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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 29, 2000
COMMISSION FILE NUMBER 33-72574
THE PANTRY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1574463
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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.
COMMON STOCK, $0.01 PAR VALUE 18,111,474 SHARES
(Class) (Outstanding at August 7, 2000)
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<PAGE>
THE PANTRY, INC.
FORM 10-Q
JUNE 29, 2000
TABLE OF CONTENTS
<TABLE>
<S> <C>
Part I -- Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets............................................. 2
Consolidated Statements of Operations................................... 3
Consolidated Statements of Cash Flows................................... 4
Notes to Consolidated Financial Statements.............................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 31
Part II -- Other Information
Item 6. Exhibits and Reports on Form 8-K.................................. 32
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION.
Item 1. Financial Statements.
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30, June 29,
1999 2000
------------- -----------
(Audited) (Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 31,157 $ 60,725
Receivables (net of allowances for doubtful accounts
of $766 at September 30, 1999 and $1,216 at June
29, 2000).......................................... 24,234 31,325
Inventories (Note 3)................................ 76,237 86,736
Income taxes receivable............................. -- 3,573
Prepaid expenses.................................... 3,497 3,536
Property held for sale.............................. 135 183
Deferred income taxes, net.......................... 4,849 3,702
-------- --------
Total current assets................................ 140,109 189,780
-------- --------
Property and equipment, net.......................... 421,685 450,844
-------- --------
Other assets:
Goodwill (net of accumulated amortization of $18,324
at September 30, 1999 and $23,870 at June 29,
2000).............................................. 197,705 239,290
Deferred financing cost (net of accumulated
amortization of $3,499 at September 30, 1999 and
$4,007 at June 29, 2000)........................... 12,680 12,809
Environmental receivables (Note 4).................. 13,136 11,959
Other noncurrent assets............................. 8,403 10,272
-------- --------
Total other assets.................................. 231,924 274,330
-------- --------
Total assets......................................... $793,718 $914,954
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 5)....... $ 10,687 $ 17,983
Current maturities of capital lease obligations..... 1,205 1,205
Accounts payable.................................... 89,124 115,848
Accrued interest.................................... 9,928 6,996
Accrued compensation and related taxes.............. 8,042 11,534
Income tax payable.................................. 5,004 --
Other accrued taxes................................. 13,834 14,708
Accrued insurance................................... 8,820 6,108
Other accrued liabilities........................... 20,976 15,537
-------- --------
Total current liabilities........................... 167,620 189,919
-------- --------
Long-term debt (Note 5).............................. 430,220 507,812
-------- --------
Other liabilities:
Environmental reserves (Note 4)..................... 15,402 14,182
Deferred income taxes............................... 26,245 32,511
Deferred revenue.................................... 28,729 40,031
Capital lease obligations........................... 13,472 12,621
Employment obligations.............................. 486 114
Other noncurrent liabilities........................ 7,347 7,847
-------- --------
Total other liabilities............................. 91,681 107,306
-------- --------
Commitments and contingencies (Notes 4 and 5)
Shareholders' equity (Note 6 and 7):
Common stock, $.01 par value, 50,000,000 shares
authorized; 18,111,474 issued and outstanding at
September 30, 1999 and at June 29, 2000,
respectively....................................... 182 182
Additional paid-in capital........................... 128,256 128,018
Shareholder loans.................................... (937) (912)
Accumulated deficit.................................. (23,304) (17,371)
-------- --------
Total shareholders' equity.......................... 104,197 109,917
-------- --------
Total liabilities and shareholders' equity........... $793,718 $914,954
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ----------------------
June 24, June 29, June 24, June 29,
1999 2000 1999 2000
---------- ---------- ---------- ----------
(13 weeks) (13 weeks) (39 weeks) (39 weeks)
<S> <C> <C> <C> <C>
Revenues:
Merchandise sales............... $199,085 $238,556 $ 503,047 $ 663,208
Gasoline sales.................. 250,816 397,174 611,733 1,082,997
Commissions..................... 6,803 7,361 17,323 21,385
-------- -------- ---------- ----------
Total revenues.................. 456,704 643,091 1,132,103 1,767,590
Cost of sales:
Merchandise..................... 133,633 160,137 338,458 442,853
Gasoline........................ 222,640 357,412 537,273 985,331
-------- -------- ---------- ----------
Total cost of sales............. 356,273 517,549 875,731 1,428,184
-------- -------- ---------- ----------
Gross profit..................... 100,431 125,542 256,372 339,406
-------- -------- ---------- ----------
Operating expenses:
Operating, general and
administrative expenses........ 69,945 86,537 187,516 248,706
Depreciation and amortization... 10,946 14,347 28,776 41,642
-------- -------- ---------- ----------
Total operating expenses........ 80,891 100,884 216,292 290,348
-------- -------- ---------- ----------
Income from operations........... 19,540 24,658 40,080 49,058
-------- -------- ---------- ----------
Other income (expense):
Interest........................ (10,707) (13,630) (29,580) (38,737)
Miscellaneous................... 286 18 414 274
-------- -------- ---------- ----------
Total other expense............. (10,421) (13,612) (29,166) (38,463)
-------- -------- ---------- ----------
Income before income taxes and
extraordinary loss.............. 9,119 11,046 10,914 10,595
Income tax expense............... (3,882) (4,860) (4,600) (4,662)
-------- -------- ---------- ----------
Income before extraordinary
loss............................ 5,237 6,186 6,314 5,933
Extraordinary loss............... (27) -- (3,584) --
-------- -------- ---------- ----------
Net income....................... $ 5,210 $ 6,186 $ 2,730 $ 5,933
======== ======== ========== ==========
Net income (loss) applicable to
common shareholders (Note 7).... $ 2,473 $ 6,186 $ (1,453) $ 5,933
======== ======== ========== ==========
Earnings per share (Note 7):
Income per share before
extraordinary loss per share-
basic........................... $ 0.19 $ 0.34 $ 0.17 $ 0.33
Extraordinary loss per share-
basic........................... -- -- (0.29) --
-------- -------- ---------- ----------
Earnings per share-basic......... $ 0.19 $ 0.34 $ (0.12) $ 0.33
======== ======== ========== ==========
Income per share before
extraordinary loss per share-
diluted......................... $ 0.18 $ 0.33 $ 0.16 $ 0.31
Extraordinary loss per share-
diluted......................... -- -- (0.27) --
-------- -------- ---------- ----------
Earnings per share-diluted....... $ 0.18 $ 0.33 $ (0.11) $ 0.31
======== ======== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------
June 24, June 29,
1999 2000
---------- ----------
(39 weeks) (39 weeks)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 2,730 $ 5,933
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary loss..................................... 3,405 --
Depreciation and amortization.......................... 28,776 41,640
Provision for deferred income taxes.................... (1,518) 7,413
(Gain) loss on sale of property and equipment.......... (170) 2,188
Reserves for environmental expenses.................... 887 (1,220)
Provision for closed stores............................ -- 484
Changes in operating assets and liabilities, net of
effects of acquisitions:
Receivables............................................ (1,238) (8,128)
Inventories............................................ (9,072) (3,627)
Prepaid expenses....................................... (470) 368
Other noncurrent assets................................ (1,754) 417
Accounts payable....................................... 14,379 19,726
Other current liabilities and accrued expenses......... (6,614) (13,760)
Other noncurrent liabilities........................... (4,595) 9,588
--------- ---------
Net cash provided by operating activities............ 24,746 61,022
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale.................... (125) (1,193)
Additions to property and equipment.................... (33,452) (41,110)
Proceeds from sale of property held for sale........... 1,495 8,685
Proceeds from sale of property and equipment........... 11,163 6,340
Acquisitions of related businesses, net of cash
acquired.............................................. (131,230) (85,962)
--------- ---------
Net cash used in investing activities................ (152,149) (113,240)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases.............. (939) (851)
Principal repayments of long-term debt................. (173,307) (67,112)
Proceeds from issuance of long-term debt............... 275,301 152,000
Redemption of series B preferred stock................. (17,500) --
Net proceeds from initial public offering.............. 72,984 --
Net proceeds from equity issues........................ 1,247 (213)
Other financing costs.................................. (3,576) (2,038)
--------- ---------
Net cash provided by financing activities............ 154,210 81,786
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................ 26,807 29,568
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......... 34,404 31,157
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 61,211 $ 60,725
========= =========
Cash paid during the year:
Interest............................................... $ 37,265 $ 41,669
========= =========
Taxes.................................................. $ 75 $ 13,453
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<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. All intercompany
transactions and balances have been eliminated in consolidation. See "Note 9--
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 29, 2000 and for the three and nine months ended June 29, 2000 and June
24, 1999 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
our Annual Report on Form 10-K for the fiscal year ended September 30, 1999,
our Registration Statement on Form S-1 (No. 333-74221), as amended, our
Current Reports on Form 8-K and 8-K/A, and our Quarterly Reports on Form 10-Q
and 10-Q/A for the period ended December 30, 1999 and our Quarterly Report on
Form 10-Q for the period ended March 30, 2000.
Our results of operations for the three and nine months ended June 29, 2000
and June 24, 1999 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 24, 1998. These acquisitions have been
accounted for under the purchase method. See "Note 2--Business Acquisitions."
Furthermore, the convenience store industry in our 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. We operate on a 52-53 week fiscal
year ending on the last Thursday in September. Our 2000 fiscal year ends on
September 28, 2000 and is a 52 week year while our 1999 fiscal year was 53
weeks.
