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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 28, 2000
Commission File Number 33-72574
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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)
P.O. Box 1410
1801 Douglas Drive
Sanford, North Carolina
27331-1410
(Address of principal executive offices)
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Registrant's telephone number, including area code: (919) 774-6700
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
common stock, $.01 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting common stock held by non-
affiliates of the registrant as of December 12, 2000 was $29,630,628.
As of December 12, 2000, there were issued and outstanding 18,111,474
shares of the registrant's common stock.
Documents Incorporated by Reference
<TABLE>
<CAPTION>
Document Where Incorporated
-------- ------------------
<S> <C>
1. Proxy Statement for the Annual Meeting of Stockholders Part III
to be held March 22, 2001
</TABLE>
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THE PANTRY, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
Page
Part I ----
<S> <C> <C>
Item 1: Business............................................................................... 1
Item 2: Properties............................................................................. 11
Item 3: Legal Proceedings...................................................................... 11
Item 4: Submission of Matters to a Vote of Security Holders.................................... 12
Part II
Item 5: Market for Our Common Equity and Related Stockholder Matters........................... 12
Item 6: Selected Financial Data................................................................ 13
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.. 15
Item 7A: Quantitative and Qualitative Disclosures About Market Risk............................. 25
Item 8: Consolidated Financial Statements and Supplementary Data............................... 26
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 66
Part III
Item 10: Our Directors and Executive Officers................................................... 66
Item 11: Executive Compensation................................................................. 66
Item 12: Security Ownership of Certain Beneficial Owners and Management......................... 66
Item 13: Certain Relationships and Related Transactions......................................... 66
Part IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 67
</TABLE>
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PART I
This Annual Report on Form 10-K contains forward-looking statements. We have
tried, wherever possible, to identify forward-looking statements by using words
such as "anticipate," "believe," "estimate," "expect," "intend," and similar
expressions. The forward-looking statements contained in this report, which
have been based on our current expectations and projections about future events
and which are subject to numerous risks, uncertainties, and assumptions about
The Pantry, our industry, and related economic conditions, include without
limitation:
. Our anticipated growth strategy, which includes our strategy to increase
our store base through acquisition
. Anticipated trends in our businesses
. Future expenditures for capital projects, including the cost of
environmental regulatory compliance
. Our ability to pass along gasoline and cigarette price increases to our
customers without a corresponding decrease in sales and grass profit
. Our ability to control costs, including our ability to achieve cost
savings in connection with our acquisitions
The forward-looking statements contained in this report are subject to
numerous risks and uncertainties, including without limitation, risks related
to:
. Future economic trends, including interest rate movements and general
business conditions in the Southeast
. The intense competition in the convenience store and retail gasoline
industries
. Our planned growth strategies, including our strategy to grow through
acquisition
. Our dependence on gasoline and tobacco sales
. The concentration of our stores in the southeastern United States
. Our dependence on favorable weather conditions in spring and summer
months
. Our rapid growth and our related ability to control costs and achieve
cost savings in connection with our acquisitions
. The extensive governmental regulation of our business, including various
environmental, federal, state and local regulations
. Our dependence on one principal wholesaler
. Control of The Pantry by one principal stockholder
. Dependence on senior management
. Other factors identified in Exhibit 99.1 to this Annual Report on Form
10-K
As a result of these and other risks, actual results may differ from the
forward-looking statements included in this Annual Report on Form 10-K.
Item 1. Business
General
The Pantry, Inc., founded in 1967, is a leading operator of convenience
stores in the Southeast. As of September 28, 2000, we operated 1,313
convenience stores under the names "The Pantry(R)," "Lil' Champ(R)," "Quick
Stop(R)," "Depot," "Food Chief(R)," "Express Stop(R)," "Dash N," "Smokers
Express(R)," "ETNA", "Kangaroo," "Handy Way," "Market Express," "Mini Mart,"
"Big K," "On-The-Way," "Zip Mart," "Wicker Mart," and "Sprint(TM)" located
throughout North and South Carolina, Florida, western Kentucky, Tennessee,
Virginia, southern Indiana, Georgia and Mississippi. Our stores offer a broad
selection of merchandise and services designed to appeal to the convenience
needs of our customers, including tobacco products, beer, soft drinks, self-
service fast food and beverages, publications, dairy products, groceries,
health and beauty aids, video games and money orders. We also sell lottery
products in our Kentucky, Virginia, Indiana and Georgia stores. We also sell
self-service gasoline at 1,267 Pantry stores, 1,008 which sell gasoline under
brand names including
1
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Amoco(R), British Petroleum ("BP")(R), Chevron(R), Citgo(R), Exxon(R),
Shell(R) and Texaco(R). Since 1996, merchandise sales (including commissions
from services) and gasoline sales have each averaged approximately 43.4% and
56.6% of total revenues, respectively.
During 1996, Freeman Spogli & Co. and Chase Manhattan Capital Corporation
acquired a controlling interest in our stock through a series of transactions
which included the purchase of common stock from certain stockholders and the
purchase of newly issued common and preferred stock. The table below shows the
number, types and overall beneficial ownership percentage of our outstanding
securities owned by Freeman Spogli & Co. and Chase as of December 12, 2000:
<TABLE>
<CAPTION>
Percentage Beneficial
Name Number and type of securities owned Ownership
---- ----------------------------------- ---------------------
<S> <C> <C>
Freeman Spogli & Co. 10,329,524 shares of common stock and warrants 62.0%(1)
to purchase 2,346,000 shares of common stock
Chase (and its 12.7%
affiliates) 2,298,438 shares of common stock
</TABLE>
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(1) Including shares underlying warrants.
Operations
For a discussion of our fiscal year 2000 operating results, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In fiscal year 2000, we acquired or opened 145 convenience stores located
in North Carolina, South Carolina, Florida, Georgia, Mississippi and Virginia.
In addition, we closed 47 convenience stores. The net increase in store count
and timing of these acquisitions materially impacted our results of operations
and comparisons to prior periods. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
We believe our results continue to be driven by three key operating
principles:
. the consistent execution of our core strategies, including focused
attention on leveraging the quality and quantity of our growing retail
network,
. our research and investment in new programs, particularly in the
services sector, and
. sensible store growth in existing and contiguous markets.
Merchandise Sales. For the year ended September 28, 2000, our merchandise
sales were 37.3% of total revenues. The following table highlights certain
information with respect to our merchandise sales for the last five fiscal
years:
<TABLE>
<CAPTION>
Fiscal Year Ending
-------------------------------------------------
Sept. 26, Sept. 25, Sept. 24, Sept. 30, Sept. 28,
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Merchandise sales (in
millions)................ $188.1 $202.4 $460.8 $731.7 $907.6
Average merchandise sales
per store (in
thousands)............... $481.1 $525.8 $533.3 $666.4 $713.8
Comparable store
merchandise sales
increase................. 2.8% 8.5% 5.3% 9.6% 7.5%
Merchandise gross margins
(after purchase rebates,
markdowns, inventory
spoilage, inventory
shrink and LIFO
reserve)................. 33.0% 34.4% 34.0% 33.1% 33.6%
</TABLE>
The increase in average merchandise sales per store is primarily due to the
addition of acquired stores which on average have comparatively higher
merchandise volume and fiscal year 2000 comparable store merchandise growth of
7.5%.
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Based on merchandise purchase and sales information, we estimate category
sales as a percentage of total sales for the last five fiscal years as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
-------------------------------------------------
Sept. 26, Sept. 25, Sept. 24, Sept. 30, Sept. 28,
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Tobacco products......... 25.2% 26.6% 27.6% 34.1% 37.2%
Beer and wine............ 14.5 15.1 17.2 16.6 16.8
Packaged beverages....... 13.8 17.0 16.0 15.2 14.2
Self-service fast foods
and beverages........... 7.4 7.1 6.5 5.5 5.5
General merchandise,
health and beauty care.. 6.0 6.3 6.4 6.6 6.9
Candy.................... 5.0 5.0 4.6 3.9 3.5
Salty snacks............. 4.5 4.4 4.5 4.1 3.8
Newspapers and
magazines............... 5.7 5.2 3.8 3.0 2.3
Dairy products........... 2.8 2.9 3.5 3.6 3.1
Bread and cakes.......... 2.3 2.2 2.1 1.9 2.4
Grocery and other
merchandise............. 12.8 8.2 7.8 5.5 4.3
----- ----- ----- ----- -----
Total.................. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
The increase in tobacco products is primarily due to an increase in retail
prices following significant cost increases and increases in our average unit
volume per store. Cigarette prices increased 16.2% during fiscal 2000. In
general, we have passed price increases to our customers. However, during
fiscal 2000 as in years past, major cigarette manufacturers offered rebates to
retailers, and we passed along these rebates to our customers. We make no
assurances that major cigarette manufacturers will continue to offer these
rebates or that any resulting increase in prices to our customers will not
have a material adverse effect on our cigarette sales and gross profit
dollars.
As of September 28, 2000, we operated quick service restaurants or food
service locations within 214 of our locations. In 154 of these stores, we
offer products from nationally branded food franchises including Subway(R),
Taco Bell(R), Aunt M's, Papa G's Pizza and Subs(R), Hardee's(R), Noble
Roman's(R), TCBY(R), Blimpie(R), Chester Fried(R), Church's(R), Hot Stuff(R),
Bullets(R), Dairy Queen(R), A&W Root Beer(R), Pizza Hut(R), Sobicks Subs(TM),
Long John Silver's(R), Baskin-Robbins(R), Bojangles(R), and Krystal(R). In
addition, we offer a variety of proprietary food service programs featuring
breakfast biscuits, fried chicken, deli and other hot food offerings in 60 of
our locations.
We purchase over 50% of our merchandise from a single wholesale grocer,
McLane Company, Inc. We purchase the products at McLane's cost plus an agreed
upon percentage, reduced by any promotional allowances and volume rebates
offered by manufacturers and McLane. In addition, we receive per store annual
service allowances from McLane which are amortized over the remaining term of
the agreement, which is four years.
McLane may terminate the agreement upon a default in payment or if we
become insolvent. However, we believe there are adequate alternative sources
available to purchase this merchandise should a change from McLane become
necessary or desirable. We purchase the balance of our merchandise from a
variety of other distributors under contract terms of up to four years. We do
not have written contracts with a number of these vendors.
3
<PAGE>
Gasoline Operations. For the year ended September 28, 2000, our gasoline
revenues were 61.6% of total revenues. The following table highlights certain
information regarding our gasoline operations for the last five fiscal years:
<TABLE>
<CAPTION>
Fiscal Year Ending
--------------------------------------------------
Sept. 26, Sept. 25, Sept. 24, Sept. 30, Sept. 28,
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Gasoline sales (in
millions).............. $192.7 $220.2 $510.0 $923.8 $1,497.7
Gasoline gallons sold
(in millions).......... 160.7 179.4 466.8 855.7 1,062.4
Average gallons sold per
store (in thousands)... 448.8 501.2 603.9 834.8 856.9
Comparable store gallon
growth................. (4.3)% 7.2% 4.8% 5.9% (2.4)%
Average retail price per
gallon................. $ 1.20 $ 1.23 $ 1.09 $ 1.08 $ 1.41
Average gross profit per
gallon................. $0.156 $0.128 $0.134 $0.123 $ 0.132
Locations selling
gasoline............... 352 364 884 1,152 1,267
Number of Company-
operated branded
locations.............. 285 300 667 851 997
Number of Company-
operated unbranded
locations.............. 6 35 192 279 253
Number of third-party
locations (branded &
unbranded)............. 61 29 25 22 17
Number of locations with
pay-at-pump credit card
readers................ 86 125 379 682 945
Number of locations with
multi-product
dispensers............. 19 142 697 945 1,085
</TABLE>
The increase in average gallons sold per store is primarily due to the
addition of acquired stores which on average had comparatively higher gallon
volume, offset by fiscal year 2000 same store gallon declines of 2.4%. In
fiscal year 2000, the gasoline markets were volatile with domestic crude oil
hitting a low in October 1999 of approximately $21 per barrel and highs in
September 2000 exceeding $37 per barrel. Generally, we pass along wholesale
gasoline cost changes to our customers through retail price changes. However,
our ability to pass along wholesale cost changes is influenced by market
conditions and competition. Although gasoline gross margins in any particular
location or market may vary from time to time, since fiscal 1997 our gross
margins on a consolidated basis have been relatively stable due to our size
and geographic diversity. We make no assurances that significant increases in
gasoline wholesale prices will not negatively affect demand for gasoline
within our markets. Historically, we have not entered into gasoline futures
contracts or other hedging transactions that may lock in gasoline prices for a
period of time or reduce the volatility of our gasoline costs.
We purchase our gasoline from major oil companies and independent refiners.
We operate a mix of branded and unbranded locations and we evaluate our
gasoline offering on a local market level. Of the 1,267 stores that sold
gasoline as of September 28, 2000, 1008 (including third-party locations
selling under these brands) or 79.6% were branded under the Amoco, BP,
Chevron, Citgo, Exxon, Shell or Texaco brand names. We purchase our branded
gasoline and diesel fuel from major oil companies under supply agreements. The
fuel is purchased at the stated rack price, or market price, quoted at each
terminal. The terms of these supply agreements range from five to thirteen
years and generally contain minimum annual purchase requirements as well as
provisions for various payments to us based on volume of purchases and vendor
allowances. We purchase the balance of our gasoline from a variety of
independent fuel distributors. There are 20 gasoline terminals in our
operating areas, allowing us to choose from more than one distribution point
for most of our stores. Our inventories of gasoline (both branded and
unbranded) turn approximately every seven days.
As of September 28, 2000, we owned the gasoline operations at 1,250
locations and at 17 locations had gasoline operations that were operated under
third-party arrangements. At company-operated locations, we own the gasoline
storage tanks, pumping equipment and canopies, and retain 100% of the gross
profit received from gasoline sales. In fiscal 2000, these locations accounted
for approximately 99% of total gallons sold. Under third-party arrangements,
an independent gasoline distributor owns and maintains the gasoline storage
tanks and pumping equipment at the site, prices the gasoline and pays us
approximately 50% of the gross profit. In fiscal
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2000, third-party locations accounted for approximately 1% of the total
gallons we sold. We are phasing out third-party arrangements because our
company-operated locations are more profitable.
Commission Revenue. For the year ended September 28, 2000, our commission
revenues represented 1.1% of our total revenue. Our commission revenue is
derived from amusement and video gaming, lottery ticket sales, money orders,
public telephones, car wash and other ancillary product and service offerings.
This category is an important aspect of our merchandise operations because we
believe it attracts new customers as well as provides additional services for
existing customers. The following table highlights certain information
regarding commissions and the sources of commissions from services for the
last five fiscal years:
<TABLE>
<CAPTION>
Fiscal Year Ending
-------------------------------------------------
Sept. 26, Sept. 25, Sept. 24, Sept. 30, Sept. 28,
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commission revenue (in
millions)............... $ 4.0 $ 4.8 $14.1 $23.4 $27.0
Average commission
revenue per store
(in thousands).......... $10.2 $12.4 $16.4 $21.3 $21.2
Commission revenue by
category (as a
percentage of total
commission revenue):
Lottery ticket sales... 20.8% 13.3% 39.3% 26.9% 27.9%
Amusement and video
gaming................ 32.4 44.6 25.1 28.9 17.9
Car wash............... -- -- 1.7 8.0 13.6
Money orders........... 24.4 22.1 14.9 13.6 12.9
Public telephones...... 14.2 10.5 13.3 12.3 10.7
Other.................. 8.2 9.5 5.7 10.3 17.0
----- ----- ----- ----- -----
Total................ 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
The increases in commission revenues are primarily attributable to
acquisitions, comparable store revenue growth and the addition of new services
including car washes, automatic teller machines and other ancillary products
and services. Effective July 1, 2000, video poker was banned in South
Carolina, which adversely impacted our results of operations. We were able to
offset this decline, in part, with increased commission revenue from fiscal
2000 acquisitions, additional ancillary services and more favorable vendor
contract terms. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Store Locations. As of September 28, 2000, we operated 1,313 convenience
stores located primarily in suburban areas of rapidly growing markets,
coastal/resort areas and smaller towns. Almost all of our stores are
freestanding structures averaging approximately 2,400 square feet and provide
ample customer parking. The following table shows the geographic distribution
by state of our stores for each of the last five fiscal years:
<TABLE>
<CAPTION>
Number of Stores as of Year End
------------------------------------------------- Percent of
Sept. 26, Sept. 25, Sept. 24, Sept. 30, Sept. 28, total stores at
State 1996 1997 1998 1999 2000 Sept. 28, 2000
----- --------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Florida................. -- -- 439 533 517 39.4%
North Carolina.......... 148 155 264 336 343 26.1
South Carolina.......... 127 134 156 232 251 19.1
Georgia................. -- -- -- 12 57 4.3
Kentucky................ 57 56 46 45 45 3.4
Mississippi............. -- -- -- -- 37 2.8
Virginia................ -- -- 10 18 30 2.3
Indiana................. 22 21 20 20 18 1.4
Tennessee............... 25 24 19 19 15 1.2
--- --- --- ----- ----- -----
Total............... 379 390 954 1,215 1,313 100.0%
=== === === ===== ===== =====
</TABLE>
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Since fiscal 1996, we have developed a limited number of new stores and
closed or sold a substantial number of underperforming stores. Beginning in
1997, we turned our attention from developing new stores to commencing our
acquisition program. The following table summarizes these activities:
<TABLE>
<CAPTION>
Fiscal Year Ending
-------------------------------------------------
Sept. 26, Sept. 25, Sept. 24, Sept. 30, Sept. 28,
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Number of stores at
beginning of period.... 403 379 390 954 1,215
Acquired or opened...... 4 36 653 300 145
Closed or sold.......... (28) (25) (89) (39) (47)
--- --- --- ----- -----
Number of stores at end
of period.............. 379 390 954 1,215 1,313
=== === === ===== =====
</TABLE>
We continually evaluate the performance of each of our stores to determine
whether any particular store should be closed or sold based on sales and
profitability trends. In deciding to close or sell an underperforming store,
we consider many factors like:
. store location
. lease term and rate
. merchandise sales and gross profits
. gasoline volumes and margins
. contribution to corporate overhead
Although closing or selling underperforming stores reduces revenues, our
operating results typically improve as these stores are generally
unprofitable.
Acquisitions. During fiscal 2000 we expanded our market area to Mississippi
as we grew to 1,313 stores located primarily in the Southeast. We focus on
acquiring chains within and contiguous to our existing market areas. In
evaluating potential acquisition candidates, we consider a number of factors,
including strategic fit and desirability of location, price, ability to
improve productivity and profitability of a location through the
implementation of our operating strategy and financial impact.
In fiscal 2000, we acquired 143 convenience stores located in North
Carolina, South Carolina, Florida, Georgia, Mississippi and Virginia in 18
separate transactions. These acquisitions were primarily funded from
borrowings under our bank credit facility, as amended, and cash on hand.
In fiscal 1999, we acquired 297 convenience stores located in North
Carolina, South Carolina, Florida, Georgia and Virginia in eight separate
transactions. These acquisitions were primarily funded from borrowings under
our bank credit facility, as amended, the initial public offering of our
common stock and cash on hand.
Site Selection. In opening new stores in recent years, we have focused on
selecting store sites on highly traveled roads in coastal/resort and suburban
markets or near exit and entrance ramps that provide convenient access to the
store location. In selecting sites for new stores, we use an evaluation
process designed to enhance our return on investment. This process focuses on
market area demographics, population density, traffic volume, visibility,
ingress and egress and economic development in the market area. We also review
the location of competitive stores and customer activity at those stores.
Upgrading of Store Facilities and Equipment. During fiscal 1999 and fiscal
2000, we upgraded the facilities and equipment, including gasoline equipment,
at many of our existing and acquired store locations. These upgrades cost
approximately $25.4 million in fiscal 1999 and $24.5 million in fiscal 2000.
During this period, we were reimbursed $7.8 million through long-term
contracts with gasoline suppliers. This store renovation program is an
integral part of our operating strategy. We continually evaluate the
performance of individual stores and periodically upgrade store facilities and
equipment based on sales volumes, the lease term
6
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for leased locations and management's assessment of the potential return on
investment. Typically upgrades for stores include:
. improvements to interior fixtures and equipment for self-service food
and beverages,
. interior lighting,
. in-store restrooms for customers,
. exterior lighting, and
. signage.
The upgrading program for our gasoline operations includes:
. the addition of automated gasoline dispensing and payment systems, such
as multi-product dispensers and pay-at-the-pump credit card readers,
. enhancement of customer convenience and service, and
. the installation of underground storage tank leak detection and other
equipment in accordance with applicable Environmental Protection Agency
(EPA) regulations.
For further discussion of the EPA and other environmental regulations, see
"Government Regulation and Environmental Matters."
Store Operations. Each convenience store is staffed with a manager, an
assistant manager and sales associates who work various shifts to enable most
stores to remain open 24 hours a day, seven days a week. Our field operations
organization is comprised of a network of regional, divisional and district
managers who, with our corporate management, evaluate store operations.
District managers typically oversee from eight to ten stores. We also monitor
store conditions, maintenance and customer service through a regular store
visitation program by district and regional management.
Competition
The convenience store and retail gasoline industries are highly
competitive. The performance of individual stores can be affected by changes
in traffic patterns and the type, number and location of competing stores.
Major competitive factors include, among others, location, ease of access,
gasoline brands, pricing, product and service selections, customer service,
store appearance, cleanliness and safety. In addition, factors such as
inflation, increased labor and benefit costs and the availability of
experienced management and hourly employees may adversely affect the
convenience store industry in general and our stores in particular.
We compete with numerous other convenience stores, supermarkets, drug
stores, fast food operations and other similar retail outlets. In addition,
our stores offering self-service gasoline compete with gasoline service
stations and, more recently, supermarkets. In some of our markets, our
competitors have been in existence longer and have greater financial,
marketing and other resources than we have.
Technology and Store Automation
We utilize information systems and application programs for our core
business systems, such as accounting, financial reporting and payroll. Within
the past two years, we installed newer and more reliable mid-range system
hardware to support these applications and our continued growth. We continue
to enhance these systems through modification and redesign in order to meet
management reporting requirements and operational needs.
Over the last year, we have expanded our computer system with the addition
of new local area network systems, improved end user computer hardware and
software and replaced older point of sale systems. This has helped to
streamline operations and improve productivity at our corporate office, among
field management staff and at our stores.
7
<PAGE>
In addition, these new and expanding systems have provided the foundation
for a strategic information systems initiative. During fiscal 2000, we
completed the implementation of a leading convenience store accounting and
management reporting system, Resource Management Series from Professional
Datasolutions, Inc., a wholly owned subsidiary of McLane.
