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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
AMENDMENT NO. 1
TO
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 25, 1999
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
1801 Douglas Drive, Sanford, North Carolina 27330
(Address of principal executive offices)
(919) 774-6700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 Par Value 232,578 Shares
(Class) (Outstanding at April 30, 1999)
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THE PANTRY, INC.
FORM 10-Q/A
MARCH 25, 1999
TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets.......................................... 1
Consolidated Statements of Operations................................ 3
Consolidated Statements of Cash Flows................................ 4
Notes to Consolidated Financial Statements........................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 24
PART I--FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 24, March 25,
1998 1999
------------- ----------
(audited) (unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents.......................... $ 34,404 $ 24,999
Receivables (net of allowances for doubtful
accounts of $280 at September 24, 1998 and $395 at
March 25, 1999)................................... 9,907 14,829
Inventories (Note 3)............................... 47,809 61,378
Income taxes receivable............................ 488 4,581
Prepaid expenses................................... 2,216 2,634
Property held for sale............................. 3,761 82
Deferred income taxes, net......................... 3,988 4,133
-------- --------
Total current assets............................. 102,573 112,636
-------- --------
Property and equipment, net.......................... 300,978 405,727
-------- --------
Other assets:
Goodwill (net of accumulated amortization of
$11,940 at September 24, 1998 and $13,854 at March
25, 1999)......................................... 120,025 169,431
Deferred lease costs (net of accumulated
amortization of $9,001 at September 24, 1998 and
$9,024 at March 25, 1999)......................... 269 247
Deferred financing cost (net of accumulated
amortization of $4,871 at September 24, 1998 and
$5,840 at March 25, 1999)......................... 14,545 13,130
Environmental receivables.......................... 13,187 12,732
Other.............................................. 3,243 9,027
-------- --------
Total other assets............................... 151,269 204,567
-------- --------
Total assets......................................... $554,820 $722,930
======== ========
See Notes to Consolidated Financial Statements.
1
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
(Dollars in thousands)
September 24, March 25,
1998 1999
------------- ----------
(audited) (unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt............... $ 45 $ 5,431
Current maturities of capital lease obligations.... 1,240 1,240
Accounts payable:
Trade............................................ 49,559 66,280
Money orders..................................... 5,181 7,965
Accrued interest................................... 11,712 10,794
Accrued compensation and related taxes............. 6,719 7,862
Other accrued taxes................................ 7,007 8,538
Accrued insurance.................................. 5,745 8,501
Other accrued liabilities.......................... 24,348 30,861
-------- --------
Total current liabilities........................ 111,556 147,472
-------- --------
Long-term debt....................................... 327,269 454,277
-------- --------
Other noncurrent liabilities:
Environmental reserves............................. 17,137 17,185
Deferred income taxes.............................. 20,366 23,414
Capital lease obligations.......................... 12,129 11,498
Employment obligations............................. 934 749
Accrued dividends on preferred stock............... 4,391 5,837
Other.............................................. 21,734 26,052
-------- --------
Total other noncurrent liabilities............... 76,691 84,735
-------- --------
Commitments and contingencies (Notes 4 and 5)........
Shareholders' equity (deficit):
Preferred stock, $.01 par value, 150,000 shares
authorized; 17,500 issued and outstanding......... -- --
Common stock, $.01 par value, 300,000 shares
authorized; 229,507 issued and outstanding at
September 24, 1998 and 232,578 issued and
outstanding at March 25, 1999..................... 2 2
Additional paid in capital......................... 69,054 70,844
Shareholder loans.................................. (215) (937)
Accumulated deficit................................ (29,537) (33,463)
-------- --------
Total shareholders' equity (deficit)............. 39,304 36,446
-------- --------
Total liabilities and shareholders' equity........... $554,820 $722,930
======== ========
See Notes to Consolidated Financial Statements.