The Pantry
As of June 29, 2000, we operated approximately 1,281 convenience stores
located in Florida, North Carolina, South Carolina, Tennessee, Georgia,
Kentucky, Indiana, Virginia, and Mississippi. Our 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, money orders,
and other ancillary services. In our Florida, Georgia, Kentucky, Virginia and
Indiana stores, we also sell lottery products. Self-service gasoline is sold
at 1,232 locations, 964 of which sell gasoline under brand names including
Amoco, British Petroleum, Chevron, Citgo, Exxon, Shell, and Texaco.
5
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2 -- Business Acquisitions
Fiscal 2000 Acquisitions:
During the nine months ended June 29, 2000, we acquired the businesses
described below (the "2000 acquisitions"). These acquisitions were accounted
for by the purchase method of accounting:
<TABLE>
<CAPTION>
Number
of
Date Acquired Trade Name Locations Stores
------------------------ -------------- ------------------------------------ ------
<S> <C> <C> <C>
June 29, 2000........... Big K Mississippi 19
April 27, 2000.......... Market Express Sumter, South Carolina 5
January 27, 2000........ On-The-Way North Carolina and Southern Virginia 12
November 11, 1999....... Kangaroo Georgia 49
November 4, 1999........ Cel Oil Charleston, South Carolina 7
October 7, 1999......... Wicker Mart North Carolina 7
Others (less than five
stores)................ Various Florida and South Carolina 5
---
Total....................................................................... 104
===
</TABLE>
Fiscal 1999 Acquisitions:
During fiscal 1999, we acquired the businesses described below (the "1999
acquisitions"). These acquisitions were accounted for by the purchase method
of accounting:
<TABLE>
<CAPTION>
Number
of
Date Acquired Trade Name Locations Stores
------------------------ ------------ --------------------------------------------------- ------
<S> <C> <C> <C>
July 22, 1999........... Depot Food South Carolina and Northern Georgia 53
July 8, 1999............ Food Chief Eastern South Carolina 29
February 25, 1999....... ETNA North Carolina and 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
Others (less than five
stores)................ Various North Carolina and South Carolina 2
---
Total.................................................................................... 297
===
</TABLE>
The purchase price allocations for the 2000 acquisitions are preliminary
estimates, based on available information and certain assumptions management
believes are reasonable. Accordingly, such purchase price allocations are
subject to finalization. Goodwill associated with the 1999 acquisitions and
the 2000 acquisitions is being amortized over 30 years using the straight-line
method.
6
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Purchase prices of 2000 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..................................................... $ 1,464
Inventories..................................................... 6,872
Prepaid expenses................................................ 407
Property held for sale.......................................... 7,136
Property and equipment.......................................... 31,670
Other noncurrent assets......................................... 2,008
-------
Total assets.................................................. 49,557
-------
Liabilities Assumed:
Accounts payable................................................ 6,998
Other current liabilities and accrued expenses.................. 2,039
Other noncurrent liabilities.................................... 1,843
-------
Total liabilities............................................. 10,880
-------
Net tangible assets acquired.................................... 38,677
Goodwill...................................................... 47,285
-------
Total consideration paid, including direct costs, net of
cash acquired.............................................. $85,962
=======
</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, except per share data):
<TABLE>
<CAPTION>
Nine Months Ended
----------------------
June 24, June 29,
1999 2000
---------- ----------
<S> <C> <C>
Total revenues...................................... $1,519,698 $1,828,035
Income before extraordinary loss.................... 4,331 5,817
Net income ......................................... 747 5,817
Net income (loss) applicable to common
shareholders....................................... (3,436) 5,817
Earnings per share applicable to common
shareholders:
Basic:
Income (loss) before extraordinary loss........... $ 0.01 $ 0.32
Extraordinary loss................................ (0.29) --
---------- ----------
Net income (loss)................................. $ (0.28) $ 0.32
========== ==========
Diluted:
Income (loss) before extraordinary loss........... $ 0.01 $ 0.31
Extraordinary loss................................ (0.27) --
---------- ----------
Net income (loss)................................. $ (0.26) $ 0.31
========== ==========
</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 1999 or fiscal 2000,
or of future operations of the combined companies.
7
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3 -- Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out method, except for gasoline inventories for which
cost is determined using the first-in, first-out method. Inventories consisted
of the following (in thousands):
<TABLE>
<CAPTION>
June
September 30, 29,
1999 2000
------------- -------
<S> <C> <C>
Inventories at FIFO cost:
Merchandise........................................... $63,941 $71,400
Gasoline.............................................. 22,431 28,371
------- -------
86,372 99,771
Less adjustment to LIFO cost:
Merchandise........................................... (10,135) (13,035)
------- -------
Inventories at LIFO cost.............................. $76,237 $86,736
======= =======
</TABLE>
Inventories are net of estimated obsolescence reserves of approximately
$200,000 at September 30, 1999 and $270,000 at June 29, 2000.
Note 4 -- Environmental Liabilities and Other Contingencies
As of June 29, 2000, we were contingently liable for outstanding letters of
credit in the amount of $17.5 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 we default 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, for the periods February 1, 1992 to September
26, 1996. For the tax years ending January 26, 1993 through September 26,
1996, we have reached a settlement with the State of North Carolina. Under the
settlement, we will reduce state net economic loss carryforwards and pay
$534,926 in additional tax. The settlement is reflected in the financial
statements as a reduction to state net economic losses, a reduction of
deferred tax assets and the related valuation allowance. We are contesting the
Tennessee assessment and believe that, in the event of a mutual settlement,
the assessment amount and related penalties of approximately $250,000 would be
substantially reduced. Based on this, we believe the outcome of the audits
will not have a material adverse effect on our financial condition or
financial statements.
We are 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, we believe the ultimate outcome of these actions will not have a
material effect on the consolidated financial statements.
Environmental Liabilities and Contingencies
We are subject to various federal, state and local environmental laws. We
make financial expenditures in order to comply with regulations governing
underground storage tanks adopted by federal, state, and local regulatory
agencies. In particular, at the federal level, the Resource Conservation and
Recovery Act of 1976, as amended, requires the EPA to establish a
comprehensive regulatory program for the detection, prevention and cleanup of
leaking underground storage tanks.
Federal and state regulations require us to provide and maintain evidence
that we are taking financial responsibility for corrective action and
compensating third parties in the event of a release from our underground
storage tank systems. In order to comply with the applicable requirements, we
maintain surety bonds in the
8
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
aggregate amount of approximately $900,000 in favor of state environmental
agencies in the states of North Carolina, South Carolina, Georgia and Virgina
and a letter of credit in the aggregate amount of approximately $1.1 million
issued by a commercial bank in favor of state environmental agencies in the
states of Florida, Tennessee, Indiana and Kentucky. We also rely upon the
reimbursement provisions of applicable state trust funds. In Florida, we meet
our financial responsibility requirements by state trust fund coverage through
December 31, 1998. After that time we will meet such requirements through a
combination of private commercial liability insurance and a letter of credit.
In Georgia, we meet our financial responsibility requirements by a combination
of state trust fund coverage, private commercial liability insurance and a
surety bond.
Regulations enacted by the EPA in 1988 established requirements for:
. installing underground storage tank systems;
. upgrading underground storage tank systems;
. taking corrective action in response to releases;
. closing underground storage tank systems;
. keeping appropriate records; and
. maintaining evidence of financial responsibility for taking corrective
action and compensating third parties for bodily injury and property
damage resulting from releases.
These regulations permit states to develop, administer and enforce their own
regulatory programs, incorporating requirements which are at least as
stringent as the federal standards. The Florida rules for 1998 upgrades are
more stringent than the 1988 EPA regulations. We believe our facilities in
Florida meet or exceed such rules. We believe all company-owned underground
storage tank systems are in material compliance with these 1998 EPA
regulations and all applicable state environmental regulations.
State Trust Funds. All states in which we operate or have operated
underground storage tank systems have established trust funds for the sharing,
recovering and reimbursing of certain cleanup costs and liabilities incurred
as a result of releases from underground storage tank systems. These trust
funds, which essentially provide insurance coverage for the cleanup of
environmental damages caused by the operation of underground storage tank
systems, are funded by an underground storage tank registration fee and a tax
on the wholesale purchase of motor fuels within each state. We have paid
underground storage tank registration fees and gasoline taxes to each state
where we operate to participate in these trust programs and we have filed
claims and received reimbursement in North Carolina, South Carolina, Kentucky,
Indiana, Georgia, Florida and Tennessee. The coverage afforded by each state
fund varies but generally provides from $150,000 to $1.0 million per site for
the cleanup of environmental contamination, and most provide coverage for
third-party liabilities. Costs for which we do not receive reimbursement
include:
. the per-site deductible;
. costs incurred in connection with releases occurring or reported to trust
funds prior to their inception;
. removal and disposal of underground storage tank systems; and
. costs incurred in connection with sites otherwise ineligible for
reimbursement from the trust funds.
The trust funds generally require us to pay deductibles ranging from $10,000
to $150,000 per occurrence depending on the upgrade status of our underground
storage tank system, the date the release is discovered/reported and the type
of cost for which reimbursement is sought. The Florida trust fund will not
cover releases first reported after December 31, 1998. We obtained private
coverage for remediation and third party claims arising out of releases
reported after December 31, 1998. We believe that this coverage exceeds
federal and Florida financial responsibility regulations. During the next five
years, we may spend up to $2.2 million for
9
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
remediation. In addition, we estimate that state trust funds established in
our operating areas or other responsible third parties (including insurers)
may spend up to $12.0 million on our behalf. To the extent those third parties
do not pay for remediation as we anticipate, we will be obligated to make such
payments. This could materially adversely affect our financial condition and
results of operations. Reimbursements from state trust funds will be dependent
upon the continued maintenance and continued solvency of the various funds.