In addition to facilitating integration of future acquisitions, these
upgrades will enable us to:
. adjust merchandise margin and mix,
. monitor inventory levels,
. implement pricing by geographic area,
. improve receiving and pricing accuracy,
. increase expense control and management reporting, and
. improve communication between individual stores and headquarters.
Trade Names, Service Marks and Trademarks
We have registered or applied for registration of a variety of trade names,
service marks and trademarks for use in our business, including The Pantry(R),
Worth(R), Bean Street Coffee Company(TM), Big Chill(R), Lil' Champ Food
Store(R), Quick Stop(R), Zip Mart(TM), Depot(TM), Food Chief(R), Express
Stop(R), Sprint(TM) and Smokers Express(R). We regard our intellectual
property as having significant value and as being an important factor in the
marketing of our company and our convenience stores. We are not aware of any
facts which would negatively impact our continuing use of any of the above
trade names, service marks or trademarks.
Government Regulation and Environmental Matters
Many aspects of our operations are subject to regulation under federal,
state and local laws. We describe below the most significant of the
regulations that impact all aspects of our operations.
Storage and Sale of Gasoline. 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 aggregate amount of approximately $900,000 in
favor of state environmental agencies in the states of North Carolina,
Virginia, South Carolina, and Georgia and a letter of credit in the aggregate
amount of $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 met
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. In Mississippi, we
meet our financial responsibility requirements through coverage under the
state trust fund.
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;
8
<PAGE>
. 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 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:
. 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 insurance 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 $1.2 million for 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 $12.8 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.
Sale of Alcoholic Beverages. In certain areas where stores are located,
state or local laws limit the hours of operation for the sale of alcoholic
beverages. State and local regulatory agencies have the authority to approve,
revoke, suspend or deny applications for and renewals of permits and licenses
relating to the sale of alcoholic beverages. These agencies may also impose
various restrictions and sanctions. In many states, retailers of alcoholic
beverages have been held responsible for damages caused by intoxicated
individuals who purchased alcoholic beverages from them. While the potential
exposure for damage claims as a seller of alcoholic beverages is substantial,
we have adopted procedures intended to minimize such exposure. In addition, we
maintain general liability insurance which may mitigate the cost of any
liability.
9
<PAGE>
Video Poker Licenses. In 1999, the South Carolina legislature passed a law
which makes it illegal to own or operate video poker machines effective July
1, 2000 unless approved by a statewide referendum. On October 14, 1999, the
South Carolina Supreme Court ruled that the referendum called for was
unconstitutional. After invalidating the referendum, the South Carolina
Supreme Court upheld the remainder of the law. Accordingly, effective July 1,
2000, video poker was banned in South Carolina. See "Item 7. Management
Discussion and Analysis of Financial Condition and Results of Operations."
Store Operations. Our stores are subject to regulation by federal agencies
and to licensing and regulations by state and local health, sanitation,
safety, fire and other departments relating to the development and operation
of convenience stores, including regulations relating to zoning and building
requirements and the preparation and sale of food. Difficulties in obtaining
or failures to obtain the required licenses or approvals could delay or
prevent the development of a new store in a particular area.
Our operations are also subject to federal and state laws governing such
matters as wage rates, overtime, working conditions and citizenship
requirements. At the federal level, there are proposals under consideration
from time to time to increase minimum wage rates and to introduce a system of
mandated health insurance which could affect our results of operations.
Employees
As of September 28, 2000, we employed approximately 8,862 full-time and
1,566 part-time employees. Fewer part-time employees are employed during the
winter months than during the peak spring and summer seasons. Approximately
9,838 of our employees are employed in our stores and 590 are corporate and
field management personnel. We have not been adversely impacted by recent
increases in the minimum wage because nearly all of our employees are paid
more than the minimum wage. None of our employees are represented by unions.
We consider our employee relations to be good.
Subsequent Events
We have entered into agreements to acquire 28 stores located in Mississippi
(19), Louisiana (8) and North Carolina (1) in three separate transactions
which will close subsequent to fiscal year end 2000. These transactions will
be primarily funded from borrowings under our bank credit facility and cash on
hand.
In order to provide for more efficient and streamlined operations, the
following direct or indirect subsidiaries of The Pantry were eliminated by
being liquidated or being merged into The Pantry, effective as of September
29, 2000: (i) Pantry Properties, Inc.; (ii) TC Capital Management, Inc.; (iii)
PH Holding Corporation; (iv) Sandhills, Inc.; and (v) Global Communications,
Inc. As a result of the elimination of these subsidiaries, the operations and
property formerly carried on and held by such subsidiaries are now carried on
and held directly by The Pantry.
Executive Officers
The following table provides information on our executive officers. There
are no family relationships between any of our executive officers or
directors:
<TABLE>
<CAPTION>
Name Age Position with our company
---- --- -------------------------
<S> <C> <C>
Peter J. Sodini......... 59 President, Chief Executive Officer and Director
Dennis R. Crook......... 57 Senior Vice President, Administration and Gasoline Marketing
William T. Flyg......... 58 Senior Vice President, Finance and Chief Financial Officer
Douglas M. Sweeney...... 62 Senior Vice President, Operations
Daniel J. McCormack..... 58 Senior Vice President, Marketing
</TABLE>
Peter J. Sodini has served as our President and Chief Executive Officer
since June 1996 and served as our Chief Operating Officer from February 1996
until June 1996. Mr. Sodini has served as a director since November
10
<PAGE>
1995. Mr. Sodini is a director of Transamerica Income Shares, Inc. From
December 1991 to the present, Mr. Sodini was Chief Executive Officer and a
director of Purity Supreme, Inc. Prior to 1991, Mr. Sodini held executive
positions at several supermarket chains including Boys Markets, Inc. and
Piggly Wiggly Southern, Inc.
Dennis R. Crook has served as our Senior Vice President, Administration and
Gasoline Marketing, since March 1996. From December 1987 to November 1995, Mr.
Crook was Senior Vice President, Human Resources and Labor Relations, of
Purity Supreme, Inc.
William T. Flyg has served as our Senior Vice President, Finance and Chief
Financial Officer since January 1997. Mr. Flyg was employed by Purity Supreme,
Inc. as Chief Financial Officer from January 1992 until that company was sold
in November 1995, at which time he continued as an employee of Purity Supreme
Inc. until December 1996.
Douglas M. Sweeney has served as our Senior Vice President, Operations,
since March 1996. From December 1991 to December 1995, Mr. Sweeney was Senior
Vice President, Operations, of Purity Supreme, Inc.
Daniel J. McCormack has served as our Vice President, Marketing, since
March 1996 and was promoted in February, 1999 to Senior Vice President. From
1989 to February 1996, Mr. McCormack was Director of Purchasing of Purity
Supreme, Inc.
Item 2. Properties
We own the real property at 381 of our stores and lease the real property
at 932 of our stores. Management believes that none of these leases is
individually material. Most of these leases are net leases requiring us to pay
taxes, insurance and maintenance costs. The aggregate rent paid for fiscal
2000 was $46.4 million. The following table lists the expiration dates of our
leases, including renewal options:
<TABLE>
<CAPTION>
Number of
Lease Expiration Stores
---------------- ---------
<S> <C>
2001-2005.......................................................... 71
2006-2010.......................................................... 125
2011-2015.......................................................... 131
2016-2020.......................................................... 74
2021-2025.......................................................... 93
2026-2030.......................................................... 62
2031 and thereafter................................................ 376
</TABLE>
Management anticipates that it will be able to negotiate acceptable
extensions of the leases that expire for those locations that we intend to
continue operating. Beyond payment of our contractual lease obligations
through the end of the term, early termination of these leases would result in
minimal penalty to us.
When appropriate, we have chosen to sell and then lease back properties.
Factors leading to this decision include alternative desires for use of cash,
beneficial taxation, and minimization of the risks associated with owning the
property (especially changes in valuation due to population shifts,
urbanization, and/or proximity to high volume streets) and the economic terms
of such sale-leaseback transactions.
We own our corporate headquarters, a three-story, 51,000 square foot office
building in Sanford, North Carolina and lease our Lil' Champ(R) corporate
headquarters in Jacksonville, Florida. Management believes that our
headquarters are adequate for our present and foreseeable needs.
Item 3. Legal Proceedings
We are party to various legal actions in the ordinary course of our
business. We believe these actions are routine in nature and incidental to the
operation of our business. While the outcome of these actions cannot be
11
<PAGE>
predicted with certainty, we believe that the ultimate resolution of these
matters will not have a material adverse impact on our business, financial
condition or prospects.
We make routine applications to state trust funds for the sharing,
recovering and reimbursement of certain cleanup costs and liabilities incurred
as a result of releases from underground storage tank systems. For more
information about these cleanup costs and liabilities, see "Item 1. Business--
Government Regulation and
Environmental Matters" and "Item 7. Management Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Environmental Considerations."
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Our Common Equity and Related Stockholder Matters
(a) Market Information--We have only one class of common equity, our common
stock, $.01 par value per share. Our common stock represents our only voting
securities. There are 18,111,474 shares of common stock issued and outstanding
as of December 12, 2000. Our common stock is traded on the NASDAQ National
Market System under the symbol "PTRY." The following table sets forth for each
fiscal quarter the high and low sale prices per share of common stock since
our initial public offering as reported on the NASDAQ National Market System
through September 28, 2000.
<TABLE>
<CAPTION>
2000 1999
------------ ---------------
Quarter High Low High Low
------- ---- --- ------ ------
<S> <C> <C> <C> <C>
First.......................................... 15 1/8 7 1/8 N/A N/A
Second......................................... 16 5/16 7 N/A N/A
Third.......................................... 11 1/2 7 1/8 13 5/8 12 7/8
Fourth......................................... 13 1/16 9 18 11/16 10 3/4
</TABLE>
(b) Holders--As of December 12, 2000, there were 67 holders of record of
our common stock.
(c) Dividends--During the last two fiscal years, we have not paid any cash
dividends on our common stock. We intend to retain earnings to support
operations and to finance expansion and do not intend to pay cash dividends on
our common stock for the foreseeable future. The payment of cash dividends in
the future will depend upon our ability to remove certain loan restrictions
and other factors such as our earnings, operations, capital requirements,
financial condition and other factors deemed relevant by our Board of
Directors. The payment of any cash dividends is prohibited under restrictions
contained in the indentures relating to the senior subordinated notes and our
bank credit facility. See "Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Item 8. Consolidated Financial Statements and Supplementary
Data--Notes to Consolidated Financial Statements--Note 5--Long-Term Debt."
(d) Recent Sales of Unregistered Securities--In November 1998, Peter
Starrett, one of our directors, purchased 22,185 shares of our common stock
for a purchase price of $250,125. The shares of common stock sold to Mr.
Starrett were sold in reliance upon Section 4(2) of the Securities Act of
1933, as amended, as a transaction not involving any public offering. Mr.
Starrett represented to us that he is an "accredited investor" as such term is
defined in Rule 501 of Regulation D promulgated under the Securities Act. No
underwriter was engaged in connection with this sale of securities.
12
<PAGE>
Item 6. Selected Financial Data
The following table sets forth historical consolidated financial data and
store operating data for the periods indicated. The selected historical annual
consolidated financial data is derived from, and is qualified in its entirety
by, our annual Consolidated Financial Statements, including those contained
elsewhere in this report. The information should be read in conjunction with
"Item 1. Business," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Consolidated Financial Statements
and related notes thereto included elsewhere in this report. In the table,
dollars are in millions, except per store and per gallon data.
<TABLE>
<CAPTION>
September 26, September 25, September 24, September 30, September 28,
1996 1997 1998 1999 2000
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Merchandise sales...... $188.1 $202.4 $ 460.8 $ 731.7 $ 907.6
Gasoline sales......... 192.7 220.2 510.0 923.8 1,497.7
Commissions............ 4.0 4.8 14.1 23.4 27.0
------ ------ ------- -------- --------
Total revenues....... 384.8 427.4 984.9 1,678.9 2,432.3
Cost of Sales:
Merchandise............ 126.0 132.8 304.0 489.3 602.6
Gasoline............... 167.6 197.3 447.6 818.8 1,357.8
------ ------ ------- -------- --------
Gross profit......... 91.2 97.3 233.3 370.8 471.9
Operating, general and
administrative
expenses............... 75.6 77.0 172.9 262.9 339.8
Unusual charges......... 4.6(e) -- 1.0(f) -- --
Depreciation and
amortization........... 9.1 9.5 27.6 42.8 56.1
------ ------ ------- -------- --------
Income from operations.. 1.9 10.8 31.8 65.2 76.0
Interest expense........ (12.0) (13.0) (28.9) (41.3) (52.3)
Income (loss) before
other items............ (8.1) (1.0) 4.7 24.8 24.8
Extraordinary loss...... -- -- (8.0)(g) (3.6)(h) --
Net income (loss)....... $ (8.1) $ (1.0) $ (3.3) $ 10.4 $ 14.0
Net income (loss)
applicable to common
shareholders........... $(10.8) $ (6.3) $ (6.3) $ 6.2 $ 14.0
Earnings (loss) per
share before
extraordinary loss:
Basic.................. $(1.89) $(1.08) $ (0.18) $ 0.71 $ 0.77
Diluted................ $(1.89) $(1.08) $ (0.16) $ 0.65 $ 0.74
Weighted average shares
outstanding:
Basic.................. 5,688 5,815 9,732 13,768 18,111
Diluted................ 5,688 5,815 11,012 15,076 18,932
Dividends paid on common
stock.................. -- -- -- -- --
Other Financial Data:
EBITDA (a).............. $ 15.6 $ 20.3 $ 60.5 $ 108.0 $ 132.1
Net cash provided by
(used in):
Operating activities... $ 5.4 $ 7.3 $ 48.0 $ 68.6 $ 88.2
Investing activities... (7.2) (25.1) (285.4) (228.9) (148.7)
Financing activities... (3.9) 15.8 268.4 157.1 82.7
Capital expenditures
(b).................... 7.1 14.7 42.1 47.4 56.4
Ratio of earnings to
fixed charges (c)...... -- -- 1.1 1.4 1.4
Store Operating Data:
Number of stores (end of
period)................ 379 390 954 1,215 1,313
Average sales per store:
Merchandise sales (in
thousands)............ $481.1 $525.8 $ 533.3 $ 666.4 $ 713.8
Gasoline gallons (in
thousands)............ 450.0 501.2 603.9 834.8 856.9
Comparable store sales
growth (d):
Merchandise............ 2.8% 8.5% 5.3% 9.6% 7.5%
Gasoline gallons....... (4.3)% 7.2% 4.8% 5.9% (2.4)%
Operating Data:
Merchandise gross
margin................. 33.0% 34.4% 34.0% 33.1% 33.6%
Gasoline gallons sold
(in millions).......... 160.7 179.4 466.8 855.7 1,062.4
Average retail gasoline
price per gallon....... $ 1.20 $ 1.23 $ 1.09 $ 1.08 $ 1.41
Average gasoline gross
profit per gallon...... $0.156 $0.128 $ 0.134 $ 0.123 $ 0.132
Operating, general and
administrative expenses
as a percentage of
total revenues......... 19.6% 18.0% 17.6% 15.7% 14.0%
Operating income as a
percentage of total
revenues............... 0.5% 2.5% 3.2% 3.9% 3.1%
Balance Sheet Data (end
of period):
Working capital
(deficiency)........... $ (6.5) $ (8.2) $ (9.0) $ (20.4) $ (7.7)
Total assets............ 120.9 142.8 554.8 793.7 930.3
Total debt and capital
lease obligations...... 101.4 101.3 340.7 455.6 541.4
Shareholders' equity
(deficit).............. (27.5) (17.9) 39.3 104.2(i) 118.0
</TABLE>
13
<PAGE>
NOTES TO SELECTED FINANCIAL DATA
(a) "EBITDA" represents income from operations before depreciation and
amortization, merger integration costs, restructuring charges, and impairment
of long-lived assets. EBITDA is not a measure of performance under accounting
principles generally accepted in the United States of America, 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 accounting principles generally accepted in the United States of America,
or as a measure of profitability or liquidity. We have included information
concerning EBITDA as one measure of our ability to service debt and because we
believe investors find this information useful. EBITDA as defined herein may
not be comparable to similarly titled measures reported by other companies.
(b) Purchases of assets to be held for sale are excluded from these
amounts.
(c) For purposes of determining the ratio of earnings to fixed charges: (i)
earnings consist of income (loss) before income tax benefit (expense) and
extraordinary item plus fixed charges and (ii) fixed charges consist of
interest expense, amortization of deferred financing costs, preferred stock
dividends and the portion of rental expense representative of interest (deemed
to be one-third of rental expense). Our earnings were inadequate to cover
fixed charges by $14.3 million, and $6.3 million for fiscal years 1996 and
1997, respectively.
(d) The stores included in calculating comparable store sales growth are
stores that were under management and in operation for both fiscal years of
the comparable period; therefore, acquired stores, new stores and closed
stores are not included.
(e) During fiscal 1996, we recorded restructuring charges of $1.6 million
pursuant to a formal plan to restructure our corporate offices. Also during
fiscal 1996, we early-adopted SFAS No. 121, Accounting for the Impairment of
Long- Lived Assets and for Long-Lived Assets to be Disposed of. In addition,
pursuant to SFAS No. 121, we evaluated our long-lived assets for impairment on
a store-by-store basis. Based on this evaluation, we recorded an impairment
loss of $0.4 million for property and equipment and $2.6 million for goodwill.
(f) During fiscal 1998, we recorded an integration charge of approximately
$1.0 million for costs of combining our existing business with the acquired
business of Lil' Champ.
(g) On October 23, 1997 in connection with the Lil' Champ acquisition, we
completed the offering of our senior subordinated notes and, in a related
transaction completed a tender offer and consent solicitation with respect to
our senior notes. The tender offer resulted in our purchasing $51 million in
principal amount of the senior notes at a purchase price of 110% of the
aggregate principal amount plus accrued and unpaid interest and other related
fees. In connection with this repurchase, we incurred an extraordinary loss of
approximately $8.0 million related to cost of the tender offer and consent
solicitation and write-off of deferred financing costs.
(h) On January 28, 1999, we redeemed $49.0 million in principal amount of
our senior notes and paid accrued and unpaid interest up to, but not
including, the date of purchase and a 4% call premium. We recognized an
extraordinary loss of approximately $3.6 million in connection with the
repurchase of the senior notes including the payment of the 4% call premium of
$2.0 million, fees paid in connection with the amendments and commitments
under our bank credit facility, and the write-off of deferred financing costs
related to our repayment of our former bank credit facility.
(i) On June 8, 1999, we offered and sold 6,250,000 shares of our common
stock in our initial public offering. The initial offering price was $13.00
per share and we received $75.6 million in net proceeds, before expenses.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis is provided to increase understanding
of, and should be read in conjunction with, the Consolidated Financial
Statements and accompanying notes. Additional discussion and analysis related
to fiscal year 2000 is contained in our Quarterly Reports on Form 10-Q and 10-
Q/A, Current Reports on Form 8-K and 8-K/A and our Registration Statement on
Form S-1, as amended.
Introduction
Fiscal 2000 was a historic year for The Pantry as we completed our first
full fiscal year as a public company while recording record results of
operations. We realized record revenues, operating profits, and net income in
the midst of a challenging gasoline environment. Our revenues increased 44.9%
to $2.4 billion and EBITDA increased 22.3% to $132.1 million. We earned record
net income of $14.0 million in fiscal 2000 compared to $10.4 million in fiscal
1999. Fiscal 1999 net income included an extraordinary loss of $3.6 million,
net of taxes, associated with the refinancing of our senior notes and credit
facilities.
These record operating results were the result of:
. increased sales and earnings associated with acquired stores,
. same store merchandise sales and earnings growth,
. higher merchandise gross margin and gasoline gross profit per gallon,
. our ability to manage the balance between total unit gross profit and
gasoline gallon volume, and
. the absence of any extraordinary charges.
We believe our results continue to be driven by three key operating
principles:
. the consistent execution of our core strategies, including focused
attention on leveraging the quality and quantity of our growing retail
network,
. our research and investment in new programs, particularly in the
services sector, and
. sensible store growth in existing and contiguous markets.
We believe our growing retail network, merchandise programs, purchasing
leverage and in-store execution will continue to drive merchandise comparable
store sales and support stable merchandise margins. We have focused a lot of
attention and resources on upgrading locations with the latest gasoline pump
technology and designing site plans to drive customer traffic.
During fiscal 2000, we completed the installation of a leading, industry-
specific retail information system across our entire network of stores. This
technology provides field and corporate management with on-line communication
tools and daily access to relevant operating information. We expect this
technology will improve store-level execution of our merchandising programs,
improve inventory management and other operating controls, and increase the
overall service to our customers. We have also developed proprietary modeling
systems to track location specific gasoline pricing decisions and their impact
on key trends and performance factors such as gasoline volume, merchandise
volume, and total unit gross profit.
On the services front, we continue to maintain a fresh and open approach to
convenience and certain services that appeal to our customers. We are
constantly reviewing opportunities to get the most out of our growing retail
network--now at more than 1,300 stores located in 9 southeastern states. We
have focused our attention on increasing ancillary revenues such as lottery
commissions, money order sales, telephone income, selected on-site advertising
commission, phone cards, prepaid cellular services, vending income, car wash
offerings and other service revenues.
Finally, we plan to continue to sensibly acquire premium chains located in
our existing and contiguous markets. We believe these markets have strong
demographic and economic growth profiles and are pleased with
15
<PAGE>
the quantity and quality of acquisition candidates particularly those located
in Mississippi and Louisiana, both new and attractive retail markets. In
fiscal 2001, we anticipate increasing our net store count by 100 to 150
stores. This includes stores to be acquired in fiscal 2001, a small number of
newly constructed stores in high growth areas and the closing of certain
underperforming stores.
Acquisition History
Our acquisition strategy focuses on acquiring convenience stores within or
contiguous to our existing market areas. We believe acquiring locations with
demonstrated operating results involves lower risk and is generally an
economically attractive alternative to traditional site selection and new
store development. We do, however, plan to develop new locations in high
growth areas within our existing markets.
The tables below provides information concerning the acquisitions we have
completed during the last three fiscal years:
Fiscal 2000 Acquisitions
<TABLE>
<CAPTION>
Date Acquired Trade Name Locations Stores
------------------------ -------------- --------------------------------------------------- ------
<S> <C> <C> <C>
September 14, 2000...... Food Mart Mississippi 18
July 3, 2000............ Mini Mart South Carolina 14
June 29, 2000........... Big K Mississippi 19
April 27, 2000.......... Market Express 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 Various Florida, North Carolina, Virginia, Mississippi
stores)................ and South Carolina 12
---
Total................... 143
Fiscal 1999 Acquisitions
<CAPTION>
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 Various North Carolina and South Carolina
stores)................ 2
---
Total................... 297
</TABLE>
16
<PAGE>
Fiscal 1998 Acquisitions
<TABLE>
<CAPTION>
Date Acquired Trade Name Locations Stores
------------------------ ---------- --------------------------------------------------- ------
<S> <C> <C> <C>
July 15, 1998........... Zip Mart Central North Carolina and Virginia 42
July 2, 1998............ Quick Stop Southeast North Carolina and Coastal South Carolina 75
May 2, 1998............. Sprint Gainesville, Florida 10
March 19, 1998.......... Kwik Mart Eastern North Carolina 23
October 23, 1997........ Lil' Champ Northeastern Florida 440(a)
Others (less than five Various North Carolina and South Carolina
stores)................ 13
---
Total................... 603
</TABLE>
--------
(a) Net of the disposition of 48 convenience stores located throughout eastern
Georgia.