2
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
Three Months Ended Six Months Ended
-------------------- --------------------
March 26, March 25, March 26, March 25,
1998 1999 1998 1999
--------- --------- --------- ---------
(13 (13 (26 (26
weeks) weeks) weeks) weeks)
Revenues:
Merchandise sales................ $104,405 $164,572 $193,765 $303,962
Gasoline sales................... 112,696 189,128 215,718 360,917
Commissions...................... 3,569 6,092 6,358 10,520
-------- -------- -------- --------
Total revenues................. 220,670 359,792 415,841 675,399
-------- -------- -------- --------
Cost of sales:
Merchandise...................... 67,968 110,372 126,865 204,825
Gasoline......................... 99,415 165,859 190,324 314,633
-------- -------- -------- --------
Total cost of sales............ 167,383 276,231 317,189 519,458
-------- -------- -------- --------
Gross profit....................... 53,287 83,561 98,652 155,941
-------- -------- -------- --------
Operating expenses:
Store expenses................... 33,688 51,486 61,853 95,215
General and administrative
expenses........................ 8,360 12,388 15,532 22,356
Depreciation and amortization.... 6,624 9,640 11,775 17,830
-------- -------- -------- --------
Total operating expenses....... 48,672 73,514 89,160 135,401
-------- -------- -------- --------
Income from operations............. 4,615 10,047 9,492 20,540
-------- -------- -------- --------
Other income (expense):
Interest......................... (7,034) (9,961) (12,851) (18,873)
Miscellaneous.................... 335 312 774 128
-------- -------- -------- --------
Total other expense............ (6,699) (9,649) (12,077) (18,745)
-------- -------- -------- --------
Income (loss) before income taxes
and extraordinary loss............ (2,084) 398 (2,585) 1,795
Income tax benefits (expense)...... 504 (386) 916 (718)
-------- -------- -------- --------
Income (loss) before extraordinary
loss.............................. (1,580) 12 (1,669) 1,077
Extraordinary loss................. -- (3,557) (6,800) (3,557)
-------- -------- -------- --------
Net loss........................... (1,580) (3,545) (8,469) (2,480)
Preferred dividends................ (647) (734) (1,586) (1,466)
-------- -------- -------- --------
Net loss applicable to common
shareholders...................... $ (2,227) $ (4,279) $(10,055) $ (3,926)
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
3
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
---------------------
March 26, March 25,
1998 1999
---------- ---------
(26 weeks) (26 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $ (8,469) $ (2,480)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Extraordinary loss................................... 6,800 3,405
Depreciation and amortization........................ 11,775 17,830
Provision for deferred income taxes.................. (1,415) 120
(Gain) loss on sale of property and equipment........ 209 (410)
Reserves for environmental expenses.................. 57 48
Changes in operating assets and liabilities, net of
effects of acquisitions:
Receivables.......................................... (3,758) (948)
Inventories.......................................... (781) (4,628)
Prepaid expenses..................................... 879 (18)
Other noncurrent assets.............................. 5,366 (2,216)
Accounts payable..................................... 1,397 7,911
Other current liabilities and accrued expenses....... 1,559 (5,686)
Employment obligations............................... (185) (185)
Other noncurrent liabilities......................... 4,218 662
--------- ---------
Net cash provided by operating activities.......... 17,652 13,405
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale.................... (2,648) (93)
Additions to property and equipment.................... (17,814) (23,166)
Proceeds from sale of property held for sale........... 2,025 1,495
Proceeds from sale of property and equipment........... 682 376
Acquisitions of related businesses, net of cash
acquired.............................................. (145,398) (129,900)
--------- ---------
Net cash used in investing activities.............. (163,153) (151,288)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases.............. (577) (631)
Principal repayments of long-term debt................. (57,009) (143,999)
Proceeds from issuance of long-term debt............... 209,022 275,000
Net proceeds from equity issues........................ 31,936 1,068
Other financing costs.................................. (12,674) (2,960)
--------- ---------
Net cash provided by financing activities............ 170,698 128,478
--------- ---------
NET INCREASE (DECREASE) IN CASH.......................... 25,197 (9,405)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......... 3,347 34,404
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 28,544 $ 24,999
========= =========
See Notes to Consolidated Financial Statements.