Several of the locations identified as contaminated are being cleaned up by
third parties who have indemnified us as to responsibility for cleanup
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.
Note 5 -- Long-Term Debt
At September 30, 1999 and June 29, 2000, long-term debt consisted of the
following (in thousands):
<TABLE>
<CAPTION>
September 30, June 29,
1999 2000
------------- --------
<S> <C> <C>
Senior subordinated notes; 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 (6.18% at June 29, 2000) plus
3.0%; principal due in quarterly installments
through January 31, 2004........................... 70,656 65,406
Term loan facility--Tranche B; interest payable
monthly at LIBOR (6.18% at June 29, 2000) plus
3.5%; principal due in quarterly installments
through January 31, 2006........................... 156,794 180,447
Term loan facility--Tranche C; interest payable
monthly at LIBOR (6.18% at June 29, 2000) plus
3.75%; principal due in quarterly installments
through January 31, 2006........................... -- 74,813
Acquisition facility; interest payable monthly at
LIBOR (6.18% at June 29, 2000) plus 3.5%; principal
due in quarterly installments through January 31,
2004............................................... 12,000 4,000
Revolving credit facility; interest payable monthly
at LIBOR (6.18% at June 29, 2000), plus 3.0%;
principal due January 31, 2004..................... -- --
Notes payable to McLane Company, Inc.; zero (0.0%)
interest, with principal due in annual installments
through February 26, 2003.......................... 1,185 889
Other notes payable; various interest rates and
maturity dates..................................... 272 240
-------- --------
Total long-term debt................................ 440,907 525,795
Less--current maturities............................ (10,687) (17,983)
-------- --------
Long-term debt, net of current maturities........... $430,220 $507,812
======== ========
</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 9--
Supplemental Guarantor Information."
Our 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) term loan
facilities with outstanding borrowings of $320.7 million; and (iii) a $50.0
million acquisition term facility with outstanding borrowings of $4.0 million.
The acquisition facility is available through January 31, 2001 to finance
10
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
acquisitions of related businesses. As of June 29, 2000, total outstanding
borrowings under our bank credit facility, as amended, were $324.7 million.
The annual maturities of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended September:
---------------------
<S> <C>
2000.......................... $ 4,171
2001.......................... 19,650
2002.......................... 23,320
2003.......................... 26,574
2004.......................... 44,072
Thereafter.................... 408,008
--------
Total long-term debt.......... $525,795
========
</TABLE>
As of June 29, 2000, we had $17.5 million in outstanding letters of credit.
As of June 29, 2000, we were in material compliance with all covenants and
restrictions relating to all outstanding borrowings.
As of June 29, 2000, substantially all of our net assets (which includes
those of our subsidiaries) are restricted as to payment of dividends and other
distributions.
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 our initial public offering. 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 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 and $2.4 million was reserved to pay
fees and expenses associated with the IPO.
On June 4, 1999 and in connection with the IPO, we effected a 51-for-1 stock
split of our 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, we adopted a new 1999 stock option plan providing for the
grant of incentive stock options and non-qualified stock options to our
officers, directors, employees and consultants. The plan is administered by
the board of directors or a committee of the board of directors. Options are
granted at prices determined by the board of directors and may be exercisable
in one or more installments. Additionally, the terms and conditions of awards
under the plan may differ from one grant to another. Under the plan, incentive
stock options may only be granted to employees with an exercise price at least
equal to the fair market value of the related common stock on the date the
option is granted. Fair values are based on the most recent common stock
sales. An aggregate of 3,825,000 shares of common stock is reserved for
issuance under the 1999 stock option plan. On June 8, 1999, we granted 200,000
shares to officers and directors. These options will vest in three equal
annual installments, expire in seven years and have an exercise price of
$13.00 per share. See "Note 7--Earnings Per Share."
11
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On August 31, 1998, we 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 fiscal 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 on August 31,
1998 by an equity investment priced in July 1998. In connection with these
sales, we received $722,000 of secured promissory notes receivable, bearing an
interest rate of 8.8%, due August 31, 2003.
Note 7 -- Earnings Per Share
We compute earnings per share data in accordance with the requirements of
Statement of Financial Accounting Standards ("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 (amounts in thousands, except per share
data).
<TABLE>
<CAPTION>
Nine Months
Three Months Ended Ended
--------------------- -----------------
June
June 24, June 29, 24, June 29,
1999 2000 1999 2000
--------- --------- ------- --------
<S> <C> <C> <C> <C>
Net income applicable to common
shareholders:
Net income before extraordinary
loss............................... $ 5,237 $ 6,186 $ 6,314 $5,933
Dividends on preferred stock........ (624) -- (2,070) --
Premium on redemption of preferred
stock.............................. (2,113) -- (2,113) --
--------- --------- ------- ------
Income applicable to common
shareholders before extraordinary
loss............................... $ 2,500 $ 6,186 $ 2,131 $5,933
Extraordinary loss.................. (27) -- (3,584) --
--------- --------- ------- ------
Net income (loss) applicable to
common shareholders................ $ 2,473 $ 6,186 $(1,453) $5,933
========= ========= ======= ======
Earnings per share--basic:
Weighted-average shares
outstanding........................ 12,960 18,111 12,225 18,111
========= ========= ======= ======
Income per share before
extraordinary loss per share--
basic.............................. $ 0.19 $ 0.34 $ 0.17 $ 0.33
Extraordinary loss per share--
basic.............................. -- -- (0.29) --
--------- --------- ------- ------
Net income (loss) per share--basic.. $ 0.19 $ 0.34 $ (0.12) $ 0.33
========= ========= ======= ======
Earnings per share--diluted:
Weighted-average shares
outstanding........................ 12,960 18,111 12,225 18,111
Dilutive impact of options and
warrants outstanding............... 1,166 542 1,163 773
--------- --------- ------- ------
Weighted-average shares and
potential dilutive shares
outstanding........................ 14,126 18,653 13,388 18,884
========= ========= ======= ======
Income per share before extraordinary
loss--diluted........................ $ 0.18 $ 0.33 $ 0.16 $ 0.31
Extraordinary loss per share--
diluted.............................. -- -- (0.27) --
--------- --------- ------- ------
Net income (loss) per share--diluted.. $ 0.18 $ 0.33 $ (0.11) $ 0.31
========= ========= ======= ======
</TABLE>
For the quarter and nine months ended June 29, 2000, 373,110 shares of
common stock were not included in the computation of diluted earnings per
share because the exercise prices of the options to purchase such shares were
greater than the average market price of our common stock for that period and
their inclusion would have been antidilutive.
12
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8 -- Subsequent Events
On July 3, 2000, we acquired certain operating assets of Oates Oil Company.
Oates Oil Company is an operator of convenience stores in South Carolina,
operating 14 stores under the name "MiniMart". The purchase price and the fees
associated with this acquisition were funded with cash on hand.
Note 9 -- Supplemental Guarantor Information
The Pantry's wholly-owned subsidiaries Lil' Champ Food Stores, Inc.,
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 our obligations under our senior
subordinated notes and our bank credit facility.
Management has determined that separate financial statements of the
Guarantors would not be material to investors and, therefore, such financial
statements are not provided. The following supplemental combining financial
statements presents information regarding the Guarantors and The Pantry.
We account for our wholly-owned subsidiaries on the equity basis. Certain
reclassifications have been made to conform all of the financial information
to the financial presentation on a consolidated basis. The principal
eliminating entries eliminate investments in subsidiaries and intercompany
balances and transactions.