Subsequent to September 28, 2000, we have entered into agreements to
acquire 28 stores located in Mississippi (19), Louisiana (8) and North
Carolina (1) in three separate transactions. These transactions will be
primarily funded from borrowings under our bank credit facility and cash on
hand.
We seek to improve the productivity and profitability of acquired stores by
implementing our merchandising and gasoline initiatives, eliminating
duplicative costs, reducing overhead and centralizing functions such as
purchasing and information technology. We believe it takes six to twelve
months to fully integrate and achieve operational and financial improvements
at acquired locations. There can be no assurance, however, that we can achieve
revenue increases or cost savings with respect to any acquisition.
Impact of Acquisitions. These acquisitions and the related transactions
have had a significant impact on our financial condition and results of
operations since each of their respective transaction dates. Due to the method
of accounting for these acquisitions, the Consolidated Statements of
Operations for the fiscal years presented include results of operations for
each of the acquisitions from the date of each acquisition only. For fiscal
2000 acquisitions, the Consolidated Balance Sheets as of September 30, 1999
and the Consolidated Statements of Operations for fiscal years September 30,
1999 and September 24, 1998 do not include the assets, liabilities, and
results of operations relating to these acquisitions. As a result, comparisons
of fiscal 2000 results to such prior fiscal years are impacted materially and
the underlying performance of same store results is obscured.
Results of Operations
Fiscal 2000 Compared To Fiscal 1999
We operate on a 52 or 53-week fiscal year. Our operations for fiscal 2000
contained 52 weeks while fiscal 1999 contained 53 weeks or an additional week.
When we make references to fiscal 1999 adjusted for the number of weeks, we
have simply adjusted last year's fourth quarter results to approximate a 13-
week period.
Total Revenue. Total revenue for fiscal 2000 was $2.4 billion compared to
$1.7 billion for fiscal 1999, an increase of $753.4 million or 44.9%. The
increase in total revenue is primarily due to the revenue from stores acquired
in fiscal 2000 of $217.6 million, the effect of a full year of revenue from
fiscal 1999 acquisitions of $290.9 million, and comparable store merchandise
sales growth of 7.5%. Comparable store merchandise sales increases at our
locations are primarily due to increased customer counts and average
transaction size resulting from more competitive gasoline pricing, enhanced
store appearance and store merchandising, and increased in-store promotional
activity. Adjusting for the number of weeks in fiscal 1999, the increase in
total revenues was 48.3%.
Merchandise Revenue. Total merchandise revenue for fiscal 2000 was $907.6
million compared to $731.7 million for fiscal 1999, an increase of $175.9
million or 24.0%. The increase in merchandise revenue is primarily due to the
revenue from stores acquired in fiscal 2000 of $68.6 million, the effect of a
full year of merchandise revenue from fiscal 1999 acquisitions of $90.1
million, and comparable store merchandise sales growth of 7.5%
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or an increase of approximately $42.3 million. Adjusting for the number of
weeks in fiscal 1999, the increase in merchandise revenues was 26.9%.
Gasoline Revenue and Gallons. Total gasoline revenue for fiscal 2000 was
$1.5 billion compared to $923.8 million for fiscal 1999, an increase of $573.9
million or 62.1%. The increase in gasoline revenue is primarily due to the
revenue from stores acquired in fiscal 2000 of $146.4 million, the effect of a
full year of gasoline revenue from fiscal 1999 acquisitions of $197.2 million,
and the impact of raising gasoline retail prices. In fiscal 2000, our average
retail price of gasoline was $1.41 per gallon, which represents a $.33 per
gallon increase from fiscal 1999. These increases were partially offset by a
gasoline gallon comparable store sales decline of 2.4%.
In fiscal 2000, total gasoline gallons were 1.1 billion gallons compared to
855.7 million gallons in fiscal 1999, an increase of 206.7 million gallons or
24.2%. The increase in gasoline gallons is primarily due to gallon volume of
106.1 million from stores acquired in fiscal 2000, the effect of a full year
of gasoline volume from 1999 acquisitions of 151.3 million offset by
comparable store gasoline volume decreases of 2.4% or a decrease of
approximately 14.9 million gallons. The fiscal 2000 same store gallon decline
was primarily due to lower demand coupled with heightened competitive factors
in selected markets such as Tampa and Orlando. Demand has been influenced by
higher gasoline retail prices as a result of wholesale gasoline cost increases
and our efforts to manage the balance between gasoline gross profit and gallon
volume.
Commission Revenue. Total commission revenue for fiscal 2000 was $27.0
million compared to $23.4 million for fiscal 1999, an increase of $3.6 million
or 15.4%. The increase in commission revenue is primarily due to revenue from
stores acquired in fiscal 2000 of $2.6 million, the effect of a full year of
commission revenue from 1999 acquisitions of $3.6 million and comparable store
commission revenue growth. These increases were partially offset by the loss
of video poker revenue in the State of South Carolina as of July 1, 2000. As a
result, video poker commission in fiscal 2000 decreased 35.5% to $4.0 from
$6.2 in fiscal 1999.
Total Gross Profit. Total gross profit for fiscal 2000 was $471.9 million
compared to $370.8 million for fiscal 1999, an increase of $101.1 million or
27.3%. The increase in gross profit is primarily due to the gross profit from
stores acquired in fiscal 2000 of $37.4 million, the effect of a full year of
operations from stores acquired in 1999 of $51.9 million and higher
merchandise and gasoline margins. Adjusting for the number of weeks in fiscal
1999, the increase in total gross profit was 30.1%.
Merchandise Gross Margin. Fiscal 2000 merchandise gross margin was 33.6%, a
50 basis point increase over fiscal 1999. The increase was primarily due to
margin improvements in selected categories and an increase in food service
sales, which earn higher gross margin percentages.
Gasoline Gross Profit Per Gallon. Gasoline gross profit per gallon
increased to $0.132 in fiscal 2000 from $0.123 in fiscal 1999 primarily due to
our efforts to manage the balance between gasoline gallon volume and gasoline
gross profit per gallon. During fiscal 2000, we experienced a volatile
wholesale gasoline market due to many factors, including world crude supply
and demand fundamentals, domestic fuel inventories, and domestic refining
capacity. Due to this volatility, our margin per gallon sold on a quarterly
basis ranged from a low of $0.101 in our second quarter to a high of $0.153 in
our fourth quarter of fiscal 2000.
Operating, General and Administrative Expenses. Operating expenses for
fiscal 2000 were $339.8 million compared to $262.9 million for fiscal 1999, an
increase of $76.9 million or 29.3%. The increase in operating expenses is
primarily due to the operating and lease expenses associated with the stores
acquired in fiscal 2000 of $26.1 million, the effect of a full year of
expenses for stores acquired in fiscal 1999 of $38.3 million, as well as an
increase in general corporate expenses associated with our store growth
initiatives. As a percentage of total revenue, operating, general and
administrative expenses decreased to 14.0% in fiscal 2000 from 15.7% in fiscal
1999.
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Income from Operations. Income from operations for fiscal 2000 was $76.0
million compared to $65.2 million for fiscal 1999, an increase of $10.9
million or 16.7%. The increase is primarily due to the items discussed above.
As a percentage of total revenue, income from operations decreased to 3.1% in
fiscal 2000 from 3.9% in fiscal 1999.
EBITDA. EBITDA represents income from operations before depreciation and
amortization, merger integration costs, and extraordinary loss. EBITDA for
fiscal 2000 was $132.1 million compared to $108.0 million for fiscal 1999, an
increase of $24.1 million or 22.3%. The increase is primarily due to the items
discussed above.
EBITDA is not a measure of performance under accounting principles
generally accepted in the United States of America, 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 accounting principles generally accepted in the United States of America,
or as a measure of profitability or liquidity. We have included information
concerning EBITDA as one measure of our cash flow and historical ability to
service debt and because we believe investors find this information useful.
EBITDA as defined herein may not be comparable to similarly titled measures
reported by other companies.
Interest Expense (see--"Liquidity and Capital Resources-Long-Term
Debt"). Interest expense in fiscal 2000 was $52.3 million compared to $41.3
million for fiscal 1999, an increase of $11.0 million or 26.8%. In fiscal
2000, interest expense was primarily related to interest costs on (i) our
senior subordinated notes of $20.5 million and (ii) our bank credit facility
of approximately $30.4 million. The increase in interest expense was primarily
due to increased borrowings associated with our acquisition activity and a
general rise in interest rates.
Income Tax Expense. Our effective income tax rate for fiscal 2000 was
43.5%. Our effective tax rate is negatively impacted by non-deductible
goodwill related to certain acquisitions and other permanent book-tax
differences.
Net Income. Net income for fiscal 2000 was $14.0 million compared to net
income of $10.4 million for fiscal 1999, an increase of $3.6 million or 34.4%.
The increase is primarily due to the absence of any extraordinary charges in
fiscal 2000 as compared to fiscal 1999, which had an extraordinary loss of
$3.6 million associated with certain debt restructuring activity. Adjusting
for the number of weeks in fiscal 1999 and excluding the fiscal 1999
extraordinary loss, the increase in net income in fiscal 2000 was 4.0%.
Fiscal 1999 Compared to Fiscal 1998
Our operations for fiscal 1999 contained 53 weeks while fiscal 1998
contained 52. When we make references to the effect of an extra week in fiscal
1999, we have simply calculated the impact of the additional week in fiscal
1999.
Total Revenue. Total revenue for fiscal 1999 was $1.7 billion compared to
$984.9 million for fiscal 1998, an increase of $694.0 million or 70.5%. The
increase in total revenue is primarily due to the revenue from stores acquired
in fiscal 1999 of $346.4 million, the effect of a full year of revenue from
fiscal 1998 acquisitions of $259.9 million, and comparable store revenue
growth of 6.9% or approximately $29.3 million. Also, the effect of an extra
week in fiscal 1999 contributed $39.4 million or 5.7% of the increase.
Comparable store sales increases at our locations are primarily due to
increased customer counts and average transaction size resulting from more
competitive gasoline pricing, enhanced store appearance and store
merchandising, and increased in-store promotional activity.
Merchandise Revenue. Total merchandise revenue for fiscal 1999 was $731.7
million compared to $460.8 million for fiscal 1998, an increase of $270.9
million or 58.8%. The increase in merchandise revenue is primarily due to the
revenue from stores acquired in fiscal 1999 of $133.8 million, the effect of a
full year of merchandise revenue from fiscal 1998 acquisitions of $92.7
million, and comparable store sales growth of 9.6% or approximately $20.3
million. Based on purchase and sales information, we estimate that cigarette
inflation during
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fiscal year 1999 accounted for 3% to 4% of the 9.6% increase in comparable
store sales. Also, the effect of an extra week in fiscal 1999 contributed
$16.3 million.
Gasoline Revenue and Gallons. Total gasoline revenue for fiscal 1999 was
$923.8 million compared to $510.0 million for fiscal 1998, an increase of
$413.8 million or 81.1%. The increase in gasoline revenue is primarily due to
the revenue from stores acquired in fiscal 1999 of $208.2 million, the effect
of a full year of gasoline revenue from fiscal 1998 acquisitions of $165.2
million, and comparable store gasoline revenue growth of 3.8% or approximately
$7.9 million. Also, the effect of an extra week in fiscal 1999 contributed
$22.3 million. In fiscal 1999, our average retail price of gasoline was $1.08,
which represents a $.01 decrease from fiscal 1998.
In fiscal 1999, total gasoline gallons were 855.7 million gallons compared
to 466.8 million gallons in fiscal 1998, an increase of 388.9 million gallons
or 83.3%. The increase in gasoline gallons is primarily due to gallon volume
of 189.4 million from stores acquired in fiscal 1999, the effect of a full
year of gasoline volume from fiscal 1998 acquisitions of 163.2 million and
comparable store gasoline volume increases of 5.9% or approximately 11.6
million gallons. Also, the effect of an extra week in fiscal 1999 contributed
18.8 million gallons. Fiscal 1999 same store gallon sales growth was 5.9% and
is primarily due to more competitive gasoline pricing, rebranding and
promotional activity, enhanced store appearance and local market and economic
conditions.
Commission Revenue. Total commission revenue for fiscal 1999 was $23.4
million compared to $14.1 million for fiscal 1998, an increase of $9.3 million
or 65.6%. The increase in commission revenue is primarily due to revenue from
stores acquired in fiscal 1999 of $4.4 million, the effect of a full year of
commission revenue from fiscal 1998 acquisitions of $2.0 million and
comparable store commission revenue growth of 18.7% or $1.1 million. The
effect of an extra week in fiscal 1999 contributed $0.4 million.
Total Gross Profit. Total gross profit for fiscal 1999 was $370.8 million
compared to $233.4 million for fiscal 1998, an increase of $137.5 million or
58.9%. The increase in gross profit is primarily due to the gross profit from
stores acquired in fiscal 1999 of $72.1 million, the effect of a full year of
operations from stores acquired in fiscal 1998 of $50.7 million and the effect
of an extra week in fiscal 1999 of $8.2 million.
Merchandise Gross Margin. Merchandise gross margin in fiscal 1999 remained
relatively constant compared to fiscal 1998, decreasing only 90 basis points
despite significant cost inflation in the tobacco category in fiscal 1999. See
"--Inflation."
Gasoline Gross Profit Per Gallon. Gasoline gross profit per gallon
decreased to $0.123 in fiscal 1999 from $0.134 in fiscal 1998 primarily due to
rising crude oil prices, the impact of rising crude oil prices on wholesale
fuels costs, and lower average margin in acquired locations.
Operating, General and Administrative Expenses. Operating, general and
administrative expenses for fiscal 1999 were $262.9 million compared to $172.9
million for fiscal 1998, an increase of $90.0 million or 52.1%. The increase
in store expenses is primarily due to the operating and lease expenses
associated with stores acquired in fiscal 1999 of $47.9 million, the effect of
a full year of expenses for stores acquired in fiscal 1998 of $29.9 million,
the effect of an extra week of operations in fiscal 1999 of $3.8 million, as
well as an increase in general corporate expenses associated with our store
growth initiative. As a percentage of total revenue, operating, general and
administrative expenses decreased to 15.7% in fiscal 1999 from 17.6% in fiscal
1998.
Income from Operations. Income from operations for fiscal 1999 was $65.2
million compared to $31.8 million for fiscal 1998, an increase of $33.3
million or 104.7%. The increase is primarily due to the items discussed above.
As a percentage of total revenue, income from operations increased to 3.9% in
fiscal 1999 from 3.2% in fiscal 1998.
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EBITDA. EBITDA for fiscal 1999 was $108.0 million compared to $60.5 million
for fiscal 1998, an increase of $47.5 million or 78.5%. The increase is
primarily due to the items discussed above.
Interest Expense (see--"Liquidity and Capital Resources- Long-Term
Debt"). Interest expense in fiscal 1999 was $41.3 million compared to $28.9
million for fiscal 1998, an increase of $12.3 million or 42.6%. Interest
expense is primarily related to interest costs on (i) our senior subordinated
notes of $21.9 million, (ii) our bank credit facility of approximately $16.6
million and (iii) our senior notes of $2.0 million which was partially offset
by $1.1 million in interest savings related to the redemption and refinancing
of $49.0 million in principal amount of the senior notes.
Income Tax Expense. Our effective income tax rate for fiscal 1999 was
43.4%. Our effective income tax rate is negatively impacted by non-deductible
goodwill related to acquisitions and other permanent book/tax differences.
Extraordinary Loss. We recognized an extraordinary loss, net of taxes, of
approximately $3.6 million in fiscal 1999 in connection with the redemption of
the remaining outstanding balance of our senior notes and the related consent
fees. The extraordinary item includes the payment of the 4% call premium of
$2.0 million and the write-off of related deferred financing costs on our
senior notes and former credit facility. The extraordinary item also reflects
an income tax benefit of approximately $2.3 million.
Net Income. Net income for fiscal 1999 was $10.4 million compared to a net
loss of $3.3 million for fiscal 1998, an increase of $13.7 million or 413.3%.
The increase is primarily due to results from acquired stores, improved
results from operations, and the lower extraordinary charges related to
redemption and refinancing activities. Our income before extraordinary loss
was $14.0 million for fiscal 1999 compared to $4.7 million during fiscal 1998,
an increase of $9.3 million or a 200% increase. Pursuant to Emerging Issues
Task Force Topic No. ("EITF") D-42, in connection with our redemption of our
preferred stock in our third fiscal quarter, we were required to recognize a
one-time deduction to net income applicable to common stockholders (and a
related reclassification to accumulated deficit) in the amount of $1,500,000
associated with original issue costs incurred in connection with the issuance
of preferred stock in December 1996. At that time, the original issue costs
were netted against the gross proceeds and thus charged to additional paid-in
capital. EITF D-42 requires that the excess of fair value of the consideration
transferred to the preferred stockholders over the carrying amount of the
preferred stock be subtracted from net income applicable to common
stockholders in the calculation of earnings per share.
Liquidity and Capital Resources
Cash Flows from Operations. Due to the nature of our business,
substantially all sales are for cash. Cash provided by operations is our
primary source of liquidity. Acquisitions, interest expense and capital
expenditures represent the primary uses of funds. We rely primarily upon cash
provided by operating activities, supplemented as necessary from time to time
by borrowings under our bank credit facility, sale-leaseback transactions,
asset dispositions and equity investments, to finance our operations, pay
interest, and fund capital expenditures and acquisitions. Cash provided by
operating activities for fiscal 1998 totaled $48.0 million, for fiscal 1999
totaled $68.6 million and for fiscal 2000 totaled $88.2 million. We had $53.4
million of cash and cash equivalents on hand at September 28, 2000.
Bank Credit Facility. On January 28, 1999, we entered into our bank credit
facility. The bank credit facility consists of a $45.0 million revolving
credit facility, a $50.0 million acquisition facility and a $240.0 million
term loan facility. The revolving credit facility is available to fund working
capital financing, general corporate purposes and for the issuance of standby
letters of credit. The acquisition facility is available to fund future
acquisitions of related businesses. As of September 28, 2000, there were no
borrowings outstanding under the revolving credit facility and $10.0 million
outstanding under the acquisition facility. As of September 28, 2000,
approximately $17.0 million of letters of credit were issued under the
revolving credit facility.
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During fiscal 2000, we entered into amendments to our bank credit facility
to include an additional $100.0 million under our term loan facility. Proceeds
from the term loans were used to prepay amounts outstanding under our
acquisition facility and to fund acquisitions closed during fiscal 2000. As of
September 28, 2000, we have approximately $68.0 million in additional
borrowing capacity.
Our bank credit facility contains covenants restricting our ability and the
ability of any of our subsidiaries to, among other things: (i) incur
additional indebtedness; (ii) declare dividends or redeem or repurchase
capital stock; (iii) prepay, redeem or purchase debt; (iv) incur liens; (v)
make loans and investments; (vi) make capital expenditures; (vii) engage in
mergers, acquisitions or asset sales; and (viii) engage in transactions with
affiliates. Our bank credit facility also contains financial ratios and tests
which must be met with respect to minimum coverage and leverage ratios, pro
forma cash flow and maximum capital expenditures. Restrictive covenants in our
debt agreements may restrict our ability to implement our acquisition
strategy.
2000 Acquisitions. In fiscal 2000, we acquired a total of 143 convenience
stores in 18 transactions for approximately $106.7 million, net of cash
acquired. These acquisitions were funded with borrowings under our bank credit
facility and cash on hand.
Subsequent to fiscal year end 2000, we acquired the operating assets of 28
stores located in Mississippi, Louisiana, and North Carolina. We funded these
transactions with proceeds from the acquisition facility and cash on hand.
Capital Expenditures. Capital expenditures (excluding all acquisitions) for
fiscal 2000 were $56.4 million. Capital expenditures are primarily
expenditures for existing store improvements, store equipment, new store
development, information systems and expenditures to comply with regulatory
statutes, including those related to environmental matters. We finance
substantially all capital expenditures and new store development through cash
flow from operations, a sale-leaseback program or similar lease activity,
vendor reimbursements and asset dispositions.
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 terms of
twenty years with four five-year renewal options. The lease payment is based
on market rates ranging from 10.5% to 11.5% applied to the cost of each
respective property. We retain ownership of all personal property and gasoline
marketing equipment. The bank credit facility limits or caps the proceeds of
sale-leasebacks that we can use to fund our operations or capital
expenditures. Under this sale-leaseback program, we received $9.5 million in
fiscal 2000 and $10.7 million during fiscal 1999.
In fiscal 2000, we received approximately $24.3 million in sale-leaseback
proceeds, vendor reimbursements for capital improvements and proceeds from
asset dispositions; therefore, net capital expenditures, excluding all
acquisitions, for fiscal 2000 were $32.1 million. We anticipate that net
capital expenditures for fiscal 2001 will be approximately $45.0 million.
Long-Term Debt. At September 30, 2000, our long-term debt consisted
primarily of $200.0 million of the senior subordinated notes, $316.5 million
in term loans, and $10.0 million outstanding under the acquisition facility.
See "--Bank Credit Facility."
We have outstanding $200.0 million of 10 1/4% senior subordinated notes due
2007. Interest on the senior subordinated notes is due on October 15 and April
15 of each year. The senior subordinated notes are unconditionally guaranteed,
on an unsecured basis, as to the payment of principal, premium, if any, and
interest, jointly and severally, by our subsidiaries, except for PH Holding
and its subsidiaries. The senior subordinated notes contain covenants that,
among other things, restrict our ability and any restricted subsidiary's
ability to (i) pay dividends or make distributions, except in amounts not in
excess of a percentage of our net income of proceeds of debt or equity
issuances and in amounts not in excess of $5.0 million, (ii) issue stock of
subsidiaries, (iii) make investments of non-affiliated entities, except
employee loans of up to $3.0 million, (iv) repurchase stock, except stock
owned by employees in amounts not in excess of $2.0 million with the proceeds
from debt
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or equity issuances, (v) incur liens not securing debt permitted under the
senior subordinated notes, (vi) enter into transactions with affiliates, (vii)
enter into sale-leaseback transactions, or (viii) engage in mergers or
consolidations.
