thereunder", "thereof" or words of like import referring to the Credit
Agreement shall mean and be a reference to the Amended Agreement.
(ii) Except as specifically amended by this Amendment, the Credit
Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of
Administrative Agent or any Lender under, the Credit Agreement or any of
the other Loan Documents.
B. Fees and Expenses. Company acknowledges that all reasonable
costs, fees and expenses as described in subsection 10.2 of the Credit Agreement
incurred by Agents and their respective counsel with respect to this Amendment
and the documents and transactions contemplated hereby shall be for the account
of Company.
C. Headings. Section and subsection headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
D. Applicable Law. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING
WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF
NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
E. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and attached
to a single counterpart so that all signature pages are physically attached to
the same document.
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[Remainder of page intentionally left blank]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
THE PANTRY, INC.
By: /s/ William T. Flyg
------------------------------------
Title: Senior Vice President/Finance/Secretary
----------------------------------
LIL' CHAMP FOOD STORES, INC.,
as a Credit Support Party
By: /s/ William T. Flyg
---------------------------------------
Title: Executive Vice President/Assistant
Secretary
------------------------------------
SANDHILLS, INC.,
as a Credit Support Party
By: /s/ William T. Flyg
--------------------------------------
Title: Vice President
-----------------------------------
GLOBAL COMMUNICATIONS, INC.,
as a Credit Support Party
By: /s/ William T. Flyg
---------------------------------------
Title: Vice President & Secretary
------------------------------------
MILLER ENTERPRISES, INC.,
as a Credit Support Party
By: /s/ William T. Flyg
--------------------------------------
Title: Executive Vice President
-----------------------------------
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<PAGE>
AUCILLA PROPERTIES, INC.,
as a Credit Support Party
By: /s/ William T. Flyg
---------------------------------------
Title: Assistant Secretary
------------------------------------
PENINSULAR PETROLEUM COMPANY,
as a Credit Support Party
By: /s/ William T. Flyg
--------------------------------------
Title: Assistant Secretary
-----------------------------------
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<PAGE>
LENDERS:
FIRST UNION NATIONAL BANK, individually
and as Administrative Agent
By: /s/ Mark B. Felker
--------------------------------------
Title: Senior Vice President
-----------------------------------
CANADIAN IMPERIAL BANK OF COMMERCE, as
Syndication Agent
By: /s/ Katherine Bass
-------------------------------------
Title: Authorized Signatory
----------------------------------
CIBC INC., as a Lender
By: /s/ Katherine Bass
-------------------------------------
Title: Executive Director
----------------------------------
NATIONSBANK, N.A.,
individually and as Documentation Agent
By: /s/ David H. xxxx
--------------------------------------
Title: Vice President
-----------------------------------
ROYAL BANK OF CANADA,
as a Lender
By: /s/ Mxxxx
--------------------------------------
Title: Senior Manager
-----------------------------------
S-3
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH,
as a Lender
By: /s/
--------------------------------------
Title: Vice President
-----------------------------------
THE PROVIDENT BANK,
as a Lender
By: /s/ D. E. O'Grady
--------------------------------------
Title: Vice President
-----------------------------------
UNION BANK OF CALIFORNIA, N.A.,
as a Lender
By: /s/ J. William Bloore
--------------------------------------
Title: Vice President
-----------------------------------
WELLS FARGO BANK, N.A.,