13
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING BALANCE SHEETS
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
The Total Total Non-
Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiaries Eliminations Total
-------- ------------ ------------ ------------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 16,446 $ 9,870 $ 4,841 $ -- $ 31,157
Receivables, net....... 34,761 46,179 3,119 (59,825) 24,234
Inventories............ 40,714 35,523 -- -- 76,237
Prepaid expenses....... 2,186 958 353 -- 3,497
Property held for sale,
net................... 135 -- -- -- 135
Deferred income taxes,
net................... 2,220 2,621 8 -- 4,849
-------- -------- ------- --------- --------
Total current assets... 96,462 95,151 8,321 (59,825) 140,109
-------- -------- ------- --------- --------
Investment in
subsidiaries........... 119,590 -- -- (119,590) --
-------- -------- ------- --------- --------
Property and equipment,
net.................... 160,809 244,622 16,254 -- 421,685
-------- -------- ------- --------- --------
Other assets:
Goodwill, net.......... 127,056 70,649 -- -- 197,705
Deferred financing
cost, net............. 12,680 -- -- -- 12,680
Environmental
receivables........... 11,959 1,177 -- -- 13,136
Intercompany notes
receivable............ 248,650 49,705 17,124 (315,479) --
Other noncurrent
assets................ 3,782 4,053 568 -- 8,403
-------- -------- ------- --------- --------
Total other assets..... 404,127 125,584 17,692 (315,479) 231,924
-------- -------- ------- --------- --------
Total assets............ $780,988 $465,357 $42,267 $(494,894) $793,718
======== ======== ======= ========= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Current liabilities:
Current maturities of
long-term debt........ $ 10,370 $ 296 $ 21 $ -- $ 10,687
Current maturities of
capital lease
obligations........... 178 1,027 -- -- 1,205
Accounts payable....... 51,641 34,698 2,919 (134) 89,124
Accrued interest....... 16,060 -- 1 (6,133) 9,928
Accrued compensation
and related taxes..... 4,730 3,310 2 -- 8,042
Income taxes payable... 6,784 12,499 447 (14,726) 5,004
Other accrued taxes.... 5,041 8,793 -- -- 13,834
Accrued insurance...... 3,401 5,419 -- -- 8,820
Other accrued
liabilities........... 36,480 13,846 4,366 (33,716) 20,976
-------- -------- ------- --------- --------
Total current
liabilities........... 134,685 79,888 7,756 (54,709) 167,620
-------- -------- ------- --------- --------
Long-term debt.......... 429,235 889 96 -- 430,220
-------- -------- ------- --------- --------
Other liabilities:
Environmental
reserves.............. 13,010 2,392 -- -- 15,402
Deferred income taxes.. 2,810 21,766 1,669 -- 26,245
Deferred revenue....... 20,705 8,024 -- -- 28,729
Capital lease
obligations........... 4,063 9,409 -- -- 13,472
Employment
obligations........... 486 -- -- -- 486
Intercompany notes
payable............... 68,829 249,715 3,997 (322,541) --
Other noncurrent
liabilities........... 2,968 4,143 36 200 7,347
-------- -------- ------- --------- --------
Total other
liabilities........... 112,871 295,449 5,702 (322,341) 91,681
-------- -------- ------- --------- --------
SHAREHOLDERS' EQUITY:
Common stock........... 182 1 5,001 (5,002) 182
Additional paid-in
capital............... 128,256 6,882 24,212 (31,094) 128,256
Shareholder loans...... (937) -- -- -- (937)
Accumulated earnings
(deficit)............. (23,304) 82,248 (500) (81,748) (23,304)
-------- -------- ------- --------- --------
Total shareholders'
equity................ 104,197 89,131 28,713 (117,844) 104,197
-------- -------- ------- --------- --------
Total liabilities and
shareholders' equity... $780,988 $465,357 $42,267 $(494,894) $793,718
======== ======== ======= ========= ========
</TABLE>
14
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING BALANCE SHEETS
JUNE 29, 2000
<TABLE>
<CAPTION>
The Total Total Non-
Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiaries Eliminations Total
-------- ------------ ------------ ------------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 33,972 $ 24,810 $ 1,943 $ -- $ 60,725
Receivables, net....... 49,003 89,583 4,276 (111,537) 31,325
Inventories............ 48,887 37,849 -- -- 86,736
Income taxes
receivable............ -- 5,643 154 (2,224) 3,573
Prepaid expenses....... 2,533 647 356 -- 3,536
Property held for
sale.................. 183 -- -- -- 183
Deferred income taxes,
net................... 1,575 2,119 8 -- 3,702
-------- -------- ------- --------- --------
Total current assets... 136,153 160,651 6,737 (113,761) 189,780
-------- -------- ------- --------- --------
Investment in
subsidiaries........... 141,264 -- -- (141,264) --
-------- -------- ------- --------- --------
Property and equipment,
net.................... 186,217 248,782 15,845 -- 450,844
-------- -------- ------- --------- --------
Other assets:
Goodwill, net.......... 167,559 71,731 -- -- 239,290
Deferred financing
cost, net............. 12,809 -- -- -- 12,809
Environmental
receivables, net...... 11,959 -- -- -- 11,959
Intercompany notes
receivable............ 253,677 49,705 17,124 (320,506) --
Other noncurrent
assets................ 6,127 3,577 568 -- 10,272
-------- -------- ------- --------- --------
Total other assets..... 452,131 125,013 17,692 (320,506) 274,330
-------- -------- ------- --------- --------
Total assets............ $915,765 $534,446 $40,274 $(575,531) $914,954
======== ======== ======= ========= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Current liabilities:
Current maturities of
long-term debt........ $ 17,665 $ 296 $ 22 $ -- $ 17,983
Current maturities of
capital lease
obligations........... 178 1,027 -- -- 1,205
Accounts payable....... 60,170 55,744 -- (66) 115,848
Accrued interest....... 17,131 -- 1 (10,136) 6,996
Accrued compensation
and related taxes..... 5,573 5,960 1 -- 11,534
Income taxes payable... 1,509 25,097 -- (26,606) --
Other accrued taxes.... 2,613 12,095 -- -- 14,708
Accrued insurance...... 2,960 3,148 -- -- 6,108
Other accrued
liabilities........... 70,051 12,231 123 (66,868) 15,537
-------- -------- ------- --------- --------
Total current
liabilities........... 177,850 115,598 147 (103,676) 189,919
-------- -------- ------- --------- --------
Long-term debt.......... 507,141 592 79 -- 507,812
-------- -------- ------- --------- --------
Other liabilities:
Environmental
reserves.............. 12,290 1,892 -- -- 14,182
Deferred income taxes.. 4,050 26,720 1,741 -- 32,511
Deferred revenue....... 28,849 11,182 -- -- 40,031
Capital lease
obligations........... 3,929 8,692 -- -- 12,621
Employment
obligations........... 114 -- -- -- 114
Intercompany notes
payable............... 68,829 250,263 8,981 (328,073) --
Other noncurrent
liabilities........... 2,796 4,549 502 -- 7,847
-------- -------- ------- --------- --------
Total other
liabilities........... 120,857 303,293 11,224 (328,073) 107,306
-------- -------- ------- --------- --------
SHAREHOLDERS' EQUITY:
Common stock........... 182 1 5,001 (5,002) 182
Additional paid-in
capital............... 128,018 6,882 24,212 (31,094) 128,018
Shareholder loans...... (912) -- -- -- (912)
Accumulated earnings
(deficit)............. (17,371) 108,075 (389) (107,686) (17,371)
-------- -------- ------- --------- --------
Total shareholders'
equity................ 109,917 114,958 28,824 (143,782) 109,917
-------- -------- ------- --------- --------
Total liabilities and
shareholders equity.... $915,765 $534,446 $40,274 $(575,531) $914,954
======== ======== ======= ========= ========
</TABLE>
15
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 24, 1999
<TABLE>
<CAPTION>
Total Total Non-
The Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiaries 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:
Operating, general and
administrative
expenses............. 44,446 33,001 (57) (7,445) 69,945
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 before income
taxes and extraordinary
loss................... 9,119 11,780 91 (11,871) 9,119
Income tax expense...... (3,882) (3,605) (45) 3,650 (3,882)
-------- ------- --- ------- --------
Net income before
extraordinary loss..... 5,237 8,175 46 (8,221) 5,237
Extraordinary loss...... (27) -- -- -- (27)
-------- ------- --- ------- --------
Net income.............. $ 5,210 $ 8,175 $46 $(8,221) $ 5,210
======== ======= === ======= ========
Net income applicable to
common shareholders.... $ 2,473 $ 8,175 $46 $(8,221) $ 2,473
======== ======= === ======= ========
</TABLE>
16
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 29, 2000
<TABLE>
<CAPTION>
Total
Total Non-
The Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------ ------------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $140,402 $98,154 $-- $ -- $238,556
Gasoline sales........ 262,112 135,062 -- -- 397,174
Commissions........... 4,964 2,397 -- -- 7,361
-------- ------- --- -------- --------
Total revenues...... 407,478 235,613 -- -- 643,091
-------- ------- --- -------- --------
Cost of sales:
Merchandise........... 96,086 64,051 -- -- 160,137
Gasoline.............. 235,785 121,627 -- -- 357,412
-------- ------- --- -------- --------
Total cost of
sales.............. 331,871 185,678 -- -- 517,549
-------- ------- --- -------- --------
Gross profit............ 75,607 49,935 -- -- 125,542
-------- ------- --- -------- --------
Operating expenses:
Operating, general and
administrative
expenses............. 63,265 35,317 (58) (11,987) 86,537
Depreciation and
amortization......... 8,615 5,731 1 -- 14,347
-------- ------- --- -------- --------
Total operating
expenses........... 71,880 41,048 (57) (11,987) 100,884
-------- ------- --- -------- --------
Income from operations.. 3,727 8,887 57 11,987 24,658
-------- ------- --- -------- --------
Equity in earnings of
subsidiaries........... 16,331 -- -- (16,331) --
-------- ------- --- -------- --------
Other income (expense):
Interest expense...... (8,923) (6,097) (3) 1,393 (13,630)
Miscellaneous......... (89) 13,487 18 (13,398) 18
-------- ------- --- -------- --------
Total other income
(expense).......... (9,012) 7,390 15 (12,005) (13,612)
-------- ------- --- -------- --------
Income before income
taxes and extraordinary
loss................... 11,046 16,277 72 (16,349) 11,046
Income tax expense...... (4,860) (5,865) (63) 5,928 (4,860)
-------- ------- --- -------- --------
Net income.............. $ 6,186 $10,412 $ 9 $(10,421) $ 6,186
======== ======= === ======== ========