We can incur debt under the senior subordinated notes if the ratio of our
pro forma EBITDA to fixed charges, after giving effect to such incurrence, is
at least 2 to 1. Even if we do not meet this ratio we can incur: (i) bank
credit facility debt of up to $50.0 million of acquisition debt and other debt
in an amount equal to the greater of $45.0 million or an amount equal to 4.0%
times our annualized revenues, (ii) capital leases or acquisition debt in
amounts not to exceed in the aggregate 10% of our tangible assets at time of
incurrence, (iii) intercompany debt, (iv) pre-existing debt, (v) up to $15.0
million in any type of debt or (vi) debt for refinancing of the above
described debt.
The senior subordinated notes also place conditions on the terms of asset
sales or transfers and require us either to reinvest the proceeds of an asset
sale or transfer, or, if we do not reinvest those proceeds, to pay down our
bank credit facility or other senior debt or to offer to redeem our senior
subordinated notes with any asset sale proceeds not so used. All of the senior
subordinated notes may be redeemed after October 15, 2002 at a redemption
price which begins at 105.125% and decreases to 100.0% after October 2005.
Cash Flows From Financing Activities. We used proceeds from our bank credit
facility and cash on hand to finance fiscal 2000 acquisitions and long term
debt principal requirements.
Cash Requirements. We believe that cash on hand, together with cash flow
anticipated to be generated from operations, short-term borrowing for seasonal
working capital, permitted borrowings under our credit facilities and
permitted borrowings by our unrestricted subsidiary 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.
Shareholders' Equity. As of September 28, 2000, our shareholders' equity
totaled $118.0 million. The increase of $13.8 million in shareholders' equity
is attributed to fiscal year 2000 net income of $14.0 million less stock
issuance costs of $0.2 million.
Additional paid in capital is impacted by the accounting treatment applied
to a 1987 leveraged buyout of the outstanding common stock of our predecessor
which resulted in a debit to equity of $17.1 million. This debit had the
effect, among others, of offsetting $7.0 million of equity capital invested in
us by our shareholders.
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 December 12, 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. In Mississippi, we meet our financial responsibility requirements
through coverage under the state trust fund.
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
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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.
Environmental reserves of $14.1 million as of September 28, 2000, represent
estimates for future expenditures for remediation, tank removal and litigation
associated with 376 all known contaminated sites as a result of releases
(e.g., overfills, spills and underground storage tank releases) and are based
on current regulations, historical results and certain other factors. Although
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 September 28, 2000, amounts which are probable of reimbursement (based on
our experience) from those sources total $12.8 million and are recorded as
long-term environmental receivables. These receivables are expected to be
collected within a period of twelve to eighteen months after the reimbursement
claim has been submitted. In Florida, remediation of such contamination before
January 1, 1999, will be performed by the state and we expect substantially
all of the costs will be paid by the state trust fund. We will perform
remediation in other states through independent contractor firms engaged by
us. For certain sites the trust fund does not cover a deductible or has a co-
pay which may be less than the cost of such remediation.
We have reserved $1.5 million 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. 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 costs, some or all of which may not be eligible for reimbursement
from state trust funds.
Several of the locations identified as contaminated are being cleaned up by
third parties who have indemnified us as to responsibility for 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 Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June 1999, the
effective date of SFAS No. 133 was extended for one year and, consequently,
the statement is now effective for the first fiscal quarter of fiscal 2001.
Adoption of SFAS 133 is not anticipated to have a material impact on our
consolidated financial statements.
Inflation
During fiscal 2000, cigarette prices increased 16.2%. In general, we have
passed cigarette price increases to our customers. However, during fiscal 2000
as in years past, major cigarette manufacturers offered rebates to retailers,
and we passed along these rebates to our customers.
During 2000, wholesale gasoline fuel prices increased significantly from a
low of $21 per barrel in October 1999 to a high of $37 per barrel in September
2000. 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 and gross profit dollars.
General CPI increased 4.2% during fiscal 2000 and food at home, which is
most indicative of our merchandise inventory, increased 3.1%. While we have
generally been able to pass along these price increases to our customers, we
make no assurances that continued inflation will not have a material adverse
effect on our sales and gross profit dollars.
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Item 7A. Quantitative And Qualitative Disclosures About Market Risk
Quantitative Disclosures:
We are exposed to certain 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 two 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 December
12, 2000.
EXPECTED MATURITY DATE
<TABLE>
<CAPTION>
As of September 28, 2000
--------------------------------------------------------------------------
Fair
FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 Thereafter Total Value
------- ------- ------- ------- ------- ---------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt.......... $20,650 $25,319 $28,573 $45,073 $88,654 $319,354 $527,623 $503,472
Weighted Average
Interest Rate.......... 10.14% 10.22% 10.23% 10.22% 10.24% 10.26% 10.22%
<CAPTION>
As of September 30, 1999
----------------------------------------------------------------
FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 Thereafter Total
------- ------- ------- ------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt.......... $10,687 $19,939 $24,942 $28,196 $39,510 $317,633 $440,907
Weighted Average
Interest Rate.......... 9.42% 9.46% 9.52% 9.60% 9.69% 10.08% 9.67%
</TABLE>
Qualitative Disclosures:
Our primary exposure relates to:
. interest rate risk on long-term and short-term borrowings,
. our ability to refinance our senior subordinated notes at maturity at
market rates,
. the impact of interest rate movements on our ability to meet interest
expense requirements and exceed financial covenants, 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. 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 continues to evaluate our
financial position on an ongoing basis.
25
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
------------
<S> <C>
Financial Statements:
Independent Auditors' Report.................................... 27
Consolidated Balance Sheets as of September 30, 1999 and
September 28, 2000............................................. 28
Consolidated Statements of Operations for the years ended
September 24, 1998, September 30, 1999, and September 28,
2000........................................................... 30
Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended September 24, 1998, September 30, 1999, and
September 28, 2000............................................. 31
Consolidated Statements of Cash Flows for the years ended
September 24, 1998, September 30, 1999, and September 28,
2000........................................................... 32
Notes to Consolidated Financial Statements...................... 34
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts and Reserves..... S-1
Financial Statement Exhibit:
Exhibit 12.1--Computation of Ratio of Earnings to Fixed
Charges........................................................ Exhibit 12.1
</TABLE>
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders of
The Pantry, Inc.
Sanford, North Carolina
We have audited the accompanying consolidated balance sheets of The Pantry,
Inc. ("The Pantry") and subsidiaries as of September 30, 1999 and September
28, 2000, and the related consolidated statements of operations, shareholders'
equity (deficit), and cash flows for each of the three years in the period
ended September 28, 2000. Our audits also included the financial statement
schedule listed in the Index at Item 14. These financial statements and
financial statement schedule are the responsibility of The Pantry's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Pantry, Inc. and
subsidiaries as of September 30, 1999 and September 28, 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended September 28, 2000 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
November 14, 2000
27
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, September 28,
1999 2000
------------- -------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 31,157 $ 53,354
Receivables (net of allowance for doubtful
accounts of $766 at September 30, 1999, $1,205
at September 28, 2000).......................... 24,947 23,601
Inventories (Note 3)............................. 76,220 87,962
Prepaid expenses................................. 3,524 3,131
Property held for sale........................... 135 2,324
Deferred income taxes (Note 6)................... 4,849 2,070
-------- --------
Total current assets........................... 140,832 172,442
-------- --------
Property and equipment, net (Notes 4, 5, and 7).... 421,685 466,967
-------- --------
Other assets:
Goodwill (net of accumulated amortization of
$18,324 at September 30, 1999, $24,352 at
September 28, 2000) (Note 2).................... 197,705 250,977
Deferred financing costs (net of accumulated
amortization of $3,499 at September 30, 1999,
$4,513 at September 28, 2000) (Note 5).......... 12,680 12,317
Environmental receivables (Note 8)............... 13,136 12,819
Other............................................ 7,693 14,819
-------- --------
Total other assets............................. 231,214 290,932
-------- --------
Total assets....................................... $793,731 $930,341
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
28
<PAGE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS--(Continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, September 28,
1999 2000
------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY:
-------------------------------------
Current liabilities:
Current maturities of long-term debt (Note 5).... $ 10,687 $ 20,649
Current maturities of capital lease obligations
(Note 7)........................................ 1,205 1,151
Accounts payable................................. 92,577 101,903
Accrued interest (Note 5)........................ 9,928 12,050
Accrued compensation and related taxes........... 9,593 13,889
Income taxes payable (Note 6).................... 6,784 1,250
Other accrued taxes.............................. 13,834 13,396
Accrued insurance................................ 6,158 5,270
Other accrued liabilities........................ 10,422 10,551
-------- --------
Total current liabilities...................... 161,188 180,109
-------- --------
Long-term debt (Note 5)............................ 430,220 506,974
-------- --------
Other noncurrent liabilities:
Environmental costs (Note 8)..................... 15,402 14,066
Deferred income taxes (Note 6)................... 26,245 34,508
Deferred revenue (Note 8)........................ 34,249 54,802
Capital lease obligations (Note 7)............... 13,472 12,648
Employment obligations........................... 486 --
Other............................................ 8,272 9,254
-------- --------
Total other noncurrent liabilities............. 98,126 125,278
-------- --------
Commitments and contingencies (Notes 5, 7, 8 and
13)
Shareholders' Equity:
Common stock, $.01 par value, 50,000,000 shares
authorized; 18,111,474 issued and outstanding at
September 30, 1999, and September 28, 2000 (Note
10)............................................. 182 182
Additional paid-in capital (Note 11)............. 128,256 128,018
Shareholder loans................................ (937) (912)
Accumulated deficit.............................. (23,304) (9,308)
-------- --------
Total shareholders' equity..................... 104,197 117,980
-------- --------
Total liabilities and shareholders' equity......... $793,731 $930,341
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, except per share amounts)
<TABLE>
<CAPTION>
September 24, September 30, September 28,
1998 1999 2000
------------- ------------- -------------
(52 weeks) (53 weeks) (52 weeks)
<S> <C> <C> <C>
Revenues:
Merchandise sales................. $460,798 $ 731,681 $ 907,550
Gasoline sales.................... 509,958 923,786 1,497,696
Commissions....................... 14,128 23,403 27,014
-------- ---------- ----------
Total revenues................ 984,884 1,678,870 2,432,260
-------- ---------- ----------
Cost of sales:
Merchandise....................... 303,968 489,258 602,615
Gasoline.......................... 447,565 818,784 1,357,766
-------- ---------- ----------
Total cost of sales........... 751,533 1,308,042 1,960,381
-------- ---------- ----------
Gross profit........................ 233,351 370,828 471,879
-------- ---------- ----------
Operating expenses:
Operating, general and
administrative expenses.......... 172,850 262,852 339,786
Merger integration costs (Note
2)............................... 1,016 -- --
Depreciation and amortization..... 27,642 42,798 56,062
-------- ---------- ----------
Total operating expenses...... 201,508 305,650 395,848
-------- ---------- ----------
Income from operations.............. 31,843 65,178 76,031
-------- ---------- ----------
Other income (expense):
Interest expense.................. (28,946) (41,280) (52,329)
Miscellaneous..................... 1,776 852 1,070
-------- ---------- ----------
Total other expense........... (27,170) (40,428) (51,259)
-------- ---------- ----------
Income before income taxes and
extraordinary loss................. 4,673 24,750 24,772
Income tax expense (Note 6)......... -- (10,750) (10,776)
-------- ---------- ----------
Net income before extraordinary
loss............................... 4,673 14,000 13,996
Extraordinary loss (Note 5)......... (7,998) (3,584) --
-------- ---------- ----------
Net income (loss)................... $ (3,325) $ 10,416 $ 13,996
======== ========== ==========
Net income (loss) applicable to
common shareholders (Note 14)...... $ (6,267) $ 6,233 $ 13,996
======== ========== ==========
Earnings per share (Note 14):
Basic:
Income before extraordinary
loss......................... $ 0.18 $ 0.71 $ 0.77
Extraordinary loss............ $ (0.82) $ (0.26) --
-------- ---------- ----------
Net income (loss)............. $ (0.64) $ 0.45 $ 0.77
======== ========== ==========
Diluted:
Income before extraordinary
loss......................... $ 0.16 $ 0.65 $ 0.74
Extraordinary loss............ $ (0.73) $ (0.24) --
-------- ---------- ----------
Net income (loss)............. $ (0.57) $ 0.41 $ 0.74
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (DEFICIT)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------- ------------------------ Paid-in
Shares Par Value Shares Par Value Capital
-------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, September 25,
1997................... 43,499 $ -- 5,815,479 $ 58 $ 22,448
Net loss................ -- -- -- -- --
Issuances of common
stock.................. -- -- 5,889,378 59 57,092
Contribution of Series A
preferred stock and
related dividends to
additional paid in
capital................ (25,999) -- -- -- 6,508
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ---------- -------- --------
Balance, September 24,
1998................... 17,500 -- 11,704,857 117 86,048
Net income.............. -- -- -- -- --
Issuances of common
stock.................. -- -- 156,617 2 1,788
Public sale of common
stock at $13.00 per
share, net of
expenses............... -- -- 6,250,000 63 72,916
Redemption of Series B
preferred stock........ (17,500) -- -- -- (15,387)
Dividends on preferred
stock.................. -- -- -- -- --
-------- -------- ---------- -------- --------
Balance, September 30,
1999................... -- -- 18,111,474 182 145,365
Net income.............. -- -- -- -- --
Repayment of shareholder
loans.................. -- -- -- -- --
Stock issue costs....... -- -- -- -- (238)
-------- -------- ---------- -------- --------
Balance, September 28,
2000................... $ -- $ -- 18,111,474 $ 182 $145,127
======== ======== ========== ======== ========
<CAPTION>
Total
Additional
Paid-in Shareholder Accumulated
Other(1) Capital Loans Deficit Total
-------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, September 25,
1997................... $(17,109) $ 5,339 $ -- $(23,270) $(17,873)
Net loss................ -- -- -- (3,325) (3,325)
Issuances of common
stock.................. -- 57,092 (215) -- 56,936
Contribution of Series A
preferred stock and
related dividends to
additional paid in
capital................ -- 6,508 -- -- 6,508
Dividends on preferred
stock.................. -- -- -- (2,942) (2,942)
-------- -------- ---------- -------- --------
Balance, September 24,
1998................... (17,109) 68,939 (215) (29,537) 39,304
Net income.............. -- -- -- 10,416 10,416
Issuances of common
stock.................. -- 1,788 (722) -- 1,068
Public sale of common
stock at $13.00 per
share, net of
expenses............... -- 72,916 -- -- 72,979
Redemption of Series B
preferred stock........ -- (15,387) -- (2,113) (17,500)
Dividends on preferred
stock.................. -- -- -- (2,070) (2,070)
-------- -------- ---------- -------- --------
Balance, September 30,
1999................... (17,109) 128,256 (937) (23,304) 104,197
Net income.............. -- -- -- 13,996 13,996
Repayment of shareholder
loans ................. -- -- 25 -- 25
Stock issue costs ...... -- (238) -- -- (238)
-------- -------- ---------- -------- --------
Balance, September 28,
2000................... $(17,109) $128,018 $ (912) $ (9,308) $117,980
======== ======== ========== ======== ========
</TABLE>
--------
(1) Represents excess of amount paid in 1987 leveraged buy-out over net book
value for "carry over" shareholders. See Note 1.
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------
September 24, September 30, September 28,
1998 1999 2000
------------- ------------- -------------
(52 weeks) (53 weeks) (52 weeks)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................... $ (3,325) $ 10,416 $ 13,996
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Extraordinary loss................ 2,006 3,406 --
Depreciation and amortization..... 27,642 42,798 56,062
Provision for deferred income
taxes............................ 138 530 8,168
Loss on sale of property and
equipment........................ 531 4,484 1,995
Provision for environmental
expenses......................... 6,181 (1,735) (1,336)
Provision for closed stores....... 50 -- 430
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Receivables....................... (8,512) 8,741 1,217
Inventories....................... (4,518) (11,138) (2,447)
Prepaid expenses.................. 390 (34) 834
Other noncurrent assets........... 5,111 (830) (1,968)
Accounts payable.................. 13,896 22,556 2,328
Other current liabilities and
accrued expenses................. 2,241 (27,310) (2,352)
Employment obligations............ (407) (448) (496)
Other noncurrent liabilities...... 6,608 17,131 11,728
--------- --------- ---------
Net cash provided by operating
activities......................... 48,032 68,567 88,159
--------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property held for
sale............................... (5,203) (178) (2,094)
Additions to property and
equipment.......................... (42,067) (47,416) (56,414)
Proceeds from sale lease-back
transactions....................... 4,807 10,724 9,470
Proceeds from sale of property and
equipment.......................... 7,648 2,366 7,033
Acquisitions of related businesses,
net of cash acquired............... (250,592) (194,414) (106,686)
--------- --------- ---------
Net cash used in investing
activities......................... (285,407) (228,918) (148,691)
--------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal repayments under capital
leases............................. (1,424) (1,495) (1,703)
Principal repayments of long-term
debt............................... (51,543) (184,888) (71,284)
Proceeds from issuance of long-term
debt............................... 278,508 297,000 158,000
Redemption of Series B preferred
stock.............................. -- (17,500) --
Net proceeds from initial public
offering........................... -- 72,979 --
Net proceeds from other stock.......
Net proceeds from other equity
issues............................. 56,935 1,068 --
Accrued dividends paid on preferred
stock.............................. -- (6,461) --
Stock issue costs................... -- -- (238)
Repayment of shareholder loans...... -- -- 25
Other financing costs............... (14,044) (3,599) (2,071)
--------- --------- ---------
Net cash provided by financing
activities......................... 268,432 157,104 82,729
--------- --------- ---------
Net increase (decrease)............. 31,057 (3,247) 22,197
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 3,347 34,404 31,157
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 34,404 $ 31,157 $ 53,354
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------
September 24, September 30, September 28,
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
Cash paid (refunded)
during the year:
Interest................ $21,826 $43,064 $50,207
======= ======= =======
Taxes................... $ 784 $ 34 $ 1,600
======= ======= =======
</TABLE>
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1998 and 1999, The Pantry entered into several business
acquisitions and divestitures. See Note 2--Business Acquisitions and Note 10--
Common Stock. In 1998 and in connection with the Lil' Champ acquisition, the
holders of The Pantry's Series A preferred stock contributed all outstanding
shares of Series A preferred stock and related accrued and unpaid dividends to
the capital of The Pantry, resulting in an increase in paid in capital of
$6,508.
During 1998, 1999 and 2000, The Pantry financed certain capital
expenditures totaling $1,086,000, $2,803,000 and $825,000, respectively,
through the issuance of capital leases.
33
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--HISTORY OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Pantry
The consolidated financial statements include the accounts of The Pantry,
Inc. (the "Company" or "The Pantry") and its wholly-owned subsidiaries,
Sandhills, Inc., Lil' Champ Food Stores, Inc. and its wholly-owned subsidiary,
Miller Enterprises Inc., Global Communications, Inc., PH Holding Corporation
and PH Holding's wholly-owned subsidiaries, TC Capital Management, Inc. and
Pantry Properties, Inc. All intercompany transactions and balances have been
eliminated in consolidation. The Pantry owns and operates 1,313 convenience
stores in Florida (517), North Carolina (343), South Carolina (251), Georgia
(57), Kentucky (45), Mississippi (37), Virginia (30), Indiana (18), and
Tennessee (15).
During fiscal 1996, Freeman Spogli & Co. ("Freeman Spogli") and Chase
Manhattan Capital Corporation ("Chase") acquired a controlling interest in the
Company through a series of transactions which included the purchase of common
stock from certain shareholders and the purchase of newly issued common and
preferred stock. During fiscal years 1997 and 1998, the Company issued
additional shares of common and preferred stock to existing shareholders and
certain directors and executives of the Company. As of September 28, 2000,
Freeman Spogli owns 10,329,524 shares of common stock and warrants to purchase
2,346,000 shares of common stock which represents beneficial ownership of
approximately 62.0% of our outstanding shares, including shares underlying
warrants. Chase and its affiliates own 2,298,438 shares of common stock, or
12.7% of the outstanding shares.
On June 8, 1999, we offered and sold 6,250,000 shares of our common stock
in our initial public offering (the "IPO"). The initial offering price was
$13.00 per share and the Company received $75.6 million in net proceeds,
before expenses. The net proceeds were used (i) to repay $19.0 million in
indebtedness under the 1999 bank credit facility; (ii) to redeem $17.5 million
in outstanding preferred stock; and (iii) to pay accrued dividends on the
preferred stock of $6.5 million. Of the remaining $32.6 million, $30.2 million
was used to fund acquisitions closed during the fourth quarter of fiscal 1999,
$2.4 million was reserved to pay fees and expenses associated with the IPO.
Accounting Period
The Pantry operates on a 52 or 53 week fiscal year ending on the last
Thursday in September. For 1998 and 2000, The Pantry's fiscal years contained
52 weeks and for 1999 The Pantry's fiscal year contained 53 weeks.
Acquisition Accounting
Generally, our acquisitions are accounted for under the purchase method of
accounting whereby purchase price is allocated to assets acquired and
liabilities assumed based on fair value. Excess of purchase price over fair
value of net assets acquired is recorded as goodwill. Accordingly, the
Consolidated Statement of Operations for the fiscal years presented includes
the results of operations for each of the acquisitions from the date of
acquisition only.
On August 13, 1987, Montrose Pantry Acquisition Corporation acquired all of
our common stock in a leveraged buy-out. Certain individuals and entities
which held an ownership interest retained approximately 45% ownership after
the leveraged buy-out and a new basis of accounting was established which
resulted in a partial step-up in basis. In accordance with EITF 88-16 and to
the extent that certain individuals and entities maintained their equity
interests, the excess amount paid over net book value was recorded as a debit
in shareholders' deficit ($17,109,000).
34
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
For purposes of the consolidated financial statements, cash and cash
equivalents includes cash on hand, demand deposits, and short-term investments
with original maturities of three months or less.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out method for merchandise inventories and using the
first-in, first-out method for gasoline inventories.
Property Held for Sale
Property is classified as current assets when management's intent is to
sell these assets in the ensuing fiscal year, and is recorded at the lower of
cost or fair value less cost to sell.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization is provided primarily by the
straight-line method over the estimated useful lives of the assets for
financial statement purposes and by accelerated methods for income tax
purposes.
