<PAGE>
EXHIBIT 99.1
RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in our common stock. The risks and uncertainties described
below are not the only ones facing us. Additional risks and uncertainties not
presently known to us, or that we currently deem immaterial, may also impair our
business operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
BECAUSE GASOLINE SALES COMPRISE A SUBSTANTIAL PORTION OF OUR REVENUES,
INTERRUPTIONS IN THE SUPPLY OF GASOLINE OR INCREASES IN THE COST OF GASOLINE
COULD ADVERSELY AFFECT OUR BUSINESS
Gasoline profit margins have a significant impact on our earnings because
gasoline revenue has increased as a percentage of our total revenue over the
past three fiscal years. Gasoline revenue has averaged 57.5% of our revenues
during that period. Several factors beyond our control affect the volume of
gasoline we sell and the gasoline profit margins we achieve:
. the supply and demand for gasoline
. any volatility in the wholesale gasoline market
. the pricing policies of competitors in local markets
In addition, increases in the cost of gasoline could adversely affect the
demand for gasoline and our business, financial condition or results of
operations if, as a result, gasoline sales volume is reduced as a result. We
face this particular risk because:
. we typically have no more than a seven-day supply of gasoline
. our gasoline contracts do not guarantee an uninterrupted, unlimited
supply of gasoline in the event of a shortage
Reductions in volume of gasoline sold or our gasoline profit margins could
have a material adverse effect on our results of operations. In addition,
because gasoline sales generate customer traffic to our stores, decreases in
gasoline sales could impact merchandise sales.
IF WE ARE UNABLE TO PASS ALONG PRICE INCREASES OF TOBACCO PRODUCTS TO OUR
CUSTOMERS, OUR BUSINESS COULD BE ADVERSELY AFFECTED BECAUSE TOBACCO SALES
COMPRISE AN LARGE PART OF OUR REVENUES
Sales of tobacco products have averaged approximately 14.0% of our total
revenue over the past three fiscal years. National and local campaigns to
discourage smoking in the United States, as well as increases in taxes on
cigarettes and other tobacco products, may have an adverse effect on our sales
of, and margins for, tobacco products. The consumer price index on tobacco
products increased approximately 16% in fiscal 2000. In general, we have passed
price increases on to our customers, however we cannot assure that we will be
able to do so in the future.
1
<PAGE>
Major cigarette manufacturers periodically offer monthly rebates to
retailers and historically we have passed along these rebates to our customers.
We cannot assure you that major cigarette manufacturers will continue to offer
these rebates or that any resulting increase in prices to our customers will not
have a material adverse effect on our cigarette sales and gross profit dollars.
A reduction in the amount of cigarettes we are able to sell could adversely
affect our business, financial condition and results of operations.
VIOLATIONS OF, OR CHANGES TO, REGULATIONS GOVERNING THE SALE OF TOBACCO AND
ALCOHOL COULD ADVERSELY AFFECT OUR BUSINESS
State laws regulate the sale of alcohol and tobacco products. A violation
or change of these laws could adversely affect our business, financial condition
and results of operations because state and local regulatory agencies have the
power to approve, revoke, suspend or deny applications for, and renewals of,
permits and licenses relating to the sale of these products or to seek other
remedies.
INCREASES IN FEDERAL MINIMUM WAGE RATES COULD ADVERSELY AFFECT OUR BUSINESS
Any appreciable increase in the statutory minimum wage rate would result in
an increase in our labor costs and such cost increase, or the penalties for
failing to comply with such statutory minimums, could adversely affect our
business, financial condition and results of operations.
PROPOSED REGULATIONS, IF ADOPTED, COULD ADVERSELY AFFECT OUR BUSINESS
From time to time, regulations are proposed which, if adopted, could have
an adverse affect on our business, financial condition or results of operations.
One example is the recent call for the introduction of a mandated system of
health insurance. If such a system were adopted and applied to us, our labor
costs could increase significantly and any violations of such regulation could
result in fines or other penalties, which could also adversely affect our
business, financial condition and results of operations.