</TABLE>
17
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 24, 1999
<TABLE>
<CAPTION>
The Total Total Non-
Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiaries 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:
Operating, general and
administrative
expenses............. 121,930 84,655 (167) (18,902) 187,516
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.............. (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 before income
taxes and extraordinary
loss................... 10,914 25,282 265 (25,547) 10,914
Income tax expense...... (4,600) (8,322) (134) 8,456 (4,600)
-------- -------- ----- -------- ----------
Net income before
extraordinary loss..... 6,314 16,960 131 $(17,091) 6,314
Extraordinary loss...... (3,584) -- -- -- (3,584)
-------- -------- ----- -------- ----------
Net income.............. $ 2,730 $ 16,960 $ 131 $(17,091) $ 2,730
======== ======== ===== ======== ==========
Net income (loss)
applicable to common
shareholders........... $ (1,453) $ 16,960 $ 131 $(17,091) $ (1,453)
======== ======== ===== ======== ==========
</TABLE>
18
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 29, 2000
<TABLE>
<CAPTION>
Total Total Non-
The Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------ ------------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $ 383,777 $279,431 $ -- $ -- $ 663,208
Gasoline sales........ 705,323 377,674 -- -- 1,082,997
Commissions........... 13,562 7,823 -- -- 21,385
---------- -------- ----- -------- ----------
Total revenues...... 1,102,662 664,928 -- -- 1,767,590
---------- -------- ----- -------- ----------
Cost of sales:
Merchandise........... 260,611 182,242 -- -- 442,853
Gasoline.............. 642,510 342,821 -- -- 985,331
---------- -------- ----- -------- ----------
Total cost of
sales.............. 903,121 525,063 -- -- 1,428,184
---------- -------- ----- -------- ----------
Gross profit............ 199,541 139,865 -- -- 339,406
---------- -------- ----- -------- ----------
Operating expenses:
Operating, general and
Administrative
expenses............. 179,731 101,635 (162) (32,498) 248,706
Depreciation and
amortization......... 24,536 17,102 4 -- 41,642
---------- -------- ----- -------- ----------
Total operating
expenses........... 204,267 118,737 (158) (32,498) 290,348
---------- -------- ----- -------- ----------
Income (loss) from
operations............. (4,726) 21,128 158 32,498 49,058
---------- -------- ----- -------- ----------
Equity in earnings of
subsidiaries........... 39,926 -- -- (39,926) --
---------- -------- ----- -------- ----------
Other income (expense):
Interest expense...... (24,445) (18,287) (7) 4,002 (38,737)
Miscellaneous......... (160) 36,824 129 (36,519) 274
---------- -------- ----- -------- ----------
Total other income
(expense).......... (24,605) 18,537 122 (32,517) (38,463)
---------- -------- ----- -------- ----------
Income before income
taxes.................. 10,595 39,665 280 (39,945) 10,595
Income tax expense...... (4,662) (13,836) (169) 14,005 (4,662)
---------- -------- ----- -------- ----------
Net income.............. $ 5,933 $ 25,829 $ 111 $(25,940) $ 5,933
========== ======== ===== ======== ==========
</TABLE>
19
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 24, 1999
<TABLE>
<CAPTION>
Total Total Non-
The Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------ ------------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income.............. $ 2,730 $ 16,960 $ 131 $(17,091) $ 2,730
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Extraordinary loss.... 3,405 -- -- -- 3,405
Depreciation and
amortization......... 15,215 13,557 4 -- 28,776
Provision for deferred
income taxes......... 462 (1,980) -- -- (1,518)
(Gain) loss on sale of
property and
equipment............ (621) 451 -- -- (170)
Reserves for
environmental
issues............... 941 (54) -- -- 887
Equity earnings of
affiliates........... (17,128) -- -- 17,128 --
Changes in operating
assets and liabilities,
net:
Receivables........... (13,710) (21,421) 18 33,875 (1,238)
Inventories........... (5,343) (3,729) -- -- (9,072)
Prepaid expenses...... (907) 440 (3) -- (470)
Other noncurrent
assets............... (132) (1,629) -- 7 (1,754)
Accounts payable...... 13,120 1,259 -- -- 14,379
Other current
liabilities and
accrued expenses..... 21,664 184 106 (28,568) (6,614)
Other noncurrent
liabilities.......... (2,374) (1,586) (2) (633) (4,594)
---------- --------- ------ -------- ----------
Net cash provided by
operating activities... 17,322 2,452 254 4,718 24,746
---------- --------- ------ -------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale........ (125) -- -- -- (125)
Additions to property
and equipment........ (18,746) (14,706) -- -- (33,452)
Proceeds from sale of
property held for
sale................. 1,495 -- -- -- 1,495
Proceeds from sale of
property and
equipment............ 535 10,628 -- -- 11,163
Intercompany notes
receivable
(payable)............ 6,378 92,834 -- (99,212) --
Acquisitions of
related businesses,
net of cash
acquired............. (144,933) (80,791) -- 94,494 (131,230)
---------- --------- ------ -------- ----------
Net cash provided by
(used in) investing
activities............. (155,396) 7,965 -- (4,718) (152,149)
---------- --------- ------ -------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital
leases............... (174) (765) -- -- (939)
Principal repayments
of long-term debt.... (173,283) (10) (14) -- (173,307)
Proceeds from issuance
of long-term debt.... 275,000 301 -- -- 275,301
Redemption of series B
preferred stock...... (17,500) -- -- -- (17,500)
Net proceeds from
initial public
offering............. 72,984 -- -- -- 72,984
Net proceeds from
equity issue......... 1,247 -- -- -- 1,247
Other financing
costs................ (3,576) -- -- -- (3,576)
---------- --------- ------ -------- ----------
Net cash provided by
(used in) financing
activities............. 154,698 (474) (14) -- 154,210
---------- --------- ------ -------- ----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS....... 16,624 9,943 240 -- 26,807
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. 24,031 6,300 4,073 -- 34,404
---------- --------- ------ -------- ----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 40,655 $ 16,243 $4,313 $ -- $ 61,211
========== ========= ====== ======== ==========
</TABLE>
20
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 29, 2000
<TABLE>
<CAPTION>
Total Total Non-
The Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------ ------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income.............. $ 5,933 $ 25,829 $ 110 $(25,939) $ 5,933
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... 24,536 17,100 4 -- 41,640
Change in deferred
income taxes......... 1,885 5,456 72 -- 7,413
Loss on sale of
property and
equipment............ 938 1,250 -- -- 2,188
Reserves for
environmental
issues............... (720) (500) -- -- (1,220)
Provision for closed
stores............... 484 -- -- -- 484
Equity earnings of
affiliates........... (21,674) -- -- 21,674 --
Changes in operating
assets and liabilities,
net:
Receivables........... (12,884) (47,871) (1,310) 53,937 (8,128)
Inventories........... (1,321) (2,306) -- -- (3,627)
Prepaid expenses...... 60 311 (3) -- 368
Other noncurrent
assets............... (52) 469 -- -- 417
Accounts payable...... 1,531 21,046 (2,919) 68 19,726
Other current
liabilities and
accrued expenses..... 25,302 14,664 (4,691) (49,035) (13,760)
Other noncurrent
liabilities.......... 5,758 3,564 466 (200) 9,588
-------- -------- ------- -------- ---------
Net cash provided by
(used in) operating
activities............. 29,776 39,012 (8,271) 505 61,022
-------- -------- ------- -------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale........ (1,193) -- -- -- (1,193)
Additions to property
and equipment........ (19,681) (21,429) -- -- (41,110)
Proceeds from sale of
property held for
sale................. 8,280 -- 405 -- 8,685
Proceeds from sale of
property and
equipment............ 5,381 959 -- -- 6,340
Intercompany notes
receivable
(payable)............ (5,027) 548 4,984 (505) --
Acquisitions of
related businesses,
net of cash
acquired............. (82,826) (3,136) -- -- (85,962)
-------- -------- ------- -------- ---------
Net cash provided by
(used in) investing
activities............. (95,066) (23,058) 5,389 (505) (113,240)
-------- -------- ------- -------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital
leases............... (134) (717) -- -- (851)
Principal repayments
of long-term debt.... (66,799) (297) (16) -- (67,112)
Proceeds from issuance
of long-term debt.... 152,000 -- -- -- 152,000
Net proceeds from
equity issues........ (213) -- -- -- (213)
Other financing
costs................ (2,038) -- -- (2,038)
-------- -------- ------- -------- ---------
Net cash provided by
(used in) financing
activities............. 82,816 (1,014) (16) -- 81,786
-------- -------- ------- -------- ---------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 17,526 14,940 (2,898) -- 29,568
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. 16,446 9,870 4,841 -- 31,157
-------- -------- ------- -------- ---------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 33,972 $ 24,810 $ 1,943 $ -- $ 60,725
======== ======== ======= ======== =========
</TABLE>
21
<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
consolidated financial statements and notes thereto. Further information is
contained in our Annual Report on Form 10-K for the year ended September 30,
1999, our Registration Statement on Form S-1 (File No. 333-74221), as amended,
our Current Reports on Form 8-K and 8-K/A and our Quarterly Reports on Form
10-Q and 10-Q/A for the period ended December 30, 1999 and our Quarterly
Report on Form 10-Q for the period ended March 30, 2000.
Introduction
The Pantry is the leading convenience store operator in the Southeast and
the second largest independent operator in the United States. As of August 7,
2000, we operate 1,295 stores in nine southeastern states. We currently
operate in selected markets in Florida (519), North Carolina (339), South
Carolina (252), Georgia (57), Kentucky (45), Virginia (30), Indiana (18),
Mississippi (18) and Tennessee (17). Our network of stores offers a broad
selection of merchandise, gasoline and services designed to appeal to the
convenience needs of today's time-constrained consumer.