Estimated useful lives for financial statement purposes are as follows:
<TABLE>
<S> <C>
Buildings................................................. 20 to 33 1/2 years
Equipment, furniture and fixtures......................... 3 to 10 years
Automobiles............................................... 3 to 5 years
</TABLE>
Upon sale or retirement of depreciable assets, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is
recognized. Leased buildings capitalized in accordance with SFAS No. 13,
Accounting for Leases, are recorded at the lesser of fair value or the
discounted present value of future lease payments at the inception of the
leases. Amounts capitalized are amortized over the estimated useful lives of
the assets or terms of the leases (generally 5 to 20 years) using the
straight-line method.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over periods of 20
to 40 years. The Pantry considers legal, contractual, regulatory, obsolescence
and competitive factors in determining the useful life and amortization period
of this intangible asset. Additions to goodwill and increases in goodwill
amortization expense primarily relate to our acquisition of the stock or
assets of convenience store operators. The useful life of the associated
goodwill is either indefinite for real property purchased or tied directly to
leases with terms, including renewal options of 30 to 40 years.
The Pantry assesses the recoverability of this intangible asset by
determining whether amortization of the goodwill balance over its remaining
life can be recovered through estimated undiscounted future operating results.
Estimated future results are based on a trend of historical results for the
trailing three fiscal years and management's estimate of future results which
indicate that the goodwill balances will be recovered over the various periods
remaining to be benefited.
Long-Lived Assets
Long-lived assets are reviewed for impairment on a store-by-store basis
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. When an evaluation is
35
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
required, the projected future undiscounted cash flows due to each store are
compared to the carrying value of the long-lived assets, including an
allocation of goodwill if appropriate, of that store to determine if a write-
down to fair value is required.
Deferred Financing Cost
Deferred financing cost represents expenses related to issuing The Pantry's
long-term debt, obtaining its lines of credit and obtaining lease financing.
See Note 5--Long Term Debt and Note 7--Leases. Such amounts are being
amortized over the remaining term of the respective financing.
Vendor Allowances, Rebates and Other Vendor Payments
The Pantry receives payments for vendor allowances, volume rebates and
other supply arrangements in connection with various programs. The Pantry
records these payments as a reduction to cost of sales or expenses to which
the particular vendor payment relates. The amounts recorded against cost of
sales were $21.6 million, $54.7 million and $78.6 million for fiscal years
1998, 1999 and 2000, respectively. For unearned payments, The Pantry records
deferred income and amortizes the balance, as earned, over the term of the
respective agreement.
Environmental Costs
The Pantry accounts for the cost incurred to comply with federal and state
environmental regulations as follows:
. The environmental reserve reflected in the financial statements is based
on internal and external estimates of the costs to remediate sites
relating to the operation of underground storage tanks. Factors
considered in the estimates of the reserve are the expected cost to
remediate each contaminated site and the estimated length of time to
remediate each site.
. Future remediation costs for amounts of deductibles under, or amounts
not covered by, state trust fund programs and third party insurance
arrangements and for which the timing of payments can be reasonably
estimated are discounted using a ten-percent rate. All other
environmental costs are provided for on an undiscounted basis.
. Amounts which are probable of reimbursement under state trust fund
programs or third party insurers, based on The Pantry's experience, are
recognized as receivables and are expected to be collected within a
period of twelve to eighteen months after the reimbursement claim has
been submitted. These receivables exclude all deductibles and an
estimate for uncollectible reimbursements. The Pantry's reimbursement
experience exceeds a 95% collection rate. The adequacy of the liability
and uncollectible receivable reserve is evaluated quarterly and
adjustments are made based on updated experience at existing sites,
newly identified sites and changes in governmental policy.
. Annual fees for tank registration and environmental compliance testing
are expensed as incurred.
. Expenditures for upgrading tank systems including corrosion protection,
installation of leak detectors and overfill/spill devices are
capitalized and depreciated over the remaining useful life of the asset
or the respective lease term, whichever is less.
. The tank removal costs associated with locations which The Pantry plans
to sell or dispose of in the near future are estimated annually and a
liability is established through a charge to expense. The costs to
remove tanks at active locations are expensed as incurred.
36
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
All operations of The Pantry and its subsidiaries are included in a
consolidated Federal income tax return. Pursuant to SFAS No. 109, Accounting
for Income Taxes, The Pantry recognizes deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between
financial statement carrying amounts and the related tax bases.
Excise and Use Taxes
The Pantry collects and remits various federal and state excise taxes on
petroleum products. Gasoline sales and cost of sales included excise taxes of
approximately $154,954,000, $303,466,000, and $419,341,000 for 1998, 1999, and
2000, respectively.
Advertising costs
Advertising costs are expensed as incurred. Advertising expense was
approximately $1,019,000, $1,694,000 and $2,219,000 for fiscal 1998, 1999 and
2000, respectively.
Stock Based Compensation
The Pantry's stock option plan is accounted for in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. The Pantry follows the disclosure requirements of SFAS No. 123,
Accounting for Stock Based Compensation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
these estimates.
Segment Reporting
In 1999, The Pantry adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major
customers. The Pantry operates in one reportable segment.
Reclassifications
Certain amounts in the fiscal 1998 and 1999 consolidated financial
statements have been reclassified to conform to the fiscal 2000 presentation.
Newly Adopted Accounting Standards and Recently Issued Accounting Standards
Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (i) a hedge of the exposure to changes in the fair
value of
37
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
a recognized asset or liability or an unrecognized firm commitment, (ii) a
hedge of the exposure to variable cash flows of a forecasted transaction, or
(iii) a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction.
Under SFAS No. 133, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk. In June 1999,
the effective date of SFAS No. 133 was extended one year; consequently, the
statement will now be effective for the first quarter of fiscal 2001. Adoption
of SFAS 133 is not anticipated to have a material impact on The Pantry's
consolidated financial statements.
NOTE 2--BUSINESS ACQUISITIONS:
During fiscal 2000, The Pantry acquired 143 convenience stores located in
North Carolina, South Carolina, Florida, Georgia, Mississippi and Virginia in
18 separate transactions. The transactions were accounted for by the purchase
method of accounting. The 2000 acquisitions were funded from borrowings under
the bank credit facility, as amended, and cash on hand.
During fiscal 1999, The Pantry acquired 297 convenience stores located in
North Carolina, South Carolina, Florida, Georgia and Virginia in eight
separate transactions. The transactions were accounted for by the purchase
method of accounting. The 1999 acquisitions were funded from borrowings under
the 1998 bank credit facility, an equity investment, and cash on hand.
The purchase prices have been allocated to the assets purchased and the
liabilities assumed based upon the fair values on the dates of the
acquisitions, as follows (amounts in thousands):
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
ASSETS ACQUIRED:
Receivables, net......................................... $ 23,220 $ 1,464
Inventories.............................................. 17,347 9,275
Deferred income taxes.................................... 733 --
Prepaid expenses and other current assets................ 1,192 441
Property and equipment................................... 120,856 52,750
Other noncurrent assets.................................. 4,308 5,203
-------- --------
Total assets acquired.................................... 167,656 69,133
-------- --------
LIABILITIES ASSUMED:
Accounts payable--trade.................................. 15,308 6,998
Other liabilities and accrued expenses................... 20,615 2,039
Income taxes payable..................................... 6,863 --
Environmental remediation liabilities.................... -- 25
Noncurrent deferred income taxes......................... 5,221 --
Other noncurrent liabilities............................. 4,402 7,325
-------- --------
Total liabilities assumed................................ 52,409 16,387
-------- --------
Net tangible assets acquired............................. 115,247 52,746
Excess of purchase price over fair value of net assets
acquired................................................ 79,167 53,940
-------- --------
Total consideration paid, including direct costs, net of
cash acquired........................................... $194,414 $106,686
======== ========
</TABLE>
38
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase price allocations for certain of the 2000 acquisitions are
preliminary estimates, based on available information, internal estimates and
certain assumptions management believes are reasonable. Accordingly, the
purchase price allocations are subject to finalization pending the completion
of internal and external appraisals of assets acquired. The excess of the
purchase prices over fair values of the net assets acquired for all
acquisitions has been recorded as goodwill, which is being amortized on a
straight-line basis over 30 years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of The Pantry and acquired businesses as if
the 2000 transactions occurred at the beginning of the fiscal year for each of
the periods presented (amounts in thousands):
<TABLE>
<CAPTION>
1999 2000
---------- ----------
<S> <C> <C>
Total revenues...................................... $2,189,686 $2,545,661
Income before extraordinary loss.................... $ 12,333 $ 14,906
Net income.......................................... $ 8,749 $ 14,906
Net income applicable to common shareholders........ $ 4,566 $ 14,906
Earnings per share applicable to common
shareholders:
Basic:
Income before extraordinary loss................ $ 0.59 $ 0.82
Extraordinary loss.............................. (0.26) --
---------- ----------
Net income...................................... $ 0.33 $ 0.82
========== ==========
Diluted:
Income before extraordinary loss................ $ 0.54 $ 0.79
Extraordinary loss.............................. (0.24) --
---------- ----------
Net income...................................... $ 0.30 $ 0.79
========== ==========
</TABLE>
In connection with the Lil' Champ acquisition, The Pantry recorded an
integration charge of approximately $1.0 million in fiscal 1998 for costs of
combining its existing businesses with the acquired businesses of Lil' Champ.
The charge included:
. $300,000 for relocation costs
. $600,000 for elimination of duplicated contractual services for which
there is no future economic benefit
. $100,000 for other consolidation and related expenses
The Pantry's integration plan included
. the relocation of approximately 11 employees
. the elimination of duplicate contractual services
. conforming Lil' Champ's corporate and field operations to The Pantry's
policies and procedures
. the disposal of unprofitable and unstrategic locations and operations
In accordance with accounting principles generally accepted in the United
States of America, these integration costs were not included as part of the
purchase price allocation for the Lil' Champ acquisition.
In connection with the Lil' Champ acquisition, The Pantry sold all 48 Lil'
Champ store operations and idle property in the state of Georgia. The sale was
completed on September 1, 1998. As required by SFAS No. 121, these assets were
measured at fair value less costs to sell during the allocation period
following the
39
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
consummation date of the acquisition. The Pantry received cash proceeds of $2.5
million from the disposition, which approximated the carrying value of the
assets. Accordingly, no gain or loss was recorded on the disposition. Revenues
and net loss before taxes related to the 48 stores disposed of and included in
our historical financial statements totaled approximately $30,313,000 and
$(954,000), respectively, for the year ended September 24, 1998.
NOTE 3--INVENTORIES:
At September 30, 1999 and September 28, 2000, inventories consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Inventories at FIFO cost:
Merchandise............................................ $ 63,924 $ 70,461
Gasoline............................................... 22,431 28,806
-------- --------
86,355 99,267
Less adjustment to LIFO cost:
Merchandise............................................ (10,135) (11,305)
-------- --------
Inventories at LIFO cost................................. $ 76,220 $ 87,962
======== ========
</TABLE>
The positive effect on cost of sales of LIFO inventory liquidations was
$482,000, $53,000 and $4,000 for fiscal years 1998, 1999 and 2000,
respectively.
NOTE 4--PROPERTY AND EQUIPMENT:
At September 30, 1999 and September 28, 2000, property and equipment
consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 2000
--------- ---------
<S> <C> <C>
Land................................................... $ 86,708 $ 86,568
Buildings.............................................. 127,609 129,643
Equipment.............................................. 266,794 345,240
Leasehold improvements................................. 51,985 57,811
Construction in progress............................... 10,072 9,749
--------- ---------
543,168 629,011
Less--accumulated depreciation and amortization........ (121,483) (162,044)
--------- ---------
$ 421,685 $ 466,967
========= =========
</TABLE>
40
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--LONG-TERM DEBT:
At September 30, 1999 and September 28, 2000, long-term debt consisted of
the following (in thousands):
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Senior subordinated notes payable; due October 15, 2007;
interest payable semi-annually at 10.25%.................. $200,000 $200,000
Term loan facility-Tranche A; interest payable monthly at
LIBOR (6.62% at September 28, 2000) plus 3.0%; principal
due in quarterly installments through January 31, 2004.... 70,656 61,906
Term loan facility-Tranche B; interest payable monthly at
LIBOR (6.62% at September 28, 2000) plus 3.5%; principal
due in quarterly installments through January 31, 2006.... 156,794 179,973
Term loan facility-Tranche C; interest payable monthly at
LIBOR (6.62% at September 28, 2000) plus 3.75%; principal
due in quarterly installments through January 31, 2006.... -- 74,625
Acquisition facility; interest payable monthly at LIBOR
(6.62% at September 28, 2000) plus 3.0%; principal due in
quarterly installments beginning April 30, 2001 through
January 31, 2004.......................................... 12,000 10,000
Note payable; 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..................................................... 272 230
-------- --------
440,907 527,623
Less--current maturities................................... (10,687) (20,649)
-------- --------
$430,220 $506,974
======== ========
</TABLE>
On October 23, 1997, in connection with the Lil' Champ acquisition, The
Pantry completed the offering of the senior subordinated notes. The senior
subordinated notes are unconditionally guaranteed, on an unsecured senior
subordinated basis, as to the payment of principal, premium, if any, and
interest, jointly and severally, by all guarantors. See Note 15--Supplemental
Guarantors Information. The senior subordinated notes contain covenants that,
among other things, restrict the ability of The Pantry and any restricted
subsidiary to (i) incur additional debt, (ii) pay dividends or make
distributions, (iii) issue stock of subsidiaries, (iv) make certain
investments or repurchase stock, (v) create liens, (vi) enter into
transactions with affiliates or sale-leaseback transactions, and (vii) merge
or consolidate The Pantry or any of its subsidiaries or sell or transfer
assets. The senior subordinated notes also contain financial ratios and tests
which must be met with respect to minimum coverage and leverage ratios, pro
forma cash flow and capital expenditures.
On January 28, 1999, The Pantry entered into its bank credit facility
consisting of (i) a $45.0 million revolving credit facility available for
working capital financing, general corporate purposes and issuing commercial
and standby letters of credit, (ii) a $50.0 million acquisition facility
available to finance acquisitions of related businesses, and (iii) a $240
million term loan facility.
On October 27, 1999, The Pantry entered into an amendment to its bank
credit facility which increased the borrowing capacity to include an
additional $75.0 million term loan. The term loan bears interest, at The
Pantry's option, based on margins over a base rate or an adjusted Eurodollar
rate. Proceeds from the term loan were used to prepay amounts outstanding
under the acquisition facility and to fund fiscal 2000 acquisition.
On November 30, 1999, The Pantry entered into an amendment to its Bank
credit facility to include an additional $25.0 million under Tranche B of the
term loan facility. Proceeds from the term loan were used to fund fiscal 2000
acquisitions.
The bank credit facility contains covenants restricting the ability of The
Pantry and any of its subsidiaries to among other things (i) incur additional
indebtedness, (ii) declare dividends or redeem or repurchase capital
41
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stock, (iii) prepay, redeem or purchase debt, (iv) incur liens, (v) make loans
and investments, (vi) make capital expenditures, (vii) engage in mergers,
acquisitions or asset sales, and (viii) engage in transactions with
affiliates. The bank credit facility also contains financial ratios and tests
which must be met with respect to minimum coverage and leverage ratios, pro
forma cash flow and maximum capital expenditures.
The Pantry used the proceeds of the term loan facilities and a $5.0 million
initial draw under its revolving credit facility, along with cash on hand, to:
. finance the fiscal 1999 acquisition of Miller Enterprises, Inc.
. repay $94.0 million outstanding under the prior bank credit facility,
and replace outstanding letters of credit
. redeem its outstanding senior notes in the aggregate principal amount of
$49.0 million
. pay related transaction costs
As of September 28, 2000, there was $10,000,000 outstanding under the
acquisition facility, outstanding letters of credit of $16,999,000, issued
under the revolving credit facility and $68 million in available credit under
these facilities.
As of September 28, 2000, The Pantry was in compliance with all covenants
and restrictions relating to all its outstanding borrowings.
As of September 28, 2000, substantially all of The Pantry's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
The Pantry's long-term debt maturities for each of the five years following
September 28, 2000 and thereafter are: $20.6 million in 2001; $25.3 million in
2002; $28.6 million in 2003; $45.1 million in 2004; $88.7 million in 2005; and
$319.3 million thereafter.
NOTE 6--INCOME TAXES:
The components of income tax expense (benefit) are summarized below (in
thousands):
<TABLE>
<CAPTION>
1998 1999 2000
----- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $ -- $ 7,093 $ 2,444
State............................................... 138 800 164
----- ------- -------
138 7,893 2,608
----- ------- -------
Deferred:
Federal............................................. -- 2,488 7,279
State............................................... (138) 369 889
----- ------- -------
(138) 2,857 8,168
----- ------- -------
$ -- $10,750 $10,776
===== ======= =======
</TABLE>
42
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of September 30, 1999 and September 28, 2000, deferred tax liabilities
(assets) are comprised of the following (in thousands):
<TABLE>
<CAPTION>
1999 2000
-------- -------
<S> <C> <C>
Depreciation.............................................. $ 39,695 $50,565
Deferred lease cost....................................... 17 17
Inventory................................................. 2,761 3,640
Amortization.............................................. 1,315 857
Other..................................................... 581 635
-------- -------
Gross deferred tax liabilities............................ 44,369 55,714
-------- -------
Capital lease obligations................................. (1,499) (1,609)
Allowance for doubtful accounts........................... (301) (464)
Environmental expenses.................................... (345) 27
Accrued insurance reserves................................ (4,692) (3,715)
Accrued compensation...................................... -- (156)
Exit and employee termination costs....................... (1,328) (10)
Other..................................................... (2,470) (1,609)
-------- -------
Gross deferred tax assets................................. (10,635) (7,536)
Net operating loss carryforwards.......................... (3,223) (7,992)
General business credits.................................. (1,833) (1,833)
AMT credits............................................... (7,282) (5,915)
-------- -------
$ 21,396 $32,438
======== =======
</TABLE>
As of September 30, 1999 and September 28, 2000, net current deferred
income tax assets totaled $4,849,000 and $2,070,000, respectively, and net
noncurrent deferred income tax assets (liabilities) totaled $(26,245,000) and
$(34,508,000), respectively.
Reconciliations of income taxes at the Federal statutory rate (34%) to
actual taxes provided are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Tax expense (benefit) at Federal statutory rate... $(1,131) $ 8,415 $ 8,422
Tax expense (benefit) at state rate, net of
Federal income tax expense (benefit)............. (149) 1,188 1,013
Permanent differences:
Amortization of goodwill........................ 677 1,081 1,161
Other........................................... 52 66 180
Tax benefit from creation of general business
credits.......................................... -- -- --
Valuation allowance............................... 551 -- --
------- ------- -------
Net income tax expense............................ $ -- $10,750 $10,776
======= ======= =======
</TABLE>
43
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of September 28, 2000, The Pantry had net operating loss carryforwards,
general business credits and AMT credits which can be used to offset future
Federal income taxes. The benefit of these carryforwards is recognized, net of
a valuation allowance for a portion of the net operating losses and credits
which The Pantry believes may expire unused, as deferred tax assets. Loss
carryforwards as of September 28, 2000 have the following expiration dates (in
thousands):
<TABLE>
<CAPTION>
Federal State
------- -------
<S> <C> <C>
2009........................................................ $ -- $ 3,158
2010........................................................ -- 2,974
2011........................................................ -- 10,919
2012........................................................ 2,332 5,101
2013........................................................ -- 13,274
2014........................................................ -- 5,162
2015........................................................ -- 5,841
2017........................................................ 9,374 --
2018........................................................ 5,662 --
------- -------
Total loss carryforwards.................................... $17,368 $46,429
======= =======
</TABLE>
NOTE 7--LEASES:
The Pantry leases store buildings, office facilities and store equipment
under both capital and operating leases. The asset balances related to capital
leases at September 30, 1999, and September 28, 2000 are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Buildings.................................................. $13,542 $12,965
Less--accumulated amortization............................. (1,564) (1,976)
------- -------
$11,978 $10,989
======= =======
</TABLE>
Amortization expense related to capitalized leased assets was $1,249,000,
$1,299,000, and $1,345,000 for fiscal 1998, 1999 and 2000, respectively.
44
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments as of September 28, 2000, for capital leases
and operating leases that have initial or remaining terms in excess of one
year are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Fiscal Year Leases Leases
----------- ------- ---------
<S> <C> <C>
2001....................................................... $ 2,684 $ 40,673
2002....................................................... 2,626 39,161
2003....................................................... 2,534 37,888
2004....................................................... 2,368 36,637
2005....................................................... 2,029 33,564
Thereafter................................................. 13,408 96,051
------- --------
Net minimum lease payments................................. 25,649 $283,975
======= ========
Amount representing interest (8% to 20%)................... 11,850
-------
Present value of net minimum lease payments................ 13,799
Less--current maturities................................... 1,151
-------
$12,648
=======
</TABLE>
Rental expense for operating leases was approximately $23,758,000,
$40,551,000 and $50,856,000 for fiscal years 1998, 1999 and 2000,
respectively. Some of The Pantry's leases require contingent rental payments;
such amounts are not material for the fiscal years presented.
During fiscal 1998, 1999, and 2000, The Pantry entered into sale-leaseback
transactions with unrelated parties with net proceeds of $4,807,000,
$10,724,000 and $9,470,000, respectively. The assets sold in these
transactions consisted of newly constructed or acquired convenience stores.
The Pantry retained ownership of all personal property and gasoline marketing
equipment at these locations. The net proceeds from these transactions
approximated the carrying value of the assets at the time of sale;
accordingly, any gains or losses recognized on these transactions were
insignificant for all periods presented. Generally, the leases are operating
leases at market rates with terms of twenty years with four five-year renewal
options.
NOTE 8--COMMITMENTS AND CONTINGENCIES:
As of September 28, 2000, The Pantry was contingently liable for
outstanding letters of credit in the amount of $16,999,000 related primarily
to several areas in which The Pantry is self-insured. The letters of credit
are not to be drawn against unless The Pantry defaults on the timely payment
of related liabilities.
The Pantry is involved in certain legal actions arising in the normal
course of business. In the opinion of management, based on a review of such
legal proceedings, the ultimate outcome of these actions will not have a
material effect on the consolidated financial statements.
Unamortized Liabilities Associated with Vendor Payments
In accordance with the terms of each service or supply agreement and in
accordance with accounting principles generally accepted in the United States
of America, service and supply allowances are amortized over the life of each
agreement in accordance with the specific terms. The unamortized liabilities
associated with these payments as of September 30, 1999 and September 28,
2000, were $35,195,000 and $58,898,000, respectively.
McLane Company, Inc. ("McLane")--The Pantry purchases over 50% of its
general merchandise from a single wholesaler, McLane. The Pantry's arrangement
with McLane is governed by a five-year distribution
45
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
service agreement under which McLane supplies general merchandise, including
tobacco products, grocery items, health and beauty aids and other products.
The Pantry receives annual service allowances based on the number of stores
operating on each contract anniversary date. If The Pantry were to default
under the contract or terminate the distribution service agreement prior to
March 28, 2003, The Pantry must reimburse McLane the unearned, unamortized
portion of the service allowance payments received to date. In accordance with
the terms of the distribution service agreement and in accordance with
generally accepted accounting principles, the original service allowances
received and all future service allowances are amortized to cost of goods sold
on a straight-line method over the life of the agreement.