4
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
Six Months Ended
---------------------
March 26, March 25,
1998 1999
---------- ----------
(26 weeks) (26 weeks)
Cash paid (refunded) during the year:
Interest................................................ $6,570 $19,791
====== =======
Taxes................................................... $ 670 $ 302
====== =======
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During 1998, The Pantry entered into several business acquisitions and
divestitures (see Note 2--Business Acquisitions). In connection with the Lil'
Champ acquisition, the holders of The Pantry's Series A preferred stock
contributed all outstanding shares of Series A preferred stock and related
accrued and unpaid dividends to the capital of The Pantry, resulting in an
increase in paid in capital of $6,508.
5
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND RECENT DEVELOPMENTS
Unaudited Consolidated Financial Statements
The accompanying consolidated financial statements include the accounts of
The Pantry, Inc. and its wholly-owned subsidiaries, Lil' Champ Food Stores,
Inc. and Lil' Champ's wholly-owned subsidiary Miller Enterprises, Inc.,
Sandhills, Inc., Global Communications, Inc. and PH Holding Corporation and
PH's wholly-owned subsidiaries, TC Capital Management, Inc., and Pantry
Properties, Inc. All intercompany transactions and balances have been
eliminated in consolidation. See "Note 7--Supplemental Guarantor Information."
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. The
interim consolidated financial statements have been prepared from the
accounting records of The Pantry, Inc. and its subsidiaries and all amounts at
March 25, 1999 and for the three and six months ended March 25, 1999 and March
26, 1998 are unaudited. References herein to "The Pantry" shall include all
subsidiaries. Pursuant to Regulation S-X, certain information and note
disclosures normally included in annual financial statements have been
condensed or omitted. The information furnished reflects all adjustments which
are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented, and which are of a normal,
recurring nature.
We suggest that these interim financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in
The Pantry's Annual Report on Form 10-K for the fiscal year ended September
24, 1998, The Pantry's Registration Statement on Form S-1, as amended, and
The Pantry's Quarterly Report on Form 10-Q for the period ended December 24,
1998.
Our results of operations for the three and six months ended March 25, 1999
and March 26, 1998 are not necessarily indicative of results to be expected
for the full fiscal year. Our results of operations and comparisons with prior
and subsequent quarters are materially impacted by the results of operations
of businesses acquired since September 25, 1997. These acquisitions have been
accounted for under the purchase method. See "Note 2--Businesses
Acquisitions". Furthermore, the convenience store industry in The Pantry's
marketing areas experiences higher levels of revenues and profit margins
during the summer months than during the winter months. Historically, we have
achieved higher revenues and earnings in our third and fourth quarters.
The Pantry
The Pantry operated approximately 1,149 convenience stores located in
Florida, North Carolina, South Carolina, Tennessee, Kentucky, Indiana and
Virginia as of March 25, 1999. The Pantry's stores offer a broad selection of
products and services designed to appeal to the convenience needs of our
customers, including gasoline, car care products and services, tobacco
products, beer, soft drinks, self-service fast food and beverages,
publications, dairy products, groceries, health and beauty aids, video games
and money orders. In our Florida, Kentucky, Virginia and Indiana stores, we
also sell lottery products. Self-service gasoline is sold at 1,068 locations,
778 of which sell gasoline under brand names including Amoco, British
Petroleum, Chevron, Citgo, Exxon, Fina, Shell, and Texaco. During the last
three fiscal years, merchandise revenues (including commissions from services)
and gasoline revenues have averaged approximately 48.6% and 51.4% of total
revenues, respectively.
Recent Developments
On March 11, 1999, we filed a Registration Statement on Form S-1, as
amended, relating to an initial public offering of shares of our common stock.
6
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On February 25, 1999, we acquired 60 convenience stores and related assets
from Taylor Oil Company. The stores are located in North Carolina and Virginia
and are operated under the name "ETNA." This transaction was primarily funded
from borrowings under the Company's 1999 bank credit facility. See "Note 2--
Business Acquisitions."