The key financial highlights of our third quarter include: (i) a net income
increase of 18.7%, to $6.2 million, with diluted earnings per share reaching
33 cents compared to 18 cents a year ago; (ii) a total revenue increase of
40.8%, to $643 million, bringing year-to-date revenues to $1.8 billion, up
56.1% versus last year and; (iii) a comparable store merchandise sales
increase of 5.3%, our eighteenth consecutive quarterly increase. We believe
these results occurred due to several factors including the impact of our core
operating strategies and improving wholesale gasoline market conditions.
Specific elements of our core operating strategy include (i) constantly
monitoring and enhancing our merchandising and in-store execution to increase
same store merchandise sales and gross profit, (ii) enhancing our gasoline
offering in order to increase customer traffic; (iii) selectively expanding
our services offerings to take full advantage of our growing network of
convenient locations; (iv) constantly leveraging this growing network to
reduce product costs and operating expenses; (v) sensibly allocating capital
resources to achieve attractive returns on our investments; and (vi) expanding
our network and increasing market share through acquisitions and new store
development.
In addition, we focus on same store sales and profit growth through
competitive merchandise and gasoline pricing, new service offerings, market-
focused promotions and scheduled store and gasoline remodeling. As part of our
efforts to leverage and continuously improve the management of our retail
network, we constantly evaluate and upgrade our retail information systems.
Finally, we seek to rationally expand our network through acquisition.
Acquisition History
Our acquisition strategy focuses on acquiring convenience stores within or
contiguous to our existing markets. We believe acquiring locations with
demonstrated revenue volume involves lower risk and is an economically
attractive alternative to traditional site selection and new store
development. Through acquisition, we have expanded the geographic scope of our
store network and thus increased the number of potential acquisition
candidates. We are excited about our recent entrance into the state of
Mississippi and the opportunities to expand into this and other contiguous
states in the Southeast. We believe there are a number of attractive
acquisition opportunities in these markets.
We seek to improve the productivity and profitability of acquired stores by
implementing our merchandising and gasoline initiatives, eliminating
duplicative overhead costs, incorporating our retail information systems, and
continuously leveraging our increasing store network to achieve lower product
and supply costs. We believe it takes six to twelve months to fully integrate
and achieve operational and financial improvements at acquired locations.
Subsequent to June 29, 2000, we acquired an additional 15 convenience
stores, bringing our year-to-date acquisitions to approximately 120 stores as
of August 7, 2000. By the end of the fiscal year, we expect to add
approximately 20 stores, increasing our new store count to 140 stores for the
year.
22
<PAGE>
The table below provides information concerning the 2000 acquisitions (as of
June 29, 2000) and the 1999 acquisitions:
Fiscal 2000 Acquisitions:
<TABLE>
<CAPTION>
Number
of
Date Acquired Trade Name Locations Stores
------------------------ -------------- ------------------------------------ ------
<S> <C> <C> <C>
June 29, 2000........... Big K Mississippi 19
April 27, 2000.......... Market Express Sumter, South Carolina 5
January 27, 2000........ On-The-Way North Carolina and Southern Virginia 12
November 11, 1999....... Kangaroo Georgia 49
November 4, 1999........ Cel Oil Charleston, South Carolina 7
October 7, 1999......... Wicker Mart North Carolina 7
Others (less than five
stores)................ Various Florida and South Carolina 5
---
Total....................................................................... 104
===
</TABLE>
Fiscal 1999 Acquisitions:
<TABLE>
<CAPTION>
Number
of
Date Acquired Trade Name Locations Stores
------------------------ ------------ --------------------------------------------------- ------
<S> <C> <C> <C>
July 22, 1999........... Depot Food South Carolina and Northern Georgia 53
July 8, 1999............ Food Chief Eastern South Carolina 29
February 25, 1999....... ETNA North Carolina and 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
Others (less than five
stores)................ Various North Carolina and South Carolina 2
---
Total.................................................................................... 297
===
</TABLE>
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 30, 1999 does not include the
assets and liabilities relating to those acquisitions consummated after
September 30, 1999. As a result, comparisons to prior operating results and
prior balance sheets are materially impacted. We intend to continue our
acquisition strategy and, accordingly, future results may not necessarily be
comparable to historic results.
Results of Operations
Three Months Ended June 29, 2000 Compared to the Three Months Ended June 24,
1999
Total Revenue. Total revenue for the three months ended June 29, 2000 was
$643.1 million compared to $456.7 million for the three months ended June 24,
1999, an increase of $186.4 million or 40.8%. The increase in total revenue is
primarily attributable to the revenue from stores acquired or opened since
June 24, 1999 of $105.2 million, an increase in retail gasoline prices and
same store merchandise sales growth. In the three months ended June 29, 2000,
total revenue increases were inflated by a higher average retail gasoline
gallon price of $1.49 compared to $1.10 for the three months ended June 24,
1999.
Merchandise Revenue. Merchandise revenue for the three months ended June 29,
2000 was $238.6 million compared to $199.1 million during the three months
ended June 24, 1999, an increase of $39.5 million or 19.8%. The increase in
merchandise revenue is primarily attributable to the revenue from stores
acquired or opened since June 24, 1999 of $32.3 million and same store
merchandise sales growth.
23
<PAGE>
Same store merchandise revenue for the quarter increased 5.3% over the
comparable period in 1999. The increase in same store merchandise revenue is
primarily attributable to increased customer traffic, greater average
transaction size and general economic and market conditions. We believe the
increases in store traffic and average transaction size are primarily
attributable to our continued emphasis on up-to-date store merchandising,
store appearance and in-store promotional activity.
Gasoline Revenue and Gallons. Gasoline revenue for the three months ended
June 29, 2000 was $397.2 million compared to $250.8 million during the three
months ended June 24, 1999, an increase of $146.4 million or 58.4%. The
increase in gasoline revenue is primarily attributable to the revenue from
stores acquired or opened since June 24, 1999 of $71.1 million and a $0.39 or
35.5% increase in average gasoline gallon retail prices compared to the three
months ended June 24, 1999.
In the three months ended June 29, 2000, gasoline gallons sold were 267.2
million compared to 227.3 million during the three months ended June 24, 1999,
an increase of 39.9 million gallons or 17.6%. The increase is primarily
attributable to the gasoline sold by stores acquired or opened since June 24,
1999 of 49.9 million, partially offset by a same store gasoline gallon sales
decline of 3.9% during the period. The same store gallon decrease is primarily
attributable to the increase in wholesale gasoline costs and its impact on
average retail price and consumer demand.
Commission Revenue. Commission revenue for the three months ended June 29,
2000 was $7.4 million compared to $6.8 million during the three months ended
June 24, 1999, an increase of $0.6 million or 8.2%. The increase is primarily
attributable to the revenue from stores acquired or opened since June 24, 1999
of $1.7 million partially offset by a decrease in video poker income.
Total Gross Profit. Total gross profit for the third quarter of fiscal 2000
was $125.5 million compared to $100.4 million during the third quarter of
fiscal 1999, an increase of $25.1 million or 25.0%. The increase in gross
profit is primarily attributable to the profits from stores acquired or opened
since June 24, 1999 of $19.2 million, higher gasoline margins and same store
merchandise gross profit increases.
Merchandise Gross Profit and Margin. Merchandise gross profit was $78.4
million for the three months ended June 29, 2000 compared to $65.5 million for
the three months ended June 24, 1999, an increase of $13.0 million or 19.8%.
This increase is primarily attributable to the profits from stores acquired or
opened since June 24, 1999 of $10.2 million and same store profit increases.
Merchandise margin of 32.9% for the three months ended June 29, 2000 was
consistent with the merchandise margin of 32.9% reported for the three months
ended June 24, 1999.
Gasoline Gross Profit and Per Gallon Margin. Gasoline gross profit was $39.8
million for the three months ended June 29, 2000 compared to $28.2 million for
the three months ended June 24, 1999, an increase of $11.6 million or 41.1%.
This increase is primarily attributable to the profits from stores acquired or
opened since June 24, 1999 of $7.2 million as well as higher gasoline margins.
Gasoline gross profit per gallon was $0.149 in the three months ended June 29,
2000 compared to $0.124 for the three months ended June 24, 1999. The increase
in gasoline gross profit per gallon is primarily attributable to improving
retail and wholesale gasoline market conditions.
Operating, General and Administrative Expenses. Operating, general and
administrative expenses for the third quarter of fiscal 2000 totaled $86.5
million compared to $69.9 million for the third quarter of fiscal 1999, an
increase of $16.6 million or 23.7%. The increase in operating, general and
administrative expenses is primarily attributable to the operating and lease
expenses associated with the stores acquired or opened since June 24, 1999 of
$13.1 million. As a percentage of total revenue, these expenses decreased to
13.5% in the three months ended June 29, 2000 from 15.3% in the three months
ended June 24, 1999. As a percentage of merchandise revenue, these expenses
increased to 36.3% from 35.1%.
24
<PAGE>
Income from Operations. Income from operations totaled $24.7 million for the
three months ended June 29, 2000 compared to $19.5 million during the three
months ended June 24, 1999, an increase of $5.1 million or 26.2%. The increase
is attributable to the factors discussed above and is further reduced by a
$3.4 million increase in depreciation and amortization.
EBITDA. EBITDA represents income (loss) before interest expense, income tax
benefit, depreciation and amortization, impairment of long-lived assets, and
extraordinary loss. EBITDA for the three months ended June 29, 2000 totaled
$39.0 million compared to EBITDA of $30.5 million during the three months
ended June 24, 1999, an increase of $8.5 million or 27.9%. 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. EBITDA as defined may not be comparable
to similarly-titled measures reported by other companies. We have included
information concerning EBITDA as one measure of our cash flow and historical
ability to service debt and because we believe investors find this information
useful.