Major Oil Companies--The Pantry has entered into product purchase
agreements with numerous oil companies to buy specified quantities of gasoline
at market prices. The length of these contracts range from five to thirteen
years and in some cases include minimum annual purchase requirements. In
connection with these agreements, The Pantry may receive upfront vendor
allowances, volume incentive payments and other vendor assistance payments. If
The Pantry were to default under the terms of any contract or terminate the
supply agreement prior to the end of the initial term, The Pantry must
reimburse the respective oil company for the unearned, unamortized portion of
the payments received to date. In accordance with accounting principles
generally accepted in the United States of America, these payments are
amortized using the specific amortization periods in accordance with the terms
of each agreement, either using the straight-line method or based on gasoline
volume purchased. The Pantry has exceeded the minimum required annual
purchases each year and expects to exceed the minimum required annual purchase
levels in future years.
Environmental Liabilities and Contingencies
The Pantry is subject to various federal, state and local environmental
laws and regulations governing underground petroleum storage tanks that
require The Pantry to make certain expenditures for compliance. In particular,
at the federal level, the Resource Conservation and Recovery Act of 1976, as
amended, requires the EPA to establish a comprehensive regulatory program for
the detection, prevention, and cleanup of leaking underground storage tanks.
Regulations enacted by the EPA in 1988 established requirements for:
. installing underground storage tank systems
. upgrading underground storage tank systems
. taking corrective action in response to releases
. closing underground storage tank systems
. keeping appropriate records
. maintaining evidence of financial responsibility for taking corrective
action and compensating third parties for bodily injury and property
damage resulting from releases
In addition to the technical standards, The Pantry is required by federal
and state regulations to maintain evidence of financial responsibility for
taking corrective action and compensating third parties in the event of a
release from its underground storage tank systems. In order to comply with
this requirement, The Pantry maintains surety bonds in the aggregate amount of
approximately $900,000 in favor of state environmental agencies in the states
of North Carolina, Virginia, South Carolina and Georgia 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 and relies on reimbursements from applicable
state trust funds. In Florida, The Pantry meets such financial responsibility
requirements by state trust fund coverage through December 31, 1998 and met
such requirements thereafter through a combination of private commercial
liability insurance and a letter of credit. In Mississippi we meet our
financial responsibility requirements through coverage under the state trust
fund.
46
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
All states in which The Pantry operates or has operated underground storage
tank systems have established trust funds for the sharing, recovering, and
reimbursing of certain cleanup costs and liabilities incurred as a result of
releases from underground storage tank systems. These trust funds, which
essentially provide insurance coverage for the cleanup of environmental
damages caused by the operation of underground storage tank systems, are
funded by an underground storage tank registration fee and a tax on the
wholesale purchase of motor fuels within each state. The Pantry has paid
underground storage tank registration fees and gasoline taxes to each state
where it operates to participate in these programs and has filed claims and
received reimbursement in North Carolina, South Carolina, Kentucky, Indiana,
Florida, Georgia, and Tennessee. The coverage afforded by each state fund
varies but generally provides from $150,000 to $1.0 million per site or
occurrence for the cleanup of environmental contamination, and most provide
coverage for third party liabilities.
In addition to immaterial amounts to be spent by The Pantry, a substantial
amount will be expended for remediation on behalf of The Pantry by state trust
funds established in The Pantry's operating areas or other responsible third
parties (including insurers). To the extent such third parties do not pay for
remediation as anticipated by The Pantry, The Pantry will be obligated to make
such payments, which could materially adversely affect The Pantry's financial
condition and results of operations. Reimbursement from state trust funds will
be dependent upon the maintenance and continued solvency of the various funds.
Environmental reserves of $15,402,000 and $14,066,000 as of September 30,
1999, September 28, 2000, respectively, represent estimates for future
expenditures for remediation, tank removal and litigation associated with 233
and 376 known contaminated sites, respectively, as a result of releases (e.g.,
overfills, spills and underground storage tank releases) and are based on
current regulations, historical results and certain other factors. As of
September 30, 2000 the current average remediation cost per site is
approximately $70,000. Remediation costs for known sites are expected to be
incurred over the next one to ten years. Environmental reserves have been
established on an undiscounted basis with remediation costs based on internal
and external estimates for each site. Future remediation costs for amounts of
deductibles under, or amounts not covered by, state trust fund programs and
third party insurance arrangements and for which the timing of payments can be
reasonably estimated are discounted using a ten-percent rate. The undiscounted
amount of future estimated payments for which The Pantry does not expect to be
reimbursed for each of the five years and thereafter at September 30, 2000 are
as follows (in thousands):
<TABLE>
<CAPTION>
Expected
Fiscal Year Payments
----------- --------
<S> <C>
2001............................................................... $ 910
2002............................................................... 283
2003............................................................... 249
2004............................................................... 146
2005............................................................... 28
Thereafter......................................................... 54
-------
Total undiscounted amounts not covered by a third party............ 1,670
Other current cost amounts......................................... 15,140
Amount representing interest (10%)................................. (2,744)
-------
Environmental reserve.............................................. $14,066
=======
</TABLE>
The Pantry anticipates that it will be reimbursed for a portion of these
expenditures from state trust funds and private insurance. As of September 28,
2000, anticipated reimbursements of $12,819,000 are recorded as long-term
environmental receivables. In Florida, remediation of such contamination
reported before January 1, 1999 will be performed by the state and
substantially all of the costs will be paid by the state trust
47
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
fund. The Pantry will perform remediation in other states through independent
contractor firms engaged by The Pantry. For certain sites the trust fund does
not cover a deductible or has a co-pay which may be less than the cost of such
remediation. Although The Pantry is not aware of releases or contamination at
other locations where it currently operates or has operated stores, any such
releases or contamination could require substantial remediation expenditures,
some or all of which may not be eligible for reimbursement from state trust
funds.
The Pantry has reserved $1.5 million to cover third party claims for
environmental conditions at adjacent real properties that are not covered by
state trust funds or by private insurance. This reserve is based on
management's best estimate of losses that may be incurred over the next
several years based on, among other things, the average remediation cost for
contaminated sites and our historical claims experience.
Several of the locations identified as contaminated are being cleaned up by
third parties who have indemnified The Pantry as to responsibility for clean
up matters. Additionally, The Pantry is awaiting closure notices on several
other locations which will release The Pantry from responsibility related to
known contamination at those sites. These sites continue to be included in our
environmental reserve until a final closure notice is received.
NOTE 9--BENEFIT PLANS:
The Pantry sponsors a 401(k) Employee Retirement Savings Plan for eligible
employees. Employees must be at least nineteen years of age and have one year
of service with at least 1,000 hours worked to be eligible to participate in
the plan. Employees may contribute up to 15% of their annual compensation, and
contributions are matched by The Pantry on the basis of 50% of the first 5%
contributed. Matching contribution expense was $396,000, $573,000 and $687,000
for fiscal years 1998, 1999 and 2000, respectively.
NOTE 10--COMMON STOCK:
On June 4, 1999, the Company effected a 51 for 1 stock split of its common
stock. In connection with the stock split, the number of authorized shares of
common stock was increased to 50,000,000 (300,000 shares previously). The
accompanying financial statements give effect to the stock split,
retroactively applied to all periods presented. There was no change in par
values of the common stock as a result of the stock split.
On June 8, 1999, the Company completed an initial public offering of
6,250,000 shares of its common stock at a public offering price of $13.00 per
share (the "IPO"). The net proceeds from the IPO of $75.6 million, before
expenses, were used (i) to repay $19.0 million in indebtedness under the 1999
bank credit facility; (ii) to redeem $17.5 million in outstanding preferred
stock; and (iii) to pay accrued dividends on the preferred stock of $6.5
million. Of the remaining $32.6 million, $30.2 million was used to fund
acquisitions closed during the fourth quarter of fiscal 1999 and $2.4 million
was reserved to pay fees and expenses associated with the IPO.
Upon completion of the IPO, Freeman Spogli owned approximately 9,349,524
shares and owned warrants for the purchase of an additional 2,346,000 shares
giving Freeman Spogli beneficial ownership of approximately 57.2% of the
outstanding common stock (including shares underlying warrants). During
fiscal, 2000 Freeman Spogli purchased an additional 980,000 shares giving them
beneficial ownership of approximately 62.0% of the outstanding common stock
(including shares underlying warrants).
In 1998 and in connection with the Lil' Champ acquisition and related
transactions, The Pantry issued 3,672,000 shares of common stock, par value
$0.01, to certain existing shareholders and a member of management for $32.4
million. Prior to the purchase of common stock, Freeman Spogli and Chase
contributed all outstanding shares of Series A preferred stock and related
accrued and unpaid dividends to the capital of The
48
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pantry. As a result, the par value of preferred stock and accrued dividends
were reduced by $260 and $6,508,000 respectively, and additional paid in
capital was increased by $6,508,260.
On July 2, 1998 in connection with two acquisitions completed in July 1998,
The Pantry issued 2,217,378 shares of common stock, par value $0.01 per share,
to certain existing shareholders for an aggregate purchase price of $25.0
million.
NOTE 11--PREFERRED STOCK:
As of September 24, 1998, preferred stock consisted of 150,000 authorized
shares. As discussed in Note 10--Common Stock, holders of The Pantry's 25,999
shares of Series A preferred stock contributed all outstanding shares of
Series A preferred stock and related accrued and unpaid dividends to the
capital of The Pantry in connection with the Lil' Champ acquisition. Issued
and outstanding shares of preferred stock at September 24, 1998 included
17,500 shares designated as Series B, all of which were held by the Freeman
Spogli entities. On June 8, 1999 in conjunction with the IPO, The Pantry
redeemed the outstanding preferred stock for $17.5 million and paid accrued
dividends on the preferred stock of $6.5 million. As of September 28, 2000,
the Company has no preferred stock issued or outstanding.
Upon the redemption of its Series B preferred stock, The Pantry recorded a
one-time dividend of $613,000 which represents the difference between the
gross proceeds ($16,887,000) from the initial sale of Series B preferred stock
and the consideration paid upon redemption ($17,500,000). In accordance with
Emerging Issues Task Force Topic No. ("EITF") D-42, The Pantry was also
required to recognize a one-time deduction to net income applicable to common
stockholders (and a related reclassification to accumulated deficit) in the
amount of $1,500,000 associated with original issue costs incurred in
connection with the issuance of the Series B preferred stock in December 1996.
At that time, the original issue costs were netted against the gross proceeds
and, thus, charged to additional paid in capital. EITF D-42 requires that the
excess of fair value of the consideration transferred to the preferred
shareholders over the carrying amount of the preferred stock be subtracted
from net income applicable to common shareholders in the calculation of
earnings per share.
NOTE 12--STOCK OPTIONS AND OTHER EQUITY INSTRUMENTS:
On January 1, 1998, The Pantry adopted an incentive and non-qualified stock
option plan. Pursuant to the provisions of the plan, options may be granted to
officers, key employees and consultants of The Pantry or any of its
subsidiaries and certain members of the board of directors to purchase up to
1,275,000 shares of The Pantry's common stock. The plan is administered by the
board of directors or a committee of the board of directors. Options are
granted at prices determined by the board of directors and may be exercisable
in one or more installments. Additionally, the terms and conditions of awards
under the plan may differ from one grant to another. Under the plan, incentive
stock options may only be granted to employees with an exercise price at least
equal to the fair market value of the related common stock on the date the
option is granted. Fair values are based on the most recent common stock
sales. During 1998, options to acquire 576,861 shares of common stock were
granted under the plan with exercise prices ranging from $8.82-$11.27 per
share (weighted-average exercise price of $9.39 per share).
On June 3, 1999, The Pantry adopted a new 1999 stock option plan providing
for the grant of incentive stock options and non-qualified stock options to
officers, directors, employees and consultants, with provisions similar to the
1998 stock option plan. During 1999, options to acquire 240,000 shares of
common stock were granted under the 1999 plan with exercise prices of $13.00
per share. These options vest over three years and have contractual lives of
seven years. No options were granted during the year ended September 28, 2000.
49
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at September 28, 2000:
<TABLE>
<CAPTION>
Number Weighted-Average Remaining
Outstanding at September 28, Contractual Weighted-Average
Exercise Prices Date Issued 2000 Life Exercise Price
--------------- --------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
$8.82................. 1/1/98 443,751 7 years $ 8.82
$11.27................ 8/25/98 133,110 7 years $11.27
$13.00................ 6/8/99, 9/30/99 236,000 6 years $13.00
-------
Total............... 812,861
</TABLE>
All options granted in 1998 and 1999 vest over a three-year period, with
one-third of each grant vesting on the anniversary of the initial grant. There
were no exercises, forfeitures, or terminations of options in 1998 or 1999.
There were 4,000 options forfeited and none exercised or terminated during
fiscal 2000. All stock options are granted at estimated fair market value of
the common stock at the grant date.
Had compensation cost for the plan been determined consistent with SFAS No.
123, Accounting for Stock-Based Compensation, The Pantry's pro-forma net
income (loss) for fiscal 1998, 1999 and 2000 would have been approximately
$(3,446,000), $10,266,000 and $13,784,000, respectively. Pro forma basic
earnings (loss) per share for fiscal 1998, 1999 and 2000 would have been
$(0.66), $0.44 and $0.76, respectively. Pro forma diluted earnings (loss) per
share for fiscal 1998, 1999 and 2000 would have been $(0.58), $0.40 and $0.73,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1998 1999
----- ----------
<S> <C> <C>
Weighted-average grant date fair value.................. $1.12 $2.07
Weighted-average expected lives (years)................. 2.33 2.00
Weighted-average grant date fair value-exercise price
equals market price.................................... $1.12 $2.24
Weighted-average grant date fair value-exercise price
greater than market price.............................. -- $1.18
Risk-free interest rate................................. 5.5% 5.5%
Expected volatility..................................... 0.00% 0.00%-21.0%
Dividend yield.......................................... 0.00% 0.00%
</TABLE>
On August 31, 1998, The Pantry adopted a stock subscription plan. The
subscription plan allows The Pantry to offer to certain employees the right to
purchase shares of common stock at a purchase price equal to the fair market
value on the date of purchase. A purchaser may not sell, transfer or pledge
their shares
. prior to the first anniversary of the date on which the purchaser
acquires the shares
. after the first anniversary, except in compliance with the provisions of
the subscription agreement and a pledge agreement if part of the
consideration for such shares includes a secured promissory note
In the event that the purchaser's employment with The Pantry and all of its
subsidiaries terminates for any reason, The Pantry shall have the option to
repurchase from the purchaser all or any portion of the shares acquired by the
purchaser under the subscription agreement for a period of six months after
the effective date of such termination. The repurchase option shall terminate
upon the later to occur of
. the first anniversary of the date the shares were originally acquired
. an initial public offering of common stock by The Pantry registered
under the Securities Act (other than an offering registered on Form S-4
or Form S-8) resulting in gross proceeds to The Pantry in excess of $25
million
50
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
After the first anniversary of the date the shares were originally acquired
by the purchaser, the purchaser may transfer the shares for cash (only) to a
third party, subject to The Pantry's right of first refusal with respect to
such sale. Finally, under certain circumstances, a purchaser of shares under
the subscription plan may be forced to sell all or part of the shares
purchased under such plan if Freeman Spogli finds a third-party buyer for all
or part of the shares of common stock held by Freeman Spogli. No issuances of
shares under the subscription plan had been made at September 24, 1998. On
September 25, 1998 and November 30, 1999, 134,436 shares, net of subsequent
repurchases of 6,273 shares, were sold under the subscription plan. These
shares were sold at fair value ($11.27), as determined by the most recent
equity investment (July 1998). In connection with these sales, The Pantry
received $722,000 of secured promissory notes receivable, bearing an interest
rate of 8.5%, due August 31, 2003.
In December 1996, in connection with its purchase of 17,500 shares of
Series B preferred stock, Freeman Spogli acquired warrants to purchase
2,346,000 shares of common stock. The warrants are exercisable at $7.45 per
share until December 30, 2006, and contain adjustment provisions in the event
The Pantry declares dividends or distributions, makes stock splits, or engages
in mergers, reorganizations or reclassifications. The fair value of the
warrants at date of issuance approximated $600,000 and is included in
additional paid-in capital. None of these warrants had been exercised at
September 28, 2000.
NOTE 13--RELATED PARTIES:
Transactions With Affiliates
Stock Issuances
In December 1996, Freeman Spogli purchased 17,500 shares of Series B
preferred stock and warrants to purchase 2,346,000 shares of common stock for
approximately $17.5 million. The purchase price for the Series B preferred
stock was $1,000.00 per share and the purchase price for each of the two
warrants was $1.00. The warrants are exercisable at $7.45 per share until
December 30, 2006 and contain adjustment provisions in the event The Pantry
declares dividends or distributions, makes stock splits or engages in mergers,
reorganizations or reclassifications. In connection with the IPO, The Pantry
repurchased the Series B preferred stock from Freeman Spogli for $17.5
million, plus approximately $6.5 million in accrued dividends. See also Note
11--Preferred Stock.
In October 1997, in connection with the Lil' Champ acquisition, Freeman
Spogli purchased 3,030,471 shares of common stock and Chase purchased 596,190
shares of common stock for an aggregate purchase price of approximately $32.0
million. Peter J. Sodini, The Pantry's Chief Executive Officer, purchased
45,339 shares of common stock for an aggregate purchase price of $400,050,
payable $185,000 in cash and $215,050 in the form of a secured promissory note
in our favor. The purchase price for the common stock was $8.82 per share. All
of the outstanding Series A preferred stock was contributed back to The Pantry
and cancelled at this time.
In July 1998, in connection with the acquisition of Quick Stop and the
acquisition of Stallings, Freeman Spogli purchased 1,845,690 shares of common
stock and Chase purchased 371,688 shares of common stock for an aggregate
purchase price of $25.0 million. The purchase price for the common stock was
$11.27 per share.
In November 1998, Peter Starrett, a director of The Pantry, purchased
22,185 shares of common stock for a purchase price of $250,125. Freeman Spogli
has the right to require the sale of Mr. Starrett's shares in the event it
sells all of its holdings of common stock.
51
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Payments to Freeman Spogli
Transaction fees of $3.0 million for the fiscal year ended September 24,
1998, were paid to Freeman Spogli in connection with previous investments and
assistance with analyzing acquisition candidates and obtaining financing.
Stockholders' Agreement
The Pantry has a stockholders' agreement, as amended July 1998, with
Freeman Spogli, Chase and Peter J. Sodini in which:
. Freeman Spogli has a right of first offer enabling it to purchase shares
held by Chase or Mr. Sodini prior to transfers of shares of common stock
to non-affiliates, other than transfers pursuant to a registration
statement or under Rule 144
. Freeman Spogli has the right to require Chase and Mr. Sodini to sell
their shares of common stock to a third party buyer on the same terms as
Freeman Spogli if Freeman Spogli is selling all of its shares
. Freeman Spogli, Chase and Mr. Sodini have rights to be included in sales
of common stock by the other stockholders
. Freeman Spogli has agreed, as long as Chase holds 10% of The Pantry's
common stock, to vote for a director nominated by Chase
. Transactions with affiliates will be on terms no less favorable to The
Pantry than would be obtained in an arms length transaction
52
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 14--EARNINGS PER SHARE:
The Pantry computes earnings per share data in accordance with the
requirements of SFAS No. 128, Earnings Per Share. Basic earnings per share is
computed on the basis of the weighted average number of common shares
outstanding. Diluted earnings per share is computed on the basis of the
weighted average number of common shares outstanding plus the effect of
outstanding warrants and stock options using the "treasury stock" method. The
following table reflects the calculation of basic and diluted earnings per
share (see also Note 11--Preferred Stock) (dollars in thousands except per
share amounts):
<TABLE>
<CAPTION>
1998 1999 2000
------ ------- -------
<S> <C> <C> <C>
Net income (loss) applicable to common
shareholders:
Net income before extraordinary loss............ $4,673 $14,000 $13,996
Preferred stock dividend requirement............ (2,942) (2,070) --
Redemption of preferred stock in excess of
carrying amount................................ -- (2,113) --
------ ------- -------
Net income applicable to common shareholders
before extraordinary loss...................... 1,731 9,817 13,996
Extraordinary loss.............................. (7,998) (3,584) --
------ ------- -------
Net income (loss) applicable to common
shareholders................................... (6,267) $ 6,233 $13,996
====== ======= =======
Earnings per share--basic:
Weighted-average shares outstanding............. 9,732 13,768 18,111
====== ======= =======
Income before extraordinary loss per share--
basic.......................................... $ 0.18 $ 0.71 $ 0.77
Extraordinary loss per share--basic............. (0.82) (0.26) --
------ ------- -------
Net income (loss) per share--basic.............. $(0.64) $ 0.45 $ 0.77
====== ======= =======
Earnings per share--diluted:
Weighted-average shares outstanding............. 9,732 13,768 18,111
Dilutive impact of options and warrants
outstanding.................................... 1,280 1,308 821
------ ------- -------
Weighted-average shares and potential dilutive
shares outstanding............................. 11,012 15,076 18,932
====== ======= =======
Income before extraordinary loss per share--
diluted........................................ $ 0.16 $ 0.65 $ 0.74
Extraordinary loss per share--diluted........... (0.73) (0.24) --
------ ------- -------
Net income (loss) per share--diluted............ $(0.57) $ 0.41 $ 0.74
====== ======= =======
</TABLE>
For the year ended September 28, 2000, 372,363 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.
NOTE 15--SUPPLEMENTAL GUARANTORS INFORMATION:
In connection with the Lil' Champ acquisition and commitments under the
acquisition facility, Lil' Champ, Sandhills, Inc. and Global Communications,
Inc. (the "Guarantors") jointly and severally, unconditionally guaranteed, on
an unsecured senior subordinated basis, the full and prompt performance of The
Pantry's obligations under its senior subordinated notes and its acquisition
facility.
The senior subordinated notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, as to the payment of principal, premium,
if any, and interest, jointly and severally, by the Guarantors and future
direct and indirect restricted subsidiaries.
53
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The senior subordinated notes contain covenants that, among other things,
restrict the ability of The Pantry and any restricted subsidiary to (i) incur
additional debt, (ii) pay dividends or make distributions, (iii) issue stock
of subsidiaries, (iv) make certain investments or repurchase stock, (v) create
liens, (vi) enter into transactions with affiliates or sale-leaseback
transactions, and (vii) merge or consolidate The Pantry or any of its
subsidiaries or sell or transfer assets.
As of September 28, 2000, substantially all of The Pantry's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
Management has determined that separate, full financial statements of the
guarantors (Lil' Champ, Sandhills and Global Communications) would not be
material to investors and therefore such financial statements are not
provided. The following supplemental combining financial statements present
information regarding the guarantors and The Pantry.