RECENT ACTION BY THE SOUTH CAROLINA LEGISLATURE BANNING VIDEO POKER HAS HAD AN
ADVERSE AFFECT ON OUR BUSINESS
In 1999, the South Carolina legislature passed a law which makes it illegal
to own or operate video poker machines. Accordingly, effective July 1, 2000,
video poker was banned in South Carolina, which adversely impacted our results
of operations for fiscal 2000. We were able to offset this decline, in part,
with increased commission revenue from fiscal 2000 acquisitions, additional
ancillary services and more favorable vendor contract terms.
OUR GROWTH AND OPERATING RESULTS COULD SUFFER IF WE ARE UNABLE TO IDENTIFY AND
ACQUIRE SUITABLE COMPANIES, OBTAIN FINANCING OR INTEGRATE ACQUIRED STORES OR IF
WE DISCOVER PREVIOUSLY UNDISCLOSED LIABILITIES
An important part of our growth strategy is to acquire other convenience
stores that complement our existing stores or broaden our geographic presence.
From April 1997 through September 2000, we acquired 1,114 convenience stores in
more than 20 transactions. We expect to continue our growth strategy through
acquisitions which, by their nature, involve risks that could cause our actual
growth or operating results to differ compared to our expectations or the
expectations of security analysts. For example:
. We may not be able to identify suitable acquisition candidates or
acquire additional convenience stores on favorable terms.
. Competition for suitable acquisition candidates may increase and could
result in decreased availability or increased price for suitable
acquisition candidates. In addition, it is difficult to anticipate the
timing and availability of acquisition candidates.
. During the acquisition process we may fail or be unable to discover some
of the liabilities of companies or businesses which we acquire.
. We may not be able to obtain the capital necessary, on favorable terms
or at all, to finance our potential acquisitions.
. We may fail to successfully integrate or manage acquired convenience
stores.
. Acquired convenience stores may not perform as we expect or we may not
be able to obtain the cost savings and financial improvements we
anticipate.
2
<PAGE>
WE ARE GROWING RAPIDLY AND OUR FAILURE TO EFFECTIVELY MANAGE OUR GROWTH MAY
ADVERSELY AFFECT OUR BUSINESS
We have grown from total revenue of $384.8 million in fiscal 1996 to $2.4
billion in fiscal 2000. Our ability to manage the growth of our operations will
require us to continue to improve our operational, financial and human resource
management information systems and our other internal systems and controls.
Failure to make these improvements may adversely affect our business, financial
condition and results of operations.
In addition, our growth will increase our need to attract, develop,
motivate and retain both our management and professional employees. The
inability of our management to manage our growth effectively, or the inability
of our employees to achieve anticipated performance or utilization levels, could
have an adverse effect on our business, financial condition and results of
operations.
RESTRICTIVE COVENANTS IN OUR DEBT AGREEMENTS MAY RESTRICT OUR ABILITY TO
IMPLEMENT OUR GROWTH STRATEGY, RESPOND TO CHANGES IN INDUSTRY CONDITIONS, SECURE
ADDITIONAL FINANCING OR ENGAGE IN ACQUISITIONS
Restrictive covenants contained in our existing bank credit facility and
indenture could limit our ability to finance future acquisitions, new locations
and other expansion of our operations. Credit facilities entered into in the
future likely will contain similar restrictive covenants. These covenants may
require us to achieve specific financial ratios and to obtain lender consent
prior to completing acquisitions. Any of these covenants could become more
restrictive in the future. Our ability to respond to changing business
conditions and to secure additional financing may be restricted by these
covenants. We also may be prevented from engaging in transactions, including
acquisitions which are important to our growth strategy. Any breach of these
covenants could cause a default under our debt obligations and result in our
debt becoming immediately due and payable which would adversely affect our
business, financial condition and results of operations.
WE DEPEND ON ONE PRINCIPAL SUPPLIER FOR THE MAJORITY OF OUR MERCHANDISE AND LOSS
OF THIS SUPPLIER COULD HAVE AN ADVERSE IMPACT ON OUR COST OF GOODS AND OUR
BUSINESS
We purchase over 50% of our general merchandise, including most tobacco
products and grocery items, from a single wholesale grocer, McLane Company,
Inc., a wholly-owned subsidiary of Wal-Mart. In addition, McLane supplies health
and beauty aids, toys and seasonal items to all of our stores. We have a
contract with McLane until 2003, but we may not be able to renew the contract
upon expiration. We believe that our arrangements with vendors, including
McLane, have enabled us to decrease the operating expenses of acquired companies
after we complete an acquisition. Therefore, a change of suppliers could have a
material adverse affect on our cost of goods and business, financial condition
and results of operations.