Interest Expense. Interest expense is primarily interest on our senior
subordinated notes and borrowings under our bank credit facility. Interest
expense for the three months ended June 29, 2000 totaled $13.6 million
compared to $10.7 million for the three months ended June 24, 1999, an
increase of $2.9 million or 27.3%. The increase in interest expense is
primarily attributable to the increased borrowings under our bank credit
facility associated with acquisition activity and a general rise in interest
rates.
Income Tax Expense. We recorded income tax expense totaling $4.9 million for
the three months ended June 29, 2000 compared to income tax expense of $3.9
million for the three months ended June 24, 1999. The change in income tax
expense was primarily attributable to the increase in income before income
taxes. 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. Our effective tax
rate was 44.0% for the quarter ending June 29, 2000 compared to 42.6% for the
quarter ending June 24, 1999.
Net Income. The net income for the three months ended June 29, 2000 was $6.2
million compared to net income of $5.2 million for the three months ended June
24, 1999. The increase is attributable to the items discussed above.
Nine Months Ended June 29, 2000 Compared to the Nine Months Ended June 24,
1999
Total Revenue. Total revenue for the nine months ended June 29, 2000 was
$1,767.6 million compared to $1,132.1 million for the nine months ended June
24, 1999, an increase of $635.5 million or 56.1%. The increase in total
revenue is primarily attributable to the revenue from stores acquired or
opened since June 24, 1999 of $403.7 million and same store merchandise sales
growth. In the nine months ended June 29, 2000, total revenue increases were
inflated by a higher average retail gasoline gallon price of $1.38 for the
nine months ended June 29, 2000 compared to $1.03 for the nine months ended
June 24, 1999.
Merchandise Revenue. Merchandise revenue for the nine months ended June 29,
2000 was $663.2 million compared to $503.0 million during the nine months
ended June 24, 1999, an increase of $160.2 million or 31.8%. The increase in
merchandise revenue is primarily attributable to the revenue from stores
acquired or opened since June 24, 1999 of $126.3 million and same store
merchandise sales growth.
Same store merchandise revenue for the nine months ended June 29, 2000
increased 8.4% over the nine months ended June 24, 1999. The increase in same
store merchandise revenue is primarily attributable to increased customer
traffic, higher average transaction size and general economic and market
conditions. We believe 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.
25
<PAGE>
Gasoline Revenue and Gallons. Gasoline revenue for the nine months ended
June 29, 2000 was $1,083.0 million compared to $611.7 million during the nine
months ended June 24, 1999, an increase of $471.3 million or 77.0%. The
increase in gasoline revenue is primarily attributable to the revenue from
stores acquired or opened since June 24, 1999 of $272.2 million and a $0.35 or
34.0% increase in average gasoline gallon retail prices compared to the nine
months ended June 24, 1999.
In the nine months ended June 29, 2000, gasoline gallons sold were 785.4
million compared to 592.6 million during the nine months ended June 24, 1999,
an increase of 192.8 million gallons or 32.5%. The increase is primarily
attributable to the gasoline sold by stores acquired or opened since June 24,
1999 of 207.8 million and was partially offset by a same store gasoline gallon
sales decline for the nine month period of 2.4%. The same store gallon
decrease is primarily attributable to the increase in wholesale gasoline costs
and its impact on average retail price and consumer demand.
Commission Revenue. Commission revenue for the nine months ended June 29,
2000 was $21.4 million compared to $17.3 million during the nine months ended
June 24, 1999, an increase of $4.1 million or 23.4%. The increase is primarily
attributable to the revenue from stores acquired or opened since June 24, 1999
of $5.3 million, partially offset by a decrease in video poker income.
Total Gross Profit. Total gross profit for the nine months ended June 29,
2000 was $339.4 million compared to $256.4 million during the nine months
ended June 24, 1999, an increase of $83.0 million or 32.4%. The increase in
gross profit is primarily attributable to the profits from stores acquired or
opened since June 24, 1999 of $71.0 million and same store merchandise gross
profit increases.
Merchandise Gross Profit and Margin. Merchandise gross profit was $220.4
million for the nine months ended June 29, 2000 compared to $164.6 million for
the nine months ended June 24, 1999, an increase of $55.8 million or 33.9%.
This increase is primarily attributable to the profits from stores acquired or
opened since June 24, 1999 of $43.1 million and same store merchandise gross
profit increases. The increase in merchandise gross margin to 33.2% for the
nine months ended June 29, 2000 from 32.7% for the nine months ended June 24,
1999 is primarily attributable to the addition of higher margin food service
locations, lower product costs and increased vendor rebates.
Gasoline Gross Profit and Per Gallon Margin. Gasoline gross profit was $97.7
million for the nine months ended June 29, 2000 compared to $74.5 million for
the nine months ended June 24, 1999, an increase of $23.2 million or 31.2%.
This increase is primarily attributable to the profits from stores acquired or
opened since June 24, 1999 of $24.1 million, offset by the lower gasoline
margin associated with higher wholesale gasoline costs and the same store
gallon sales decrease noted above. The gasoline gross profit per gallon was
$0.124 in the nine months ended June 29, 2000 compared to $0.126 for the nine
months ended June 24, 1999.
Store Operating, General and Administrative Expenses. Store operating,
general and administrative expenses for the nine months ended June 29, 2000
totaled $248.7 million compared to store operating, general and administrative
expenses of $187.5 million for the nine months ended June 24, 1999, an
increase of $61.2 million or 32.6%. The increase in store operating, general
and adminstrative expenses is primarily attributable to the operating, lease
and administrative expenses associated with the stores acquired or opened
since June 24, 1999 of $52.0 million. As a percentage of total revenue, store
operating, general and administrative expenses decreased to 14.1% in the nine
months ended June 29, 2000 from 16.6% in the nine months ended June 24, 1999.
As a percentage of merchandise revenue, store operating expenses increased to
37.5% from 37.3% for the nine months ended June 24, 1999.
Income from Operations. Income from operations totaled $49.1 million for the
nine months ended June 29, 2000 compared to $40.1 million during the nine
months ended June 24, 1999, an increase of $9.0 million or 22.4%. The increase
is attributable to the factors discussed above and is partially reduced by the
$12.9 million increase in depreciation and amortization.
EBITDA. EBITDA for the nine months ended June 29, 2000 totaled $90.7 million
compared to EBITDA of $68.9 million during the nine months ended June 24,
1999, an increase of $21.8 million or 31.7%. The increase is attributable to
the items discussed above.
26
<PAGE>
Interest Expense. Interest expense is primarily interest on our senior
subordinated notes and borrowings under our bank credit facilities. Interest
expense for the nine months ended June 29, 2000 totaled $38.7 million compared
to $29.6 million for the nine months ended June 24, 1999, an increase of $9.2
million or 31.0%. The increase in interest expense is attributable to
additional borrowings under our bank credit facility associated with
acquisition activity and a general rise in interest rates.
Income Tax Expense. We recorded income tax expense totaling $4.7 million for
the nine months ended June 29, 2000 compared to income tax expense of $4.6
million for the nine months ended June 24, 1999. The change in income tax
expense was primarily attributable to an increase in our effective tax rate.
For the nine months ending June 29, 2000 our effective tax rate was 44.0%
compared to 42.1% in the prior year period. 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. Net income for the nine months ended June 29, 2000 was $5.9
million compared to net income of $2.7 million for the nine months ended June
24, 1999. Net income for fiscal 1999 included an extraordinary loss of $3.6
million related to the write-off of a call premium and deferred financing fees
as a result of the redemption of our senior notes.
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, sale-leaseback transactions, asset dispositions and
equity investments to finance our operations, pay principal and interest on
long-term debt, and fund capital expenditures. We rely on excess cash,
supplemented as necessary from time to time by borrowings under our bank
facilities, to finance acquisitions. Cash provided by operating activities
increased to $61.0 million for the nine months ended June 29, 2000 from $24.7
million for the nine months ended June 24, 1999. We had $60.7 million of cash
and cash equivalents on hand at June 29, 2000.
Fiscal 2000 Acquisitions. For the nine months ended June 29, 2000, we have
acquired a total of 104 convenience stores in eight transactions for
approximately $86.0 million, net of cash acquired. These acquisitions were
funded with borrowings under our bank credit facility and cash on hand.
Capital Expenditures. Capital expenditures (excluding all acquisitions) were
approximately $42.3 million in the nine months ended June 29, 2000 and
approximately $33.6 million in the nine months ended June 24, 1999. Capital
expenditures are primarily expenditures for existing store improvements, store
equipment, new store development, information systems and expenditures to
comply with regulatory statutes, including those related to environmental
matters.
We finance our capital expenditures and new store development through cash
flow from operations, a sale-leaseback program or similar lease activity,
vendor reimbursements and asset dispositions. Our sale-leaseback program
includes the packaging of our owned convenience store real estate, both land
and buildings, for sale to investors in return for their agreement to
leaseback the property to us under long-term leases. Generally, the leases are
operating leases at market rates with initial terms of twenty years with four
five-year renewal options. The lease payments are based on market rates
applied to the cost of each respective property. We retain ownership of all
personal property and gasoline marketing equipment. Our bank credit facility
limits or caps the proceeds of sale-leasebacks that we can use to fund our
operations or capital expenditures. Under our sale-leaseback program, we
received $8.7 million during the nine months ended June 29, 2000. Vendor
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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.