The Pantry accounts for its wholly-owned subsidiaries on the equity basis.
Certain reclassifications have been made to conform all of the financial
information to the financial presentation on a consolidated basis. The
principal eliminating entries eliminate investments in subsidiaries and
intercompany balances.
54
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Year Ended September 24, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $245,402 $215,396 $ -- $ -- $460,798
Gasoline sales........ 269,865 240,093 -- -- 509,958
Commissions........... 6,838 7,290 -- -- 14,128
-------- -------- ----- -------- --------
Total revenues...... 522,105 462,779 -- -- 984,884
-------- -------- ----- -------- --------
Cost of sales:
Merchandise........... 162,027 141,941 -- -- 303,968
Gasoline.............. 238,381 209,184 -- -- 447,565
-------- -------- ----- -------- --------
Total cost of
sales.............. 400,408 351,125 -- -- 751,533
-------- -------- ----- -------- --------
Gross profit............ 121,697 111,654 -- -- 233,351
-------- -------- ----- -------- --------
Operating expenses:
Operating, general and
administrative
expenses............. 108,172 80,387 (218) (15,491) 172,850
Merger integration
costs................ -- 1,016 -- -- 1,016
Depreciation and
amortization......... 14,003 13,633 6 -- 27,642
-------- -------- ----- -------- --------
Total operating
expenses........... 122,175 95,036 (212) (15,491) 201,508
-------- -------- ----- -------- --------
Income (loss) from
operations............. (478) 16,618 212 15,491 31,843
-------- -------- ----- -------- --------
Equity in earnings of
subsidiaries........... 22,864 -- -- (22,864) --
-------- -------- ----- -------- --------
Other income (expense):
Interest expense...... (18,241) (14,926) (12) 4,233 (28,946)
Miscellaneous......... 528 20,943 29 (19,724) 1,776
-------- -------- ----- -------- --------
Total other income
(expense).......... (17,713) 6,017 17 (15,491) (27,170)
-------- -------- ----- -------- --------
Income before income
taxes and extraordinary
loss................... 4,673 22,635 229 (22,864) 4,673
Income tax expense...... -- (8,337) (250) 8,587 --
-------- -------- ----- -------- --------
Net income (loss) before
extraordinary loss..... 4,673 14,298 (21) (14,277) 4,673
Extraordinary loss...... (7,998) -- -- -- (7,998)
-------- -------- ----- -------- --------
Net income (loss)....... $ (3,325) $ 14,298 $ (21) $(14,277) $ (3,325)
======== ======== ===== ======== ========
Net income (loss)
applicable to common
shareholders........... $ (6,267) $ 14,298 $ (21) $(14,277) $ (6,267)
======== ======== ===== ======== ========
</TABLE>
55
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Year Ended September 24, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)...... $ (3,325) $ 14,298 $ (21) $(14,277) $ (3,325)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Extraordinary loss... 2,006 -- -- -- 2,006
Depreciation and
amortization........ 14,014 13,623 5 -- 27,642
Provision for
deferred income
taxes............... -- 1,737 -- (1,599) 138
Loss on sale of
property and
equipment........... 88 443 -- -- 531
Provision for
environmental
expenses............ 5,681 500 -- -- 6,181
Provision for closed
stores.............. 50 -- -- -- 50
Equity earnings of
affiliates.......... (15,359) -- -- 15,359 --
Changes in operating
assets and
liabilities, net of
acquisitions:
Receivables.......... (10,380) (2,165) (1,017) 5,050 (8,512)
Inventories.......... 986 (5,504) -- -- (4,518)
Prepaid expenses..... (11) 401 -- -- 390
Other noncurrent
assets.............. 379 681 4,050 1 5,111
Accounts payable..... 13,393 503 -- -- 13,896
Other current
liabilities and
accrued expenses.... 11,632 (6,497) 254 (3,148) 2,241
Employment
obligations......... (407) -- -- -- (407)
Other noncurrent
liabilities......... 8,459 (2,483) (2) 634 6,608
--------- --------- ------- -------- ---------
Net cash provided by
operating activities... 27,206 15,537 3,269 2,020 48,032
--------- --------- ------- -------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale....... (5,203) -- -- -- (5,203)
Additions to property
and equipment....... (26,483) (15,584) -- -- (42,067)
Proceeds from sale
lease-back
transactions........ 4,807 -- -- -- 4,807
Proceeds from sale of
property and
equipment........... 2,102 5,546 -- -- 7,648
Intercompany notes
receivable
(payable)........... (8,532) 10,551 -- (2,019) --
Acquisition of
related businesses,
net of cash
acquired............ (102,684) (147,908) -- -- (250,592)
--------- --------- ------- -------- ---------
Net cash used in
investing activities... (135,993) (147,395) -- (2,019) (285,407)
--------- --------- ------- -------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital
leases.............. (303) (1,121) -- -- (1,424)
Principal repayments
of long-term debt... (51,516) (10) (17) -- (51,543)
Proceeds from
issuance of long-
term debt........... 139,499 139,010 -- (1) 278,508
Net proceeds from
other equity
issues.............. 56,935 -- -- -- 56,935
Other financing
costs............... (14,044) -- -- -- (14,044)
--------- --------- ------- -------- ---------
Net cash provided by
(used in) financing
activities............. 130,571 137,879 (17) (1) 268,432
--------- --------- ------- -------- ---------
Net increase............ 21,784 6,021 3,252 -- 31,057
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR...... 2,247 279 821 -- 3,347
--------- --------- ------- -------- ---------
CASH AND CASH
EQUIVALENTS AT END OF
YEAR................... $ 24,031 $ 6,300 $ 4,073 $ -- $ 34,404
========= ========= ======= ======== =========
</TABLE>
56
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc. and Subsidiaries
Supplemental Combining Balance Sheets
September 30, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Non-
Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
-------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents.......... $ 16,446 $ 9,870 $ 4,841 $ -- $ 31,157
Receivables, net...... 34,761 46,892 3,119 (59,825) 24,947
Inventories........... 40,714 35,506 -- -- 76,220
Prepaid expenses...... 2,186 985 353 -- 3,524
Property held for
sale................. 135 -- -- -- 135
Deferred income
taxes................ 2,220 2,621 8 -- 4,849
-------- -------- ------- --------- --------
Total current
assets............. 96,462 95,874 8,321 (59,825) 140,832
-------- -------- ------- --------- --------
Investment in
subsidiaries........... 119,590 -- -- (119,590) --
-------- -------- ------- --------- --------
Property and equipment,
net.................... 160,808 244,623 16,254 -- 421,685
-------- -------- ------- --------- --------
Other assets:
Goodwill, net......... 127,057 70,648 -- -- 197,705
Deferred financing
costs, 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................. 3,782 3,343 568 -- 7,693
-------- -------- ------- --------- --------
Total other assets.. 404,128 124,873 17,692 (315,479) 231,214
-------- -------- ------- --------- --------
Total assets........ $780,988 $465,370 $42,267 $(494,894) $793,731
======== ======== ======= ========= ========
</TABLE>
57
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc. and Subsidiaries
Supplemental Combining Balance Sheets--(Continued)
September 30, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Non-
Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
-------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
-----------------------------
Current liabilities:
Current maturities of long-
term debt.................. $ 10,370 $ 296 $ 21 $ -- $ 10,687
Current maturities of
capital lease obligations.. 178 1,027 -- -- 1,205
Accounts payable............ 51,641 38,151 2,919 (134) 92,577
Accrued interest............ 16,060 -- 1 (6,133) 9,928
Accrued compensation and
related taxes.............. 4,730 4,861 2 -- 9,593
Income taxes payable........ 6,784 12,498 447 (12,945) 6,784
Other accrued taxes......... 5,041 8,793 -- -- 13,834
Accrued insurance........... 3,401 2,757 -- -- 6,158
Other accrued liabilities... 36,480 4,878 4,366 (35,302) 10,422
-------- -------- ------- --------- --------
Total current
liabilities.............. 134,685 73,261 7,756 (54,514) 161,188
-------- -------- ------- --------- --------
Long-term debt................ 429,235 889 96 -- 430,220
-------- -------- ------- --------- --------
Other noncurrent liabilities:
Environmental costs......... 13,010 2,392 -- -- 15,402
Deferred income taxes....... 2,810 21,766 1,669 -- 26,245
Deferred revenue............ 20,705 13,544 -- -- 34,249
Capital lease obligations... 4,063 9,409 -- -- 13,472
Employment obligations...... 486 -- -- -- 486
Intercompany note payable... 68,829 249,710 3,997 (322,536) --
Other....................... 2,968 5,268 36 -- 8,272
-------- -------- ------- --------- --------
Total other noncurrent
liabilities.................. 112,871 302,089 5,702 (322,536) 98,126
-------- -------- ------- --------- --------
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
total shareholders'
equity................... $780,988 $465,370 $42,267 $(494,894) $793,731
======== ======== ======= ========= ========
</TABLE>
58
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Year Ended September 30, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Non-
Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
-------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $402,013 $329,668 $ -- $ -- $ 731,681
Gasoline sales........ 550,940 372,846 -- -- 923,786
Commissions........... 13,831 9,560 12 -- 23,403
-------- -------- ----- -------- ----------
Total revenues...... 966,784 712,074 12 -- 1,678,870
-------- -------- ----- -------- ----------
Cost of sales:
Merchandise........... 268,750 220,508 -- -- 489,258
Gasoline.............. 491,793 326,991 -- -- 818,784
-------- -------- ----- -------- ----------
Total cost of
sales.............. 760,543 547,499 -- -- 1,308,042
-------- -------- ----- -------- ----------
Gross profit............ 206,241 164,575 12 -- 370,828
-------- -------- ----- -------- ----------
Operating expenses:
Operating, general and
administrative
expenses............. 174,277 117,118 33 (28,576) 262,852
Depreciation and
amortization......... 22,855 19,525 418 -- 42,798
-------- -------- ----- -------- ----------
Total operating
expenses........... 197,132 136,643 451 (28,576) 305,650
-------- -------- ----- -------- ----------
Income (loss) from
operations............. 9,109 27,932 (439) 28,576 65,178
-------- -------- ----- -------- ----------
Equity in earnings of
subsidiaries........... 39,871 6 -- (39,877) --
-------- -------- ----- -------- ----------
Other income (expense):
Interest expense...... (24,063) (22,186) (13) 4,982 (41,280)
Miscellaneous......... (167) 34,292 276 (33,549) 852
-------- -------- ----- -------- ----------
Total other income
(expense).......... (24,230) 12,106 263 (28,567) (40,428)
-------- -------- ----- -------- ----------
Income (loss) before
income taxes and
extraordinary loss..... 24,750 40,044 (176) (39,868) 24,750
Income tax (expense).... (10,750) (14,571) -- 14,571 (10,750)
-------- -------- ----- -------- ----------
Net income (loss) before
extraordinary loss..... 14,000 25,473 (176) (25,297) 14,000
Extraordinary loss...... (3,584) -- -- -- (3,584)
-------- -------- ----- -------- ----------
Net income (loss)....... $ 10,416 $ 25,473 $(176) $(25,297) $ 10,416
======== ======== ===== ======== ==========
Net income (loss)
applicable to common
shareholders........... $ 6,233 $ 25,473 $(176) $(25,297) $ 6,233
======== ======== ===== ======== ==========
</TABLE>
59
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry
Supplemental Combining Statements of Cash Flows
Year Ended September 30, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
Non-
The Guarantor Guarantor
Pantry Subsidiaries Subsidiary Eliminations Total
--------- ------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (loss)...... $ 10,416 $ 25,473 $ (176) $ (25,297) $ 10,416
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Extraordinary loss... 3,406 -- -- -- 3,406
Depreciation and
amortization........ 22,855 19,525 418 -- 42,798
Provision for
deferred income
taxes............... 1,851 (2,982) 1,661 -- 530
Loss on sale of
property and
equipment........... 402 4,082 -- -- 4,484
Provision for
environmental
expenses............ (477) (1,258) -- -- (1,735)
Equity earnings of
affiliates.......... (51,352) -- 24,212 27,140 --
Changes in operating
assets and liabilities,
net of effects of
acquisitions:
Receivables............ (7,238) (31,776) (2,071) 49,826 8,741
Inventories............ (6,071) (5,067) -- -- (11,138)
Prepaid expenses....... (59) 375 (350) -- (34)
Other noncurrent
assets................ 12 (264) (568) (10) (830)
Accounts payable....... 15,238 4,506 2,919 (107) 22,556
Other current
liabilities and
accrued expenses...... 27,365 (14,067) 4,203 (44,811) (27,310)
Employment
obligations........... (448) -- -- -- (448)
Other noncurrent
liabilities........... 8,347 9,419 (2) (633) 17,131
--------- -------- -------- --------- ---------
Net cash provided by
operating activities... 24,247 7,966 30,246 6,108 68,567
--------- -------- -------- --------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (178) -- -- -- (178)
Additions to property
and equipment......... (10,502) (20,582) (16,332) -- (47,416)
Proceeds from sale
lease-back
transactions.......... 524 10,200 -- -- 10,724
Proceeds from sale of
property and
equipment............. 1,959 407 -- -- 2,366
Intercompany notes
receivable
(payable)............. 23,858 89,888 (13,127) (100,619) --
Acquisitions of
related businesses,
net of cash
acquired.............. (206,108) (82,817) -- 94,511 (194,414)
--------- -------- -------- --------- ---------
Net cash used in
investing activities... (190,447) (2,904) (29,459) (6,108) (228,918)
--------- -------- -------- --------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital
leases................ (309) (1,186) -- -- (1,495)
Principal repayments
of long-term debt..... (184,563) (306) (19) -- (184,888)
Proceeds from issuance
of long-term debt..... 297,000 -- -- -- 297,000
Redemption of Series B
preferred stock....... (17,500) -- -- -- (17,500)
Net proceeds from
initial public
offering.............. 72,979 -- -- -- 72,979
Net proceeds from
other equity issues... 1,068 -- -- -- 1,068
Accrued dividends paid
on preferred stock.... (6,461) -- -- -- (6,461)
Other financing
costs................. (3,599) -- -- -- (3,599)
--------- -------- -------- --------- ---------
Net cash provided by
(used in) financing
activities............. 158,615 (1,492) (19) -- 157,104
--------- -------- -------- --------- ---------
Net increase
(decrease)............. (7,585) 3,570 768 -- (3,247)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR...... 24,031 6,300 4,073 -- 34,404
--------- -------- -------- --------- ---------
CASH AND CASH
EQUIVALENTS AT END OF
YEAR................... $ 16,446 $ 9,870 $ 4,841 $ -- $ 31,157
========= ======== ======== ========= =========
</TABLE>
60
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc.
Supplemental Combining Balance Sheets
September 28, 2000
(Dollars in Thousands)
<TABLE>
<CAPTION>
The
Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
-------- ------------ ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 41,107 $ 10,247 $ 2,000 $ -- $ 53,354
Receivables, net...... 51,886 99,461 3,530 (131,276) 23,601
Inventories........... 50,558 37,404 -- -- 87,962
Prepaid expenses...... 2,052 1,074 5 -- 3,131
Property held for
sale................. 2,324 -- -- -- 2,324
Deferred income
taxes................ 1,821 241 8 -- 2,070
-------- -------- ------- --------- --------
Total current
assets............. 149,748 148,427 5,543 (131,276) 172,442
-------- -------- ------- --------- --------
Investment in
subsidiaries........... 153,532 -- -- (153,532) --
-------- -------- ------- --------- --------
Property and equipment,
net.................... 200,711 250,412 15,844 -- 466,967
-------- -------- ------- --------- --------
Other assets:
Goodwill, net......... 178,197 72,780 -- -- 250,977
Deferred financing
costs, net........... 12,317 -- -- -- 12,317
Environmental
receivables.......... 10,509 2,310 -- -- 12,819
Intercompany notes
receivable........... 248,868 49,705 17,124 (315,697) --
Other................. 9,146 5,105 568 -- 14,819
-------- -------- ------- --------- --------
Total other assets.. 459,037 129,900 17,692 (315,697) 290,932
-------- -------- ------- --------- --------
Total assets........ $963,028 $528,739 $39,079 $(600,505) $930,341
======== ======== ======= ========= ========
</TABLE>
61
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc.
Supplemental Combining Balance Sheets
September 28, 2000
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Non-
Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
-------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
-----------------------------
Current liabilities:
Current maturities of long-
term debt.................. $ 20,331 $ 296 $ 22 $ -- $ 20,649
Current maturities of
capital lease obligations.. 134 1,017 -- -- 1,151
Accounts payable............ 62,402 39,567 -- (66) 101,903
Accrued interest............ 23,610 -- 1 (11,561) 12,050
Accrued compensation and
related taxes.............. 6,562 7,327 -- -- 13,889
Income taxes payable........ 1,250 29,749 (21) (29,728) 1,250
Other accrued taxes......... 7,044 6,352 -- -- 13,396
Accrued insurance........... 3,554 1,716 -- -- 5,270
Other accrued liabilities... 83,000 7,804 122 (80,375) 10,551
-------- -------- ------- --------- --------
Total current
liabilities............ 207,887 93,828 124 (121,730) 180,109
-------- -------- ------- --------- --------
Long-term debt................ 506,308 592 74 -- 506,974
-------- -------- ------- --------- --------
Other noncurrent liabilities:
Environmental costs......... 11,319 2,747 -- -- 14,066
Deferred income taxes....... 7,329 25,510 1,669 -- 34,508
Deferred revenue............ 33,151 21,651 -- -- 54,802
Capital lease obligations... 4,663 7,985 -- -- 12,648
Intercompany note payable... 67,831 246,968 7,887 (322,686) --
Other....................... 6,560 2,660 34 -- 9,254
-------- -------- ------- --------- --------
Total other noncurrent
liabilities.................. 130,853 307,521 9,590 (322,686) 125,278
-------- -------- ------- --------- --------
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).................. (9,308) 119,915 78 (119,993) (9,308)
-------- -------- ------- --------- --------
Total shareholders'
equity................. 117,980 126,798 29,291 (156,089) 117,980
-------- -------- ------- --------- --------
Total liabilities and
shareholders' equity... $963,028 $528,739 $39,079 $(600,505) $930,341
======== ======== ======= ========= ========
</TABLE>
62
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc.
Supplemental Combining Statement of Operations
Year Ended September 28, 2000
(Dollars in Thousands)
<TABLE>
<CAPTION>
The Non-
Pantry Guarantor Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
--------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales..... $ 531,227 $376,323 $-- $ -- $ 907,550
Gasoline sales........ 991,865 505,831 -- -- 1,497,696
Commissions........... 16,639 10,375 -- -- 27,014
--------- -------- ---- -------- ----------
Total revenues...... 1,539,731 892,529 -- -- 2,432,260
--------- -------- ---- -------- ----------
Cost of sales:
Merchandise........... 357,036 245,579 -- -- 602,615
Gasoline.............. 900,456 457,310 -- -- 1,357,766
--------- -------- ---- -------- ----------
Total cost of
sales.............. 1,257,492 702,889 -- -- 1,960,381
--------- -------- ---- -------- ----------
Gross profit............ 282,239 189,640 -- -- 471,879
--------- -------- ---- -------- ----------
Operating expenses:
Operating, general and
administrative
expenses............. 251,829 133,592 (205) (45,430) 339,786
Depreciation and
amortization......... 32,408 23,649 5 -- 56,062
--------- -------- ---- -------- ----------
Total operating
expenses........... 284,237 157,241 (200) (45,430) 395,848
--------- -------- ---- -------- ----------
Income (loss) from
operations............. (1,998) 32,399 200 45,430 76,031
--------- -------- ---- -------- ----------
Equity in earnings of
subsidiaries........... 59,555 -- -- (59,555) --
--------- -------- ---- -------- ----------
Other income (expense):
Interest expense...... (32,419) (25,329) (9) 5,428 (52,329)
Miscellaneous......... (366) 51,720 617 (50,901) 1,070
--------- -------- ---- -------- ----------
Total other income
(expense).......... (32,785) 26,391 608 (45,473) (51,259)
--------- -------- ---- -------- ----------
Income before income
taxes.................. 24,772 58,790 808 (59,598) 24,772
Income tax expense...... (10,776) (21,123) (230) 21,353 (10,776)
--------- -------- ---- -------- ----------
Net income.............. $ 13,996 $ 37,667 $578 $(38,245) $ 13,996
========= ======== ==== ======== ==========
</TABLE>
63
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Pantry, Inc.
Supplemental Combining Statements of Cash Flows
Year Ended September 28, 2000
(Dollar in Thousands)
<TABLE>
<CAPTION>
Non-
The Guarantor Guarantor
Pantry Subsidiaries Subsidiary Eliminations Total
--------- ------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income ............ $ 13,996 $ 37,667 $ 578 $(38,245) $ 13,996
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization........ 32,408 23,649 5 -- 56,062
Provision for
deferred income
taxes............... 2,044 6,124 -- -- 8,168
Loss on sale of
property and
equipment........... 1,455 540 -- -- 1,995
Provision for
environmental
expenses............ (1,691) 355 -- -- (1,336)
Provision for closed
stores.............. 282 148 -- -- 430
Equity in earnings of
affiliates.......... (33,942) -- -- 33,942 --
Changes in operating
assets and liabilities,
net of effects of
acquisitions:
Receivables............ (16,121) (53,703) (411) 71,452 1,217
Inventories............ (569) (1,878) -- -- (2,447)
Prepaid expenses....... 575 (89) 348 -- 834
Other noncurrent
assets................ (198) (1,770) -- -- (1,968)
Accounts payable....... 3,763 1,416 (2,919) 68 2,328
Other current
liabilities and
accrued expenses...... 50,485 19,161 (4,714) (67,285) (2,352)
Employment
obligations........... (496) -- -- -- (496)
Other noncurrent
liabilities........... 10,991 739 (2) -- 11,728
--------- -------- ------- -------- ---------
Net cash provided by
(used in) operating
activities............. 62,982 32,359 (7,115) (68) 88,159
--------- -------- ------- -------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale......... (2,094) -- -- -- (2,094)
Additions to property
and equipment......... (27,260) (29,154) -- -- (56,414)
Proceeds from sale
lease-back
transactions.......... 9,065 -- 405 -- 9,470
Proceeds from sale of
property and
equipment............. 5,162 1,871 -- -- 7,033
Intercompany notes
receivable
(payable)............. (1,216) (2,742) 3,890 68 --
Acquisition of related
business, net of cash
acquired.............. (106,459) (227) -- -- (106,686)
--------- -------- ------- -------- ---------
Net cash provided by
(used in) investing
activities............. (122,802) (30,252) 4,295 68 (148,691)
--------- -------- ------- -------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital
leases................ (269) (1,434) -- -- (1,703)
Principal repayments
of long-term debt..... (70,966) (297) (21) -- (71,284)
Proceeds from issuance
of long-term debt..... 158,000 -- -- -- 158,000
Stock issue costs...... (238) -- -- -- (238)
Repayment of
shareholder loans..... 25 -- -- -- 25
Other financing
costs................. (2,071) -- -- -- (2,071)
--------- -------- ------- -------- ---------
Net cash provided by
(used in) financing
activities............. 84,481 (1,731) (21) -- 82,729
--------- -------- ------- -------- ---------
Net increase
(decrease)............. 24,661 376 (2,842) -- 22,197
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR...... 16,446 9,870 4,841 -- 31,157
--------- -------- ------- -------- ---------
CASH AND CASH
EQUIVALENTS AT END OF
YEAR................... $ 41,107 $ 10,246 $ 2,000 $ -- $ 53,354
========= ======== ======= ======== =========
</TABLE>
64
<PAGE>
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16--SUBSEQUENT EVENTS:
In three separate transactions subsequent to fiscal year end 2000, The
Pantry has entered into agreements to acquire 28 stores located in Mississippi
(19), Louisiana (8) and North Carolina (1). These transactions will be
primarily funded from borrowings under The Pantry's bank credit facility and
cash on hand.