WE ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL REGULATION, AND INCREASED REGULATION
OR OUR FAILURE TO COMPLY WITH EXISTING REGULATIONS COULD REQUIRE SUBSTANTIAL
CAPITAL EXPENDITURES OR AFFECT OUR BUSINESS
Our business is subject to extensive environmental requirements,
particularly environmental laws regulating underground storage tanks. Compliance
with these regulations may require significant capital expenditures.
Federal, state and local regulations governing underground storage tanks
were phased in over a period ending in December 1998. These regulations required
us to make expenditures for compliance with corrosion protection and leak
detection requirements and required spill/overfill equipment by December 1998.
We believe we are in compliance with the December 1998 upgrade requirements.
Failure to comply with any environmental regulations or an increase in
regulations could affect our business, financial condition and results of
operations.
WE MAY INCUR SUBSTANTIAL LIABILITIES FOR REMEDIATION OF ENVIRONMENTAL
CONTAMINATION AT OUR LOCATIONS
Under various federal, state and local laws, ordinances and regulations, we
may, as the owner or operator of our locations, be liable for the costs of
removal or remediation of contamination at these or our former locations,
whether or not we knew of, or were responsible for, the presence of such
contamination. The failure to properly remediate such contamination may subject
us to liability to third parties and may adversely affect our ability to sell or
rent such property or to borrow money using such property as collateral.
Additionally, persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs of removal or remediation of
such substances at sites where they are located, whether or not such site is
3
<PAGE>
owned or operated by such person. Although we do not typically arrange for the
treatment or disposal of hazardous substances, we may be deemed to have arranged
for the disposal or treatment of hazardous or toxic substances and, therefore,
may be liable for removal or remediation costs, as well as other related costs,
including governmental fines, and injuries to persons, property and natural
resources.
We estimate that our future expenditures for remediation of current
locations net of reimbursements will be approximately $1.2 million for which
reserves have been established on our financial statements. In addition, The
Pantry estimates that up to $12.8 million may be expended for remediation on our
behalf by state trust funds established in our operating areas or other
responsible third parties including insurers. To the extent third parties do not
pay for remediation as we anticipate, we will be obligated to make these
payments, which could materially adversely affect our financial condition and
results of operations.Reimbursements from state trust funds will be dependent on
the continued viability of these funds.
We may incur additional substantial expenditures for remediation of
contamination that has not been discovered at existing locations or locations
which we may acquire in the future. We cannot assure you that we have identified
all environmental liabilities at all of our current and former locations; that
material environmental conditions not known to us do not exist; that future
laws, ordinances or regulations will not impose material environmental liability
on us; or that a material environmental condition does not otherwise exist as to
any one or more of our locations.
THE LARGE AMOUNT OF OUR TOTAL OUTSTANDING DEBT AND OUR OBLIGATION TO SERVICE
THAT DEBT COULD DIVERT NECESSARY FUNDS FROM OPERATIONS, LIMIT OUR ABILITY TO
OBTAIN FINANCING FOR FUTURE NEEDS AND EXPOSE US TO INTEREST RATE RISKS
We are highly leveraged, which means that the amount of our outstanding
debt is large compared to the net book value of our assets, and have substantial
repayment obligations under our outstanding debt. As of September 28, 2000 we
had:
. Total consolidated debt including capital lease obligations of
approximately $541.4 million
. Shareholders' equity of approximately $118.0 million
As of September 28, 2000, our borrowing availability under our bank credit
facility was approximately $68.0 million.
Our bank credit facility contains numerous financial and operating
covenants that limit our ability, and the ability of most of our subsidiaries,
to engage in activities such as acquiring or disposing of assets, engaging in
mergers or reorganizations, making investments or capital expenditures and
paying dividends. These covenants require that we meet interest coverage, net
worth and leverage tests. The indenture governing our senior subordinated notes
and our bank credit facility permit us and our subsidiaries to incur or
guarantee additional debt, subject to limitations.