as a Lender
By: /s/ Kevin McKlee
--------------------------------------
Title: Vice President
-----------------------------------
COMPAGNIE FINANCIERE DE CIC ET
DE L' UNION EUROPEENNE, as a Lender
By: /s/ Anthony Rock
--------------------------------------
Title: Vice President
-----------------------------------
S-4
<PAGE>
By: /s/ Marcus Edwards
--------------------------------------
Title: Vice President
-----------------------------------
REPUBLIC NATIONAL BANK OF MIAMI,
as a Lender
By:
--------------------------------------
Title:
-----------------------------------
DRESDNER BANK, AG, NEW YORK AND GRAND
CAYMAN BRANCHES, as a Lender
By: /s/ John W. Sweeney
--------------------------------------
Title: Vice President
-----------------------------------
By: /s/ Thomas J. Nadramia
--------------------------------------
Title: Vice President
-----------------------------------
S-5
<PAGE>
KZH CYPRESSTREE-1 LLC,
as a Lender
By:
--------------------------------------
Title:
-----------------------------------
NORTH AMERICAN SENIOR FLOATING RATE FUND,
as a Lender
By: CypressTree Investment Management
Company, Inc., as Portfolio Manager
By: Catherine J. McDermott
--------------------------------------
Title: Principal
-----------------------------------
CYPRESSTREE INVESTMENT FUND, LLC,
as a Lender
By: CypressTree Investment Management
Company, Inc., its Managing Member
By: Catherine J. McDermott
--------------------------------------
Title: Principal
-----------------------------------
CYPRESSTREE INSTITUTIONAL FUND, LLC, as a
Lender
By: CypressTree Investment Management
Company, Inc., its Managing Member
By: Catherine J. McDermott
--------------------------------------
Title: Principal
-----------------------------------
S-6
<PAGE>
KZH CNC LLC, as a Lender
By:
--------------------------------------
Title:
-----------------------------------
MERRILL LYNCH SENIOR FLOATING RATE FUND,
INC., as a Lender
By: /s/ George D. Pelose
--------------------------------------
Title: Authorized Signatory
-----------------------------------
MERRILL LYNCH PRIME RATE PORTFOLIO, as a
Lender
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By: /s/ George D. Pelose
--------------------------------------
Title: Authorized Signatory
-----------------------------------
MORGAN STANLEY DEAN WITTER PRIME INCOME
TRUST, as a Lender
By: /s/ Sheila A. Finnerty
--------------------------------------
Title: Vice President
-----------------------------------
VAN KAMPEN SENIOR FLOATING RATE FUND, as
a Lender
By: /s/ Lisa M. Mincheski
--------------------------------------
Title: Vice President
-----------------------------------
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<PAGE>
VAN KAMPEN PRIME RATE INCOME
TRUST, as a Lender
By: /s/ Lisa M. Mincheski
--------------------------------------
Title: Vice President
-----------------------------------
INDOSUEZ CAPITAL FUNDING IIA, LIMITED, as
a Lender
By: Indosuez Capital, as Portfolio Advisor
By: /s/ Melissa Mana
--------------------------------------
Title: Vice President
-----------------------------------
INDOSUEZ CAPITAL FUNDING III, LIMITED, as
a Lender
By: Indosuez Capital, as Portfolio Advisor
By: /s/ Melissa Mana
--------------------------------------
Title: Vice President
-----------------------------------
INDOSUEZ CAPITAL FUNDING IV, L.P.,
as a Lender
By: Indosuez Capital, as Portfolio Advisor
By: /s/ Melissa Mana
--------------------------------------
Title: Vice President
-----------------------------------
S-8
<PAGE>
ALLIANCE INVESTMENT OPPORTUNITIES FUND,
L.L.C., as a Lender
By: ALLIANCE INVESTMENT
OPPORTUNITIES MANAGEMENT,
L.L.C., as Managing Member
By: ALLIANCE CAPITAL MANAGEMENT
L.P., as Managing Member
By: ALLIANCE CAPITAL MANAGEMENT
CORPORATION, as General Partner
By: /s/ L. I. Savitri Alex
--------------------------------------
Title: Vice President
-----------------------------------
OAK MOUNTAIN LIMITED,
as a Lender
By: Alliance Capital Management L.P.,
as Investment Manager
By: Alliance Capital Management