On January 28, 1999, we entered into an Amended and Restated Credit Facility
(the "1999 bank credit facility") consisting of
. a $45.0 million revolving credit facility available for working capital
financing, general corporate purposes and issuing commercial and standby
letters of credit;
. a $50.0 million acquisition facility available to finance acquisition of
related businesses
. a term loan facility with outstanding borrowings of $239.0 million
See "Note 5--Long Term Debt." The 1999 bank credit facility replaces a
previous facility (the "1998 bank credit facility").
We used the proceeds of the term loan facility and a $5.0 million initial
draw under our revolving credit facility, along with cash on hand, to
. finance the acquisition of Miller Enterprises and affiliates,
. refinance $94.0 million outstanding under the 1998 bank credit facility
. redeem our outstanding senior notes in the aggregate principal amount of
$49.0 million
. pay related transaction costs.
On January 28, 1999, we acquired 100% of the outstanding capital stock of
Miller Enterprises and certain other real estate assets of certain affiliates
of Miller for $95.1 million. Miller is a leading operator of convenience
stores, operating 121 stores located in central Florida under the name "Handy
Way." The purchase price and the fees and expenses of the Miller acquisition
were financed with proceeds from the 1999 bank credit facility and cash on
hand.
Also on January 28, 1999, we repurchased $49.0 million in principal amount
of senior notes and paid accrued and unpaid interest up to, but not including,
the date of purchase and a 4% call premium. The repurchase of 100% of the
senior notes outstanding, the payment of accrued interest and the call premium
were financed with proceeds from the 1999 bank credit facility. The Pantry
recognized an extraordinary loss, net of taxes, of approximately $3.6 million
in connection with the repurchase of the senior notes including the payment of
a $2.0 million call premium and the write-off of related deferred financing
costs.
NOTE 2--BUSINESS ACQUISITIONS:
During the six months ended March 25, 1999, The Pantry acquired the
businesses described below, which are accounted for by the purchase method of
accounting:
. The October 22, 1998 acquisition of the operating assets of 10
convenience stores in eastern North Carolina, for $3.8 million which was
financed by cash on hand.
. The November 5, 1998 acquisition of the operating assets of 22
convenience stores in North Carolina and South Carolina, for $21.8
million which was financed with proceeds of $16.0 million from the 1998
bank credit facility and cash on hand.
. The January 28, 1999 acquisition of all of the common stock of Miller
Enterprises and real estate assets of affiliates of Miller Enterprises.
The $95.1 million purchase price was financed with the proceeds from the
1999 bank credit facility and cash on hand.
. The February 25, 1999 acquisition of the operating assets of 60
convenience stores in North Carolina and Virginia for $22.8 million
which was financed with $19.0 million of proceeds from the 1999 bank
credit facility and cash on hand.
7
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase price of the Miller Enterprises and affiliates acquisition is
subject to working capital and capital expenditure adjustments pending the
completion of a closing balance-sheet audit of Miller Enterprises as of
January 28, 1999. $2.5 million of the purchase price of the Express Stop, Inc.
acquisition was subject to an escrow agreement until March 1999, and was to be
forfeited upon the occurrence of specific events or conditions relating to the
operations of video poker machines in the State of South Carolina. The events
or conditions specified in the purchase agreement did not occur, and the $2.5
million held in escrow was paid to Express Stop, Inc. in March 1999.
Goodwill associated with the 1999 acquisitions is being amortized over 30
years using the straight-line method.
During fiscal 1998, The Pantry acquired and disposed of the businesses
described below. These acquisitions were accounted for by the purchase method
of accounting:
. The October 23, 1997 acquisition of all of the common stock of Lil'
Champ for $136.4 million. The purchase price, the refinancing of
existing Lil' Champ debt, and the fees and expenses of the Lil' Champ
acquisition were financed with the proceeds from the offering of $200.0
million, 10.5% senior subordinated notes due 2007, cash on hand and the
purchase by existing shareholders and management of The Pantry of an
additional $32.4 million of The Pantry's common stock.