In the nine months ended June 29, 2000, we received approximately $19.5
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 29, 2000 were $22.8 million.
We anticipate net capital expenditures for fiscal 2000 will be in the range of
$30.0 million to $35.0 million.
Long-Term Debt. Our long-term debt consisted primarily of $200.0 million of
senior subordinated notes and $324.7 million outstanding under our bank credit
facility.
Our 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) term loan
facilities with outstanding borrowings of $320.7 million; and (iii) a $50.0
million acquisition term facility with outstanding borrowings of $4.0 million.
The acquisition facility is available through January 31, 2001 to finance
acquisitions of related businesses. As of August 7, 2000, we had $25.0 million
available for borrowing under the revolving credit facility and $46.0 million
available for borrowing under the acquisition term facility.
The interest rates we pay on borrowings under our bank credit facility are
variable and are based, at our option, on either a Eurodollar rate plus a
percentage or a base rate plus a percentage. If we choose the Eurodollar base
rate, we pay 3.0% per year in addition to the Eurodollar base rate for our
revolving credit facility, our acquisition term facility, and our Tranche A
term loan facility. For the Tranche B term loan facility we pay 3.5% per year
in addition to the Eurodollar base rate and for the Tranche C we pay 3.75% 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 and for the Tranche C term loan facility we pay 2.25% per year in
addition to the base rate.
In order to reduce our exposure to interest rate fluctuations we have
entered into interest rate swap arrangements, in which we agree to exchange,
at specified intervals, the difference between fixed and variable interest
amounts calculated by reference to an agreed upon notional amount. The
interest rate differential is reflected as an adjustment to interest expense
over the life of the swaps. On March 2, 1999, we entered into a swap
arrangement with a notional amount of $45 million that fixes our Eurodollar
rate at 5.62% through January 2001. On November 30, 1999, we entered into a
swap arrangement with a notional amount of $50 million that fixes our
Eurodollar rate at 6.28% through November 2001. Effective June 16, 2000 we
entered into two additional swap arrangements with notional amounts of $25.0
million and $50.0 million that fix our Eurodollar rate at 6.96% and 6.90%,
respectively, through June 2003.
On January 31, 2001, all amounts then outstanding under the acquisition term
facility convert into a three year term loan. The Tranche A matures in January
2004, and the Tranche B and Tranche C term loan facilities mature in January
2006. All term loan facilities require quarterly payments of principal with
annual payments of principal totaling approximately $4.2 million in fiscal
2000, $18.6 million in fiscal 2001, $21.6 million in fiscal 2002, $24.9
million in fiscal 2003, $43.4 million in fiscal 2004, $88.6 million in fiscal
2005, and $119.4 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.
Cash Flows from Financing Activities. During the nine months ended June 29,
2000, we used proceeds from our bank credit facility and cash on hand to
finance the 2000 acquisitions, principal repayments and related fees and
expenses.
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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 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 29, 2000, our shareholders' equity totaled
$109.9 million. The $5.7 million increase from September 30, 1999 is primarily
attributable to net income for the period.
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 7, 2000, 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, Georgia 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. We also rely on reimbursements from applicable state
trust funds. In Florida, we also meet such financial responsibility
requirements through a combination of private commercial liability insurance
and a letter of credit. In Georgia, we meet our financial responsibility
requirements by a combination of state trust fund coverage, private commercial
liability insurance and a surety bond.
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 (i) the per-site deductible; (ii) costs incurred in connection with
releases occurring or reported to trust funds prior to their inception; (iii)
removal and disposal of underground storage tank systems; and (iv) costs
incurred in connection with sites otherwise ineligible for reimbursement from
the trust funds. The trust funds generally require us to pay deductibles
ranging from $10,000 to $150,000 per occurrence depending on the upgrade
status of our underground storage tank system, the date the release is
discovered/reported and the type of cost for which reimbursement is sought.
The Florida trust fund will not cover releases first reported after December
31, 1998. We meet Florida financial responsibility requirements for
remediation and third party claims arising out of releases reported after
December 31, 1998 through a combination of private insurance and a letter of
credit. In Georgia, we meet our financial responsibility requirements by a
combination of state trust fund coverage, private commercial liability
insurance and a surety bond.
Environmental reserves of $14.2 million as of June 29, 2000 represent
estimates for future expenditures for remediation, tank removal and litigation
associated with 442 known contaminated sites as a result of 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 trust funds and private insurance. As
of June 29, 2000, amounts which are probable of reimbursement (based on our
experience) from those sources total $12.0 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
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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 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. 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. Although we are not aware of releases or contamination at
other locations where we currently operate or have operated stores, any such
releases or contamination could require substantial remediation 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.
Recently Issued Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts 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, SFAS No. 133 was
amended to defer the effective date to the first fiscal quarter of fiscal
2001. As of June 29, 2000, we have not determined the effect of SFAS No. 133
on our consolidated financial statements, however, we do not believe adoption
of this accounting standard will have a material impact on our financial
condition.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB No. 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the Commission and is
required to be implemented no later than the fourth quarter of fiscal 2000. We
do not believe the adoption of SAB No. 101 will have a material impact on our
financial condition.
Inflation
As reported by the Bureau of Labor Statistics the consumer price index for
the category labeled "cigarettes" increased approximately 33.4% during fiscal
1999 and an additional 10.5% during the nine months ended June 29, 2000. The
largest increase occurred on November 23, 1998, when major cigarette
manufacturers increased prices by $0.45 per pack. In January 2000,
manufacturers raised cigarette prices an additional $0.13 per pack. In
general, we have passed price increases on to our customers. However, during
the period as in previous periods, major cigarette manufacturers periodically
offered rebates to retailers, and we passed along those rebates to our
customers.
During the nine months ended June 29, 2000, wholesale gasoline fuel costs
continued to increase. Average wholesale gasoline costs as quoted on the New
York Mercantile Exchange for the nine month period were $0.82 compared to
$0.45 per gallon for the comparable period in fiscal 1999. New York Mercantile
Exchange cost quotes do not include freight or federal, state and local taxes,
however changes in NYMEX gas closely approximate changes in our direct
wholesale gasoline costs. Generally, we pass along wholesale gasoline cost
changes to our customers through retail price changes. Gasoline price
inflation has had an impact on total revenue, gross profit dollars, gross
margin percentage and gasoline gallons comparable store growth.
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General CPI, excluding energy, increased 2.61% during the nine months ended
June 29, 2000 and food at home, which is most indicative of our merchandise
inventory, increased 1.83%. While we have generally been able to pass along
these and other price increases on to our customers, we can make no assurances
that continued inflation will not have a material adverse effect on our sales
and gross profit dollars.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative Disclosures. We are exposed to market risks inherent in our
financial instruments. These instruments arise from transactions entered into
in the normal course of business and, in some cases, relate to our
acquisitions of related businesses. We are subject to interest rate risk on
our existing long-term debt and any future financing requirements. Our fixed
rate debt consists primarily of outstanding balances on our senior
subordinated notes and our variable rate debt relates to borrowings under our
bank credit facility.
In order to reduce our exposure to interest rate fluctuations, we have
entered into interest rate swap arrangements, in which we agree to exchange,
at specified intervals, the difference between fixed and variable interest
amounts calculated by reference to an agreed upon notional amount. The
interest rate differential is reflected as an adjustment to interest expense
over the life of the swaps. On March 2, 1999, we entered into an interest rate
swap arrangement with a notional amount of $45.0 million that fixes our
Eurodollar rate at 5.62% through January 2001. On November 30, 1999, we
entered into a swap arrangement with a notional amount of $50 million that
fixes our Eurodollar rate at 6.28% through November 2001. Effective June 16,
2000 we entered into two additional swap arrangements with notional amounts of
$25.0 million and $50.0 million that fix our Eurodollar rate at 6.96% and
6.90%, respectively, through June 2003.
The following table presents the future principal cash flows and weighted-
average interest rates expected on our existing long-term debt instruments.
Fair values have been determined based on quoted market prices as of August 7,
2000.
Expected Maturity Date
as of June 29, 2000
(Dollars in Thousands)
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal Fiscal Fiscal Fair
2000 2001 2002 2003 2004 Thereafter Total Value
------ ------- ------- ------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt.......... $4,171 $19,650 $23,320 $26,574 $44,072 $408,008 $525,795 $515,644
Weighted average
Interest rate.......... 10.08% 10.15% 10.25% 10.27% 10.26% 10.27% 10.23%
</TABLE>
Qualitative Disclosures. Our primary exposure relates to:
. interest rate risk on long-term and short-term borrowings,
. our ability to pay or refinance long-term borrowings at maturity at
market rates,
. the impact of interest rate movements on our ability to meet interest
expense and financial covenant requirements, and
. the impact of interest rate movements on our ability to obtain adequate
financing to fund future acquisitions.
We manage interest rate risk on our outstanding long-term and short-term
debt through our use of fixed and variable rate debt. We expect the interest
rate swaps 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.
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PART II--OTHER INFORMATION.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule
99.1 Risk Factors
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 29, 2000.
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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.
Date: August 14, 2000
/s/ WILLIAM T. FLYG
By: _________________________________
William T. Flyg
Senior Vice President Finance and
Secretary
(Authorized Officer and Principal
Financial Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Document
----------- -----------------------
<C> <S>
27.1 Financial Data Schedule
99.1 Risk Factors
</TABLE>
34