Corporation, as General Partner
By: /s/ L. I. Savitri Alex
--------------------------------------
Title: Vice President
-----------------------------------
ELC (CAYMAN) LTD.,
as a Lender
By: /s/ Thomas
--------------------------------------
Title: Managing Director
-----------------------------------
S-9
<PAGE>
ATHENA CDO, LIMITED, as a Lender
By: Pacific Investment Management Company,
as its investment advisor
By: PIMCO Management Inc., a general
partner
By: /s/ Mohan V. Phansalkar
--------------------------------------
Title: Senior Vice President
-----------------------------------
CAPTIVA III FINANCE, LTD., as a Lender,
as advised by Pacific Investment
Management Company
By:
--------------------------------------
Title:
-----------------------------------
DELANO COMPANY, as a Lender
By: Pacific Investment Management Company,
as its investment advisor
By: PIMCO Management Inc., a general
partner
By: /s/ Mohan V. Phansalkar
--------------------------------------
Title: Senior Vice President
-----------------------------------
STEIN ROE & FARNHAM INCORPORATED,
as Agent for KEYPORT LIFE INSURANCE
COMPANY, as a Lender
By:
--------------------------------------
Title:
-----------------------------------
S-10
<PAGE>
STEIN ROE FLOATING RATE LIMITED LIABILITY
COMPANY, as a Lender
By:
--------------------------------------
Title:
-----------------------------------
HIGHLAND CAPITAL MANAGEMENT,
as a Lender
By:
--------------------------------------
Title:
-----------------------------------
CANADIAN IMPERIAL BANK OF COMMERCE, as a
Lender
By:
--------------------------------------
Title:
-----------------------------------
S-11
AMENDMENT NO. 1 TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT (the "Amendment") is made and
entered into as of the 1st day of April 1999, by and between THE PANTRY, INC., a
Delaware corporation (the "Corporation"), and Peter J. Sodini (the "Employee").
W I T N E S S E T H:
WHEREAS, the Corporation has entered into an Employment Agreement with the
Employee dated as of October 1, 1997 (the "Original Agreement"); and
WHEREAS, the Corporation desires to extend the term of such Employment
Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the employment of Employee, the mutual
terms and conditions set forth below, and other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties agree
as follows:
1.Section 1 of the Original Agreement is hereby amended to reflect an
employment term commencing on October 1, 1997 and ending on September 30, 2001.
2. Except as amended hereby, the Original Agreement shall remain in full
force and effect and is hereby ratified and confirmed in all respects.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the
day and year set forth above.
THE PANTRY, INC.
By: /w/ William T. Flyg
------------------------------
William T. Flyg
Senior Vice President,
Chief Financial Officer and
Secretary
/s/ Peter J. Sodini
---------------------------------
Peter J. Sodini
AMENDMENT NO. 1 TO
AMENDED AND RESTATED
STOCKHOLDERS' AGREEMENT
by and among
THE PANTRY, INC.,
FS EQUITY PARTNERS III, L.P.,
FS EQUITY PARTNERS IV, L.P.,
FS EQUITY PARTNERS INTERNATIONAL, L.P.,
CHASE MANHATTAN CAPITAL, L.P.,
CB CAPITAL INVESTORS, L.P.,
BASEBALL PARTNERS
and
PETER J. SODINI
June 1, 1999
<PAGE>
THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
(this "Amendment") is made and entered into as of June 1, 1999 by and among The
Pantry, Inc., a Delaware corporation (the "Company"), FS Equity Partners III,
L.P., a Delaware limited partnership ("FSEP III"), FS Equity Partners IV, L.P.,
a Delaware limited partnership ("FSEP IV"), FS Equity Partners International,
L.P., a Delaware limited partnership ("FSEP International"), Chase Manhattan
Capital, L.P., a Delaware limited partnership as successor-in-interest to Chase
Manhattan Capital Corporation, a Delaware corporation ("CMC"), CB Capital
Investors, L.P., a Delaware limited partnership ("CBC"), Baseball Partners, a
New York general partnership ("BP"), and Peter J. Sodini, an individual
("Sodini").