Our level of debt and the limitations imposed on us by our debt agreements
could have other important consequences to our shareholders, including the
following:
. We will have to use a portion of our cash flow from operations for debt
service, rather than for our operations or to implement our growth
strategy
. We may not be able to obtain additional debt financing for future
working capital, capital expenditures, acquisitions or other corporate
purposes
. We are vulnerable to increases in interest rates because the debt under
our bank credit facility is at a variable interest rate and although in
the past we have on occasion entered into certain hedging instruments in
an effort to curb our interest rate risk, we cannot assure you that we
will continue to do so, on favorable terms or at all, in the future
4
<PAGE>
CHANGES IN TRAFFIC PATTERNS AND THE TYPE, NUMBER AND LOCATION OF COMPETING
STORES COULD RESULT IN THE LOSS OF CUSTOMERS AND A CORRESPONDING DECREASE IN
REVENUES FOR AFFECTED STORES
The convenience store and retail gasoline industries are highly competitive
and we may not be able to compete successfully. Changes in traffic patterns and
the type, number and location of competing stores could result in the loss of
customers and a corresponding decrease in revenues for affected stores. Major
competitive factors include, among others, location, ease of access, gasoline
brands, pricing, product and service selections, customer service, store
appearance, cleanliness and safety. In addition, inflation, increased labor and
benefit costs and the lack of availability of experienced management and hourly
employees may adversely affect the profitability of the convenience store
industry. Any or all of these factors could create heavy competitive pressures
and have an adverse affect on our business, financial condition and results of
operations.
The Pantry competes with numerous other convenience stores and
supermarkets. In addition, our stores offering self-service gasoline compete
with gasoline service stations and, more recently, supermarkets. Our stores also
compete to some extent with supermarket chains, drug stores, fast food
operations and other similar retail outlets. In some of our markets our
competitors have been in existence longer and have greater financial, marketing
and other resources than us. As a result, our competitors may be able to respond
better to changes in the economy and new opportunities in our industry.
BECAUSE SUBSTANTIALLY ALL OF OUR STORES ARE LOCATED IN THE SOUTHEASTERN UNITED
STATES, OUR REVENUES COULD SUFFER IF THE ECONOMY OF THAT REGION DETERIORATES
Substantially all of our stores are located in the Southeast region of the
United States. As a result, our results of operations are subject to general
economic conditions in that region. In the event of an economic downturn in the
Southeast, our business, financial condition and results of operations could be
adversely impacted.
UNFAVORABLE WEATHER CONDITIONS IN THE SPRING AND SUMMER MONTHS COULD ADVERSELY
AFFECT OUR BUSINESS
Weather conditions in our operating area impact our business, financial
condition and results of operations. During the spring and summer vacation
season, customers are more likely to purchase higher profit margin items at our
stores, such as fast foods, fountain drinks and other beverages, and more
gasoline at our gasoline locations. As a result, we typically generate higher
revenues and gross margins during warmer weather months in the Southeast, which
fall within our third and fourth quarters. If weather conditions are not
favorable during these periods, our operating results and cash flow from
operations could be adversely affected.
In addition, approximately 37% of our stores are concentrated in coastal
areas in the southeastern United States, and are therefore exposed to damage
associated with hurricanes, tropical storms and other weather conditions in
these areas.
IF OUR HISTORY OF LOSSES CONTINUES, WE MAY BE UNABLE TO COMPLETE OUR GROWTH
STRATEGY AND FINANCING PLANS
We have experienced losses during two out of our most recent four fiscal
years. Our net losses were $1.0 million in fiscal 1997 and $3.3 million in
fiscal 1998. In fiscal 1999, we had net income of $10.4 million and in fiscal
2000 we had net income of $14.0 million. We incurred interest expense of $28.9
million in fiscal 1998, $41.3 million in fiscal 1999 and $52.3 million in fiscal
2000. We also incurred an extraordinary loss of $8.0 million in fiscal 1998 and
$3.6 million (net of taxes) in fiscal 1999, in each case related to the early
extinguishment of debt.
If we incur net losses in future periods, we may not be able to implement
our growth strategy in accordance with our present plans. Continuation of our
net losses may also require us to secure additional financing sooner than
anticipated. Such financing may not be available in sufficient amounts, or on
terms acceptable to us, and may dilute existing shareholders. If we do achieve
profitability, we may not sustain or increase profitability in the future. This
may, in turn, cause our stock price to decline.