In order to provide for more efficient and streamlined operations, the
following direct or indirect subsidiaries of The Pantry were eliminated by
being liquidated or being merged into The Pantry, effective as of September
29, 2000: (i) Pantry Properties, Inc.; (ii) TC Capital Management, Inc.; (iii)
PH Holding Corporation; (iv) Sandhills, Inc.; and (v) Global Communications,
Inc. As a result of the elimination of these subsidiaries, the operations and
property formerly carried on and held by such subsidiaries are now carried on
and held directly by The Pantry.
NOTE 17--QUARTERLY FINANCIAL DATA (unaudited):
Summary quarterly financial data for fiscal 1999 and 2000, respectively, is
as follows (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended September 30, 1999 Year Ended September 28, 2000
----------------------------------------------- -----------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Year Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- ---------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue.......... $315,607 $359,792 $456,704 $546,767 $1,678,870 $540,390 $584,109 $643,091 $664,670 $2,432,260
Gross profit........... $ 72,380 $ 83,561 $100,431 $114,456 $ 370,828 $108,884 $104,980 $125,542 $132,473 $ 471,879
Income (loss) before
income taxes and
extraordinary loss: $ 1,397 $ 398 $ 9,119 $ 13,836 $ 24,750 $ 4,063 $ (4,514) $ 11,046 $ 14,177 $ 24,772
Net income (loss)...... $ 1,065 $ (3,545) $ 5,210 $ 7,686 $ 10,416 $ 2,275 $ (2,528) $ 6,186 $ 8,063 $ 13,996
Earnings per share
before extraordinary
loss:
Basic................. $ 0.03 $ (0.06) $ 0.19 $ 0.42 $ 0.71 $ 0.13 $ (0.14) $ 0.34 $ 0.45 $ 0.77
Diluted............... $ 0.03 $ (0.06) $ 0.18 $ 0.40 $ 0.65 $ 0.12 $ (0.14) $ 0.33 $ 0.42 $ 0.74
Earnings per share:
Basic................. $ 0.03 $ (0.36) $ 0.19 $ 0.42 $ 0.45 $ 0.13 $ (0.14) $ 0.34 $ 0.45 $ 0.77
Diluted............... $ 0.03 $ (0.36) $ 0.18 $ 0.40 $ 0.41 $ 0.12 $ (0.14) $ 0.33 $ 0.42 $ 0.74
</TABLE>
65
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Our Directors and Executive Officers
Information on our directors is incorporated by reference from the section
entitled "Proposal 1: Election of Directors" in our definitive proxy statement
to be filed with respect to the Annual Meeting of Stockholders to be held
March 22, 2001. Information on our executive officers is included in the
section entitled "Executive Officers" on page 10 of this report.
Item 11. Executive Compensation
This information is incorporated by reference from the section entitled
"Executive Compensation" in our definitive proxy statement to be filed with
respect to the Annual Meeting of Stockholders be held March 22, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This information is incorporated by reference from the section entitled
"Principal Stockholders" in our definitive proxy statement to be filed with
respect to the Annual Meeting of Stockholders be held March 22, 2001.
Item 13. Certain Relationships and Related Transactions
This information is incorporated by reference from the sections entitled
"Principal Stockholders" and "Transactions with Affiliates" in our definitive
proxy statement to be filed with respect to the Annual Meeting of Stockholders
be held March 22, 2001.
66
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits--The
following documents are filed as part of this Annual Report on Form 10-K.
(i) Consolidated Financial Statements--See index on page 26.
(ii) Financial Statement Schedule--See index on page 26.
(iii) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
---------- -----------------------
<C> <S>
2.1(1) Purchase Agreement dated November 30, 1998 among Lil Champ Food
Stores, Inc. and the Selling Shareholders of Miller: Thomas A.
Miller, Joseph E. Miller, The Miller Investments Trust U/A dated
October 11, 1995 and The George C. Miller, Jr. Estate Trust U/A
dated June 30, 1989, and Miller Brothers and Circle Investments,
Ltd. and Miller.
3.1(2) Amended and Restated Certificate of Incorporation of The Pantry.
3.2(2) Amended and Restated Bylaws of The Pantry.
4.1(3) Indenture dated as of October 23, 1997 among The Pantry, Sandhills,
Lil' Champ and United States Trust Company of New York, as Trustee,
with respect to the 10 1/4% Senior Subordinated Notes due 2007
(including the form of 10 1/4% Senior Subordinated Notes due 2007.
4.2(4) Amended and Restated Registration Rights Agreement dated July 2,
1998 among The Pantry, FS Equity Partners III, L.P. ("FSEP III"),
FS Equity Partners IV, L.P. ("FSEP IV") FS Equity Partners
International, L.P. ("FSEP International"), Peter J. Sodini, Chase
Manhattan Capital, L.P., CB Capital Investors, L.P., and Baseball
Partners.
4.3(4) Amended and Restated Stockholders' Agreement dated July 2, 1998
among The Pantry, FSEP III, FSEP IV, FSEP International, Chase
Manhattan Capital, L.P., CB Capital Investors, L.P., Baseball
Partners and Peter J. Sodini.
10.1(5)(6) The Pantry, Inc. 1998 Stock Option Plan.
10.2(4) Form of Incentive Stock Option Agreement.
10.3(7) Stock Purchase Agreement dated October 23, 1997 among The Pantry,
FSEP III, FSEP International, CB Capital Investors, L.P. and Peter
J. Sodini.
10.4(7) Contribution to Capital Agreement dated October 23, 1997 among The
Pantry, FSEP III, FSEP International, Chase Manhattan Capital,
L.P., and Baseball Partners.
10.5(7) Stock Pledge Agreement dated October 23, 1997 between Peter J.
Sodini and The Pantry.
10.6(7) Secured Promissory Note dated October 23, 1997 between Peter J.
Sodini and The Pantry.
10.7(7)(6) Employment Agreement dated June 3, 1996 between Dennis R. Crook and
The Pantry (same form of agreement with Daniel McCormack and
Douglas Sweeney).
10.8(8) Amended and Restated Credit Agreement dated as of January 27, 1999
among The Pantry, the financial institutions listed therein
(collectively, "Lenders"), First Union National Bank ("First
Union"), as administrative agent, and Canadian Imperial Bank of
Commerce ("CIBC"), as syndication agent for Lenders.
10.9(7) Company Security Agreement dated as of October 23, 1997 between The
Pantry and First Union, as administrative agent.
10.10(7) Company Pledge Agreement dated as of October 23, 1997 between The
Pantry and First Union, as administrative agent.
10.11(7) Company Trademark Security Agreement dated as of October 23, 1997
between The Pantry and First Union, as administrative agent.
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
----------- -----------------------
<C> <S>
10.13(7)(6) Employment Agreement dated October 1, 1997 between Peter J. Sodini
and The Pantry.
10.14(7) Form of Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (North Carolina)
dated October 23, 1997 among The Pantry, David R. Cannon, as
Trustee, and First Union as Agent.
10.15(7) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (South Carolina)
dated October 23, 1997 between The Pantry and First Union, as
Agent.
10.16(7) Form of Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (Tennessee)
dated October 23, 1997 among The Pantry, David R. Cannon, as
Trustee, and First Union, as Agent.
10.17(7) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases (Kentucky) dated October 23, 1997
between The Pantry and First Union, as Agent.
10.18(7) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (Indiana) dated
as of October 23, 1997 between The Pantry and First Union, as
Agent.
10.19(7) Form of Mortgage, Security Agreement, Assignment of Rents and
Leases and Fixture Filing (Florida) dated October 23, 1997 between
Lil' Champ and First Union, as Agent.
10.20(7) Form of Deed to Secure Debt, Security Agreement, and Assignment of
Rents (Georgia) dated October 23, 1997 between Lil' Champ and
First Union, as Agent.
10.21(4) Form of Subsidiary Guaranty.
10.22(4) Form of Subsidiary Security Agreement.
10.23(4) Form of Subsidiary Pledge Agreement.
10.24(4) Form of Subsidiary Trademark Security Agreement.
10.25(8) The Pantry Inc. 1998 Stock Subscription Plan.
10.26(4) Form of Stock Subscription Agreement.
10.27(4) Stock Purchase Agreement dated July 2, 1998 among The Pantry, FSEP
IV and CB Capital Investors, L.P.
10.28(4) Distribution Service Agreement dated as of March 29, 1998 among
The Pantry, Lil' Champ and McLane Company, Inc., as amended
(asterisks located within the exhibit denote information which has
been deleted pursuant to a confidential treatment filing with the
Securities and Exchange Commission).
10.29(4) Form of Indemnification Agreement.
10.30(4) Common Stock Purchase Warrant dated December 30, 1996.
10.31(4) Common Stock Purchase Warrant dated December 30, 1996.
10.32(4) Form of 1999 Stock Option Plan.
10.33(10) First Amendment to Amended Credit Agreement dated as of April 30,
1999 among the Pantry, the Lenders listed therein, First Union,
CIBC and NationsBank, N.A.
10.34(10) Amendment No. 1 to Employment Agreement between The Pantry and
Peter J. Sodini.
10.35(10) Amendment No. 1 to the Amended and Restated Stockholder's
Agreement dated as of June 1, 1999 among The Pantry, FSEP III,
FSEP IV, FSEP International, Chase Manhattan Capital, L.P., CB
Capital Investors, L.P., Baseball Partners and Peter J. Sodini.
10.36(10) Amendment No. 1 to the Amended and Restated Registration Rights
Agreement dated as of June 1, 1999 among The Pantry, FSEP III,
FSEP IV, FSEP International, Chase Manhattan Capital, L.P., CB
Capital Investors, L.P., Baseball Partners and Peter J. Sodini.
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
12.1 Statement re Computation of Earnings to Fixed Charges Ratio.
21.1 Subsidiaries of The Pantry.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
99.1 Risk Factors.
</TABLE>
--------
(1) Incorporated by reference to the exhibit designated by exhibit 2.1 in The
Pantry's Current Report on Form 8-K dated February 5, 1999.
(2) Incorporated by reference to the exhibit designated by exhibit number 3.3
in The Pantry's Registration Statement on Form S-1, as amended
(Registration No. 333-74221) (the "Form S-1").
(3) Incorporated by reference to the exhibit designated by exhibit number 4.5
in The Pantry's Registration Statement on Form S-4 (Registration No. 333-
42811) (the "Form S-4").
(4) Incorporated by reference to the exhibit designated by the same number in
the Form S-1.
(5) Incorporated by reference to the exhibit designated by the same number in
The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended
December 25, 1997.
(6) Represents a management contract or compensation plan arrangement.
(7) Incorporated by reference to the exhibit designated by the same number in
the Form S-4.
(8) Incorporated by reference to the exhibit designated by exhibit 10.1 in
The Pantry's Current Report on Form 8-K dated February 5, 1999.
(9) Incorporated by reference to the exhibit designated by the same number in
The Pantry's Annual Report on Form 10-K dated December 23, 1998.
(10) Incorporated by reference to the exhibit designated by the same number in
The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended
June 24, 1999.
(b) Reports on Form 8-K.
None
(c) See (a)(iii) above.
(d) See (a)(ii) above.
69
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
2.1(1) Purchase Agreement dated November 30, 1998 among Lil Champ Food
Stores, Inc. and the Selling Shareholders of Miller: Thomas A.
Miller, Joseph E. Miller, The Miller Investments Trust U/A dated
October 11, 1995 and The George C. Miller, Jr. Estate Trust U/A
dated June 30, 1989, and Miller Brothers and Circle Investments,
Ltd. and Miller.
3.1(2) Amended and Restated Certificate of Incorporation of The Pantry.
3.2(2) Amended and Restated Bylaws of The Pantry.
4.1(3) Indenture dated as of October 23, 1997 among The Pantry,
Sandhills, Lil' Champ and United States Trust Company of New York,
as Trustee, with respect to the 10 1/4% Senior Subordinated Notes
due 2007 (including the form of 10 1/4% Senior Subordinated Note
due 2007).
4.2(4) Amended and Restated Registration Rights Agreement dated July 2,
1998 among The Pantry, FS Equity Partners III, L.P. ("FSEP III"),
FS Equity Partners IV, L.P. ("FSEP IV") FS Equity Partners
International, L.P. ("FSEP International"), Peter J. Sodini, Chase
Manhattan Capital, L.P., CB Capital Investors, L.P., and Baseball
Partners.
4.3(4) Amended and Restated Stockholders' Agreement dated July 2, 1998
among The Pantry, FSEP III, FSEP IV, FSEP International, Chase
Manhattan Capital, L.P., CB Capital Investors, L.P., Baseball
Partners and Peter J. Sodini.
10.1(5)(6) The Pantry, Inc. 1998 Stock Option Plan.
10.2(4) Form of Incentive Stock Option Agreement.
10.3(7) Stock Purchase Agreement dated October 23, 1997 among The Pantry,
FSEP III, FSEP International, CB Capital Investors, L.P. and Peter
J. Sodini.
10.4(7) Contribution to Capital Agreement dated October 23, 1997 among The
Pantry, FSEP III, FSEP International, Chase Manhattan Capital,
L.P., and Baseball Partners.
10.5(7) Stock Pledge Agreement dated October 23, 1997 between Peter J.
Sodini and The Pantry.
10.6(7) Secured Promissory Note dated October 23, 1997 between Peter J.
Sodini and The Pantry.
10.7(7)(6) Employment Agreement dated June 3, 1996 between Dennis R. Crook
and The Pantry (same form of agreement with Daniel McCormack and
Douglas Sweeney).
10.8(8) Amended and Restated Credit Agreement dated as of January 27, 1999
among The Pantry, the financial institutions listed therein
(collectively, "Lenders"), First Union National Bank ("First
Union"), as administrative agent, and Canadian Imperial Bank of
Commerce ("CIBC"), as syndication agent for Lenders.
10.9(7) Company Security Agreement dated as of October 23, 1997 between
The Pantry and First Union, as administrative agent.
10.10(7) Company Pledge Agreement dated as of October 23, 1997 between The
Pantry and First Union, as administrative agent.
10.11(7) Company Trademark Security Agreement dated as of October 23, 1997
between The Pantry and First Union, as administrative agent.
10.12(1) Collateral Account Agreement dated as of October 23, 1997 between
The Pantry and First Union, as administrative agent.
10.13(7)(6) Employment Agreement dated October 1, 1997 between Peter J. Sodini
and The Pantry.
10.14(7) Form of Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (North Carolina)
dated October 23, 1997 among The Pantry, David R. Cannon, as
Trustee, and First Union as Agent.
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.15(7) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (South Carolina)
dated October 23, 1997 between The Pantry and First Union, as Agent.
10.16(7) Form of Amended and Restated Deed of Trust, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (Tennessee) dated
October 23, 1997 among The Pantry, David R. Cannon, as Trustee, and
First Union, as Agent.
10.17(7) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases (Kentucky) dated October 23, 1997
between The Pantry and First Union, as Agent.
10.18(7) Form of Amended and Restated Mortgage, Security Agreement,
Assignment of Rents and Leases and Fixture Filing (Indiana) dated as
of October 23, 1997 between The Pantry and First Union, as Agent.
10.19(7) Form of Mortgage, Security Agreement, Assignment of Rents and Leases
and Fixture Filing (Florida) dated October 23, 1997 between Lil'
Champ and First Union, as Agent.
10.20(7) Form of Deed to Secure Debt, Security Agreement, and Assignment of
Rents (Georgia) dated October 23, 1997 between Lil' Champ and First
Union, as Agent.
10.21(4) Form of Subsidiary Guaranty.
10.22(4) Form of Subsidiary Security Agreement.
10.23(4) Form of Subsidiary Pledge Agreement.
10.24(4) Form of Subsidiary Trademark Security Agreement.
10.25(8) The Pantry Inc. 1998 Stock Subscription Plan.
10.26(4) Form of Stock Subscription Agreement.
10.27(4) Stock Purchase Agreement dated July 2, 1998 among The Pantry, FSEP
IV and CB Capital Investors, L.P.
10.28(4) Distribution Service Agreement dated as of March 29, 1998 among The
Pantry, Lil' Champ and McLane Company, Inc., as amended (asterisks
located within the exhibit denote information which has been deleted
pursuant to a request for confidential treatment filed with the
Securities and Exchange Commission).
10.29(4) Form of Indemnification Agreement.
10.30(4) Common Stock Purchase Warrant dated December 30, 1996.
10.31(4) Common Stock Purchase Warrant dated December 30, 1996.
10.32(4) Form of 1999 Stock Option Plan.
10.33(10) First Amendment to Amended Credit Agreement dated as of April 30,
1999 among the Pantry, the Lenders listed therein, First Union, CIBC
and NationsBank, N.A.
10.34(10) Amendment No. 1 to Employment Agreement between The Pantry and Peter
J. Sodini.
10.35(10) Amendment No. 1 to the Amended and Restated Stockholder's Agreement
dated as of June 1, 1999 among The Pantry, FSEP III, FSEP IV, FSEP
International, Chase Manhattan Capital, L.P., CB Capital Investors,
L.P., Baseball Partners and Peter J. Sodini.
10.36(10) Amendment No. 1 to the Amended and Restated Registration Rights
Agreement dated as of June 1, 1999 among The Pantry, FSEP III, FSEP
IV, FSEP International, Chase Manhattan Capital, L.P., CB Capital
Investors, L.P., Baseball Partners and Peter J. Sodini.
12.1 Statement re Computation of Earnings to Fixed Charges Ratio.
21.1 Subsidiaries of The Pantry.
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
99.1 Risk Factors.
</TABLE>
71
<PAGE>
--------
(1) Incorporated by reference to the exhibit designated by exhibit 2.1 in The
Pantry's Current Report on Form 8-K dated February 5, 1999.
(2) Incorporated by reference to the exhibit designated by exhibit number 3.3
in The Pantry's Registration Statement on Form S-1, as amended
(Registration No. 333-74221) (the "Form S-1").
(3) Incorporated by reference to the exhibit designated by exhibit number 4.5
in The Pantry's Registration Statement on Form S-4 (Registration No. 333-
42811) (the "Form S-4").
(4) Incorporated by reference to the exhibit designated by the same number in
the Form S-1.
(5) Incorporated by reference to the exhibit designated by the same number in
The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended
December 25, 1997.
(6) Represents a management contract or compensation plan arrangement.
(7) Incorporated by reference to the exhibit designated by the same number in
the Form S-4.
(8) Incorporated by reference to the exhibit designated by exhibit 10.1 in
The Pantry's Current Report on Form 8-K dated February 5, 1999.
(9) Incorporated by reference to the exhibit designated by the same number in
The Pantry's Annual Report on Form 10-K dated December 23, 1998.
(10) Incorporated by reference to the exhibit designated by the same number in
The Pantry's Quarterly Report on Form 10-Q for the quarterly period ended
June 24, 1999.
72
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
The Pantry, Inc.
/s/ Peter J. Sodini
By: _________________________________
Peter J. Sodini
President and Chief Executive
Officer
Date: December 21, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934 this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Peter J. Sodini President, Chief Executive December 21, 2000
____________________________________ Officer and Director
Peter J. Sodini (Principal Executive
Officer)
/s/ William T. Flyg Senior Vice President and December 21, 2000
____________________________________ Chief Financial Officer
William T. Flyg (Principal Financial
Officer)
/s/ Joseph J. Duncan Vice President and Corporate December 21, 2000
____________________________________ Controller (Principal
Joseph J. Duncan Accounting Officer)
/s/ Todd W. Halloran Director December 21, 2000
____________________________________
Todd W. Halloran
/s/ Jon D. Ralph Director December 21, 2000
____________________________________
Jon D. Ralph
/s/ Charles P. Rullman Director December 21, 2000
____________________________________
Charles P. Rullman
/s/ Edfred Shannon Director December 21, 2000
____________________________________
Edfred Shannon
/s/ Peter M. Starrett Director December 21, 2000
____________________________________
Peter M. Starrett
/s/ Hubert Yarborough Director December 21, 2000
____________________________________
Hubert Yarborough
</TABLE>
73
<PAGE>
THE PANTRY, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in thousands)
<TABLE>
<CAPTION>
Additions Deductions Balance
Balance at charged to Additions for at end
beginning costs and charged to payments or of
of period expenses Goodwill write-offs period
---------- ---------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
Year ended September 24,
1998
Allowance for doubtful
accounts............... $ 150 $ 130 $ -- $ -- $ 280
Reserve for
environmental issues... 7,806 6,456 3,150 (275) 17,137
Reserve for closed
stores................. 950 380 383 (110) 1,603
Deferred tax asset
valuation allowance.... 632 551 -- (1,183) --
------- ------ ------ ------- -------
$ 9,538 $7,517 $3,533 $(1,568) $19,020
======= ====== ====== ======= =======
Year ended September 30,
1999
Allowance for doubtful
accounts............... $ 280 $ 486 $ -- $ -- $ 766
Reserve for
environmental issues... 17,137 5,546 -- (7,281) 15,402
Reserve for closed
stores................. 1,603 505 1,302 (606) 2,804
------- ------ ------ ------- -------
$19,020 $6,537 $1,302 $(7,887) $18,972
======= ====== ====== ======= =======
Year ended September 28,
2000
Allowance for doubtful
accounts............... $ 766 $ 439 $ -- $ -- $ 1,205
Reserve for
environmental issues... 15,402 4,126 -- (5,462) 14,066
Reserve for closed
stores................. 2,804 430 4,222 (766) 6,690
------- ------ ------ ------- -------
$18,972 $4,995 $4,222 $(6,228) $21,961
======= ====== ====== ======= =======
</TABLE>
S-1