RECITALS
A. The Company, FSEP III, FSEP International, CMC, CBC, BP and
Sodini entered into an Amended and Restated Stockholders' Agreement dated as of
July 2, 1998 (the "Stockholders' Agreement"); and
B. The Parties wish to amend the Stockholders' Agreement as more
fully set forth below.
A M E N D M E N T
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:
1. Subparagraph (a) of Section 7, Regulatory Compliance Cooperation, is
hereby deleted in its entirety and replaced with the following:
(a) In the event that an SBIC determines that it has a
Regulatory Problem (as defined below), the Company agrees to use
commercially reasonable efforts to take all such actions as are
reasonably requested by such SBIC in order (i) to effectuate and
facilitate any transfer by such SBIC of any Securities (as defined
below) of the Company then held by such SBIC to any Person
designated by such SBIC and approved by the FS Entities (with such
approval not to be unreasonably withheld), (ii) to continue and
preserve the voting interests with respect to the Company arising
out of such SBIC's ownership of voting Securities before the
transfers referred to above (including entering into such additional
agreements as are requested by such SBIC to permit any Person(s)
1
<PAGE>
designated by such SBIC and approved by the FS Entities (with such
approval not to be unreasonably withheld) to exercise any voting
power which is relinquished by such SBIC upon any exchange of voting
Securities for nonvoting Securities of the Company) and (iii)
entering into such additional agreements and taking such additional
actions, in each case as are reasonably requested by such SBIC in
order to effectuate the intent of the foregoing.
If an SBIC elects to transfer Securities of the Company
to a Regulated Holder (as defined below) in order to avoid a
Regulatory Problem, the Company shall enter into such agreements
with such Regulated Holder as it may reasonably request in order to
assist such Regulated Holder in complying with applicable laws,
rules and regulations to which it is subject. Such agreements may
include restrictions on the redemption, repurchase or retirement of
Securities of the Company that would result or be reasonably
expected to result in such Regulated Holder holding more voting
securities or total securities (equity and debt) than it is
permitted to hold under such regulations.
2.Subparagraph (d) of Section 8, Information Rights and Related
Covenants, is hereby deleted in its entirety.
3. Except as amended hereby, the Stockholders' Agreement shall
remain in full force and effect and is hereby ratified and confirmed in all
respects.
4. All capitalized terms not defined herein shall have the meanings
set forth in the Stockholders' Agreement.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by an officer or partner thereunto duly authorized, all as of the date
first written above.
THE PANTRY, INC.,
a Delaware corporation
By: /s/ Peter J. Sodini
-------------------------------------
Peter J. Sodini
President and Chief Executive Officer
FS EQUITY PARTNERS III, L.P.,
a Delaware limited partnership
By: FS Capital Partners, L.P.
Its: General Partner
By: FS Holdings, Inc.
Its: General Partner
By: /s/ Charles P. Rullman
-------------------------
Charles P. Rullman
Title:
-------------------
FS EQUITY PARTNERS IV, L.P.,
a Delaware limited partnership
By: FS Capital Partners LLC
Its: General Partner
By: /s/ Charles P. Rullman
-------------------------------
Charles P. Rullman
Title:
-------------------------
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
3
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
FS EQUITY PARTNERS INTERNATIONAL, L.P.,
a Delaware limited partnership
By: FS&Co. International, L.P.
Its: General Partner
By: FS International Holdings
Limited
Its: General Partner
By: /s/ Charles P. Rullman
-------------------------
Charles P. Rullman
Title:
-------------------
CHASE MANHATTAN CAPITAL, L.P.
a Delaware limited partnership
By: /s/ Christopher M. Behrens
----------------------------------
Christopher M. Behrens
Title:
----------------------------
CB CAPITAL INVESTORS, L.P.,
a Delaware limited partnership
By: CB Capital Investors, Inc.