THE INTERESTS OF fREEMAN SPOGLI & CO., OUR CONTROLLING STOCKHOLDER, MAY CONFLICT
WITH OUR INTERESTS AND THE INTERESTS OF OUR OTHER STOCKHOLDERS
As a result of its stock ownership and board representation, Freeman Spogli
will be in a position to affect our corporate actions such as mergers or
takeover attempts in a manner that could conflict with the interests of our
other stockholders. As of December 12, 2000, Freeman Spogli owns 10,329,524
shares of common stock and warrants to purchase 2,346,000 shares of common
stock, or approximately 62.0% of our common stock on a fully diluted basis. In
addition, four of the seven members of our board of directors are
representatives of Freeman Spogli.
5
<PAGE>
BECAUSE WE DEPEND ON OUR SENIOR MANAGEMENT'S EXPERIENCE AND KNOWLEDGE OF OUR
INDUSTRY, WE WOULD BE ADVERSELY AFFECTED IF SENIOR MANAGEMENT LEFT THE pANTRY
We are dependent on the continued efforts of our senior management team,
including our President and Chief Executive Officer, Peter Sodini. Mr. Sodini's
employment contract terminates in September 2001. If, for any reason, our senior
executives do not continue to be active in management, our business, financial
condition or results of operations could be adversely affected. We cannot assure
you that we will be able to attract and retain additional qualified senior
personnel as needed in the future. In addition, we do not maintain key personnel
life insurance on our senior executives and other key employees.
FUTURE SALES OF ADDITIONAL SHARES INTO THE MARKET MAY DEPRESS THE MARKET PRICE
OF THE COMMON STOCK
If our existing stockholders sell shares of common stock in the public
market, including shares issued upon the exercise of outstanding options and
warrants, or if the market perceives such sales could occur, the market price of
our common stock could decline. These sales also might make it more difficult
for us to sell equity or equity-related securities in the future at a time and
price that we deem appropriate or to use equity as consideration for future
acquisitions.
As of September 28, 2000, there are 18,111,474 outstanding shares of our
common stock outstanding. Of these shares, 6,250,000 shares are freely tradable.
12,627,951 shares are held by affliliates investment funds of Freeman Spogli and
affiliates of Chase Manhattan Capital Corporation, who may be deemed to be
affiliates of The Pantry. Pursuant to Rule 144 under the Securities Act of 1993,
as amended, affiliates of The Pantry can resell up to 1% of the aggregate
outstanding common stock during any three months period. In addition, Freeman
Spogli and Chase Capital have registration rights allowing them to require us
to register the resale of their shares. If Freeman Spogli and Chase Capital
exercise their registration rights and sell shares of common stock in the public
market, the market price of our common stock could decline.
OUR CHARTER INCLUDES PROVISIONS WHICH MAY HAVE THE EFFECT OF PREVENTING OR
HINDERING A CHANGE IN CONTROL AND ADVERSELY AFFECTING THE MARKET PRICE OF OUR
COMMON STOCK
Our certificate of incorporation gives our board of directors the authority
to issue up to five million shares of preferred stock and to determine the
rights and preferences of the preferred stock, without obtaining shareholder
approval. The existence of this preferred stock could make more difficult or
discourage an attempt to obtain control of The Pantry by means of a tender
offer, merger, proxy contest or otherwise. Furthermore, this preferred stock
could be issued with other rights, including economic rights, senior to our
common stock, and, therefore, issuance of the preferred stock could have an
adverse affect on the market price of our common stock. We have no present plans
to issue any shares of our preferred stock.
Other provisions of our certificate of incorporation and bylaws and of
Delaware law could make it more difficult for a third party to acquire us or
hinder a change in management even if doing so would be beneficial to our
shareholders. These governance provisions could affect the market price of our
common stock.
We may, in the future, adopt other measures that may have the effect of
delaying, deferring or preventing an unsolicited takeover, even if such a change
in control were at a premium price or favored by a majority of unaffiliated
shareholders. These measures may be adopted without any further vote or action
by our shareholders.
6