Its: General Partners
By: /s/ Christopher M. Behrens
-------------------------------
Christopher M. Behrens
Title:
-------------------------
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
4
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
BASEBALL PARTNERS,
a New York general partnership
By: /s/ Christopher M. Behrens
---------------------------
Christopher M. Behrens
General Partner
PETER J. SODINI
/s/ Peter J. Sodini
----------------------------------
Peter J. Sodini
5
AMENDMENT NO. 1
TO
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
by and among
THE PANTRY, INC.,
FS EQUITY PARTNERS III, L.P.,
FS EQUITY PARTNERS IV, L.P.
FS EQUITY PARTNERS INTERNATIONAL, L.P.,
CHASE MANHATTAN CAPITAL, L.P.,
CB CAPITAL INVESTORS, L.P.,
BASEBALL PARTNERS
and
PETER J. SODINI
June 1, 1999
<PAGE>
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
(this "Amendment") is made and entered into as of June 1, 1999 by and between
The Pantry, Inc., a Delaware corporation (the "Company"), FS Equity Partners
III, L.P., a Delaware limited partnership ("FSEP III"), FS Equity Partners IV,
L.P., a Delaware limited partnership ("FSEP IV"), FS Equity Partners
International, L.P., a Delaware limited partnership ("FSEP International;" FSEP
III, FSEP IV and FSEP International are sometimes collectively referred to
herein as the "FS Entities"), Peter J. Sodini, an individual ("Sodini"), Chase
Manhattan Capital, L.P., a Delaware limited partnership, as
successor-in-interest to Chase Manhattan Capital Corporation, a Delaware
corporation ("Chase"), CB Capital Investors, L.P., a Delaware limited
partnership ("CBC"), and Baseball Partners, a New York general partnership
("BP;" Chase, CBC and BP are sometimes collectively referred to herein as the
"Chase Entities"). The FS Entities, the Chase Entities and Sodini are sometimes
collectively referred to as the "Holders" and individually as the "Holder."
R E C I T A L S
A. The Company, FSEP III, FSEP International, Chase, CBC and BP have
previously entered into an Amended and Restated Registration Rights Agreement
(the "Registration Rights Agreement") dated as of July 2, 1998 with respect to
an aggregate of Two Hundred Twenty-Nine Thousand Five Hundred Seven (229,507)
shares of the Company's common stock, par value $0.01 per share (the "Common
Stock"), held by such parties;
B. Section 17 of the Registration Rights Agreement provides that the
Registration Rights Agreement may be amended by written instrument executed by
the Company and the holders of at least fifty percent (50%) of the Registrable
Securities, as defined therein, (i) held by the FSEP III and FSEP International
and (ii) held by the Chase Entities;
C. FSEP III, FSEP International and the Chase Entities collectively own at
least fifty percent (50%) of the Registrable Securities, as defined in the
Registration Rights Agreement, held by each of FSEP III and FSEP International
and the Chase Entities, and hereby desire to amend the Registration Rights
Agreement as more particularly set forth herein; and
D. The Board of Directors of the Company (the "Board") has approved this
Amendment upon the terms and subject to the conditions set forth herein.
<PAGE>
A M E N D M E N T
1. Section 9, Restrictions on Public Sale by the Company and Others,
is hereby amended to read in its entirety as follows:
"The Company shall not effect any public sale or
distribution of any of its equity securities, or cause to be
effected any other registration of such securities (other than
securities issued pursuant to an employee benefit plan), during the
fourteen (14) business days prior to, and during the one hundred
twenty (120)-day period beginning on the effective date of a
registration statement covering the Registrable Securities.
2. The FS Entities, the Chase Entities and Sodini hereby waive any
preemptive rights that may have been granted to any of them under any
registration rights agreement entered into by the Chase Entities and the Company
with respect to any issuance of capital stock or warrants to purchase common
stock by the Company.
3. The parties hereby waive the requirement that the Company cause
each holder of its equity securities after November 30, 1995 to agree not to
effect any public sale or distribution of any securities the during the one
hundred twenty (120)-day period beginning on the effective date of a
registration statement covering Registrable Securities.
4. Except as amended hereby, the Registration Rights Agreement shall
remain in full force and effect and is hereby ratified and confirmed in all
respects.
5. All capitalized terms not defined herein shall have the meanings
set forth in the Registration Rights Agreement.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by an officer or partner thereunto duly authorized, all as of the date
first written above.
THE PANTRY, INC.,
a Delaware corporation
By: /s/ Peter J. Sodini
-------------------------------------
Peter J. Sodini
President and Chief Executive Officer
FS EQUITY PARTNERS III, L.P.,
a Delaware limited partnership
By: FS Capital Partners, L.P.
Its: General Partner
By: FS Holdings, Inc.
Its: General Partner
By: /s/ Charles P. Rullman
-------------------------
Charles P. Rullman
Title:
------------------
FS EQUITY PARTNERS IV, L.P.,
a Delaware limited partnership
By: FS Capital Partners LLC
Its: General Partner
By: /s/ Charles P. Rullman
---------------------------
Charles P. Rullman
Title:
----------------------
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
3
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
FS EQUITY PARTNERS INTERNATIONAL, L.P.,
a Delaware limited partnership
By: FS&Co. International, L.P.
Its: General Partner
By: FS International Holdings
Limited
Its: General Partner
By: /s/ Charles P. Rullman
------------------------
Charles P. Rullman
Title:
------------------
CHASE MANHATTAN CAPITAL, L.P.
a Delaware limited partnership
By: /s/ Christopher M. Behrens
----------------------------
Christopher M. Behrens
Title:
---------------------
CB CAPITAL INVESTORS, L.P.,
a Delaware limited partnership
By: CB Capital Investors, Inc.
Its: General Partners
By: /s/ Christopher M. Behrens
---------------------------
Christopher M. Behrens
Title:
--------------------
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
4
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
BASEBALL PARTNERS,
a New York general partnership
By: /s/ Christopher M. Behrens
----------------------------
Christopher M. Behrens
General Partner
PETER J. SODINI
/s/ Peter J. Sodini
---------------------------------
Peter J. Sodini
5
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1999
<PERIOD-START> MAR-26-1999 SEP-25-1998
<PERIOD-END> JUN-24-1999 JUN-24-1999
<CASH> 61,211 61,211
<SECURITIES> 0 0
<RECEIVABLES> 19,077 19,077
<ALLOWANCES> 395 395
<INVENTORY> 65,822 65,822
<CURRENT-ASSETS> 154,691 154,691
<PP&E> 396,404 396,404
<DEPRECIATION> 10,946 28,776
<TOTAL-ASSETS> 755,800 755,800
<CURRENT-LIABILITIES> 153,012 153,012
<BONDS> 425,270 425,270
0 0
0 0
<COMMON> 181 181
<OTHER-SE> 96,514 96,514
<TOTAL-LIABILITY-AND-EQUITY> 755,800 755,800
<SALES> 456,704 1,132,103
<TOTAL-REVENUES> 456,704 1,132,103
<CGS> 356,273 875,731
<TOTAL-COSTS> 356,273 875,731
<OTHER-EXPENSES> 80,891 216,292
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (10,707) (29,580)
<INCOME-PRETAX> 9,119 10,919
<INCOME-TAX> (3,882) (4,600)
<INCOME-CONTINUING> 5,237 6,314
<DISCONTINUED> 0 0
<EXTRAORDINARY> (27) (3,584)
<CHANGES> 0 0
<NET-INCOME> 5,210 2,730
<EPS-BASIC> 0.31 0.01
<EPS-DILUTED> 0.28 0.00
</TABLE>