. The March 19, 1998 acquisition of the operating assets of 23 convenience
stores in eastern North Carolina for approximately $9.0 million, which
was financed with proceeds from the 1998 bank credit facility and cash
on hand.
. The May 10, 1998 acquisition of 10 convenience stores for approximately
$18.3 million in the Gainesville, Florida area, which was financed with
proceeds from the 1998 bank credit facility.
. The July 2, 1998 acquisition of assets of Quick Stop Food Mart, Inc.
including 75 convenience stores located throughout North Carolina and
South Carolina, for $56.0 million, which was financed with the proceeds
of $25.0 million from the sale of common stock to existing shareholders,
borrowings of $25.0 million under the 1998 bank credit facility and cash
on hand.
. The July 15, 1998 acquisition of assets of Stallings Oil Company, Inc.
including 41 convenience stores located throughout North Carolina and
Virginia for $29.3 million. The Stallings and Quick Stop acquisitions
were financed by proceeds of $50.0 million from the 1998 bank credit
facility and cash on hand.
. The September 1, 1998 disposition of certain assets of Lil' Champ
including 48 convenience stores located throughout eastern Georgia.
. The September 1, 1998 acquisition of the operating assets of 4
convenience stores located in northern Florida which was financed with a
portion of the proceeds from the disposition of the assets discussed
above.
With the exception of the Lil' Champ acquisition, the purchase price
allocations are preliminary estimates, based on available information and
certain assumptions management believes are reasonable. Accordingly, the
purchase price allocations are subject to finalization. The purchase price
allocation for the Lil' Champ acquisition has been finalized.
The following unaudited pro forma information presents a summary of
consolidated results of operations of The Pantry and acquired businesses as if
the transactions occurred at the beginning of the fiscal year for each of the
periods presented (amounts in thousands):
Six Months Ended
--------------------
March 26, March 25,
1998 1999
--------- ---------
Total revenues......................................... $827,185 $805,923
Income before extraordinary loss....................... $ 1,207 $ (1,050)
Net income (loss)...................................... $ (5,593) $ (4,607)
8
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In management's opinion, the unaudited pro forma information is not
necessarily indicative of actual results that would have occurred had the
acquisitions been consummated at the beginning of fiscal 1997 or fiscal 1998,
or of future operations of the combined companies.
NOTE 3--INVENTORIES
Inventories are stated at the lower of last-in, first-out (LIFO) cost or
market. Inventories consisted of the following (in thousands):
September 24, March 26,
1998 1999
------------- ---------
Inventories at FIFO cost:
Merchandise........................................ $41,967 $56,055
Gasoline........................................... 11,510 14,932
------- -------
53,477 70,987
Less adjustment to LIFO cost:
Merchandise........................................ (5,668) (9,348)
Gasoline........................................... -- (261)
------- -------
Inventories at LIFO cost............................. $47,809 $61,378
======= =======
Total inventories at September 24, 1998 and March 25, 1999 include $5.2
million and $6.4 million of gasoline inventories held by Lil' Champ and Miller
(March 25, 1999 only) that are recorded under the FIFO method, respectively.
Inventories are net of estimated obsolescence reserves of approximately
$200,000 at September 24, 1998 and March 25, 1999.
NOTE 4--ENVIRONMENTAL LIABILITIES AND OTHER CONTINGENCIES
As of March 25, 1999, The Pantry was contingently liable for outstanding
letters of credit in the amount of $15.7 million related primarily to several
self-insured programs, regulatory requirements, and vendor contract terms. The
letters of credit are not to be drawn against unless The Pantry defaults on
the timely payment of related liabilities.
The State of North Carolina and the State of Tennessee have assessed
Sandhills, Inc., a subsidiary of The Pantry , with additional taxes plus
penalties and accrued interest totaling approximately $5 million, for the
periods February 1, 1992 to September 26, 1996. In December 1998, The Pantry
reached a tentative settlement with the State of North Carolina, which is
pending final approval by the state. Under the settlement, The Pantry will
reduce state net economic loss carryforwards and pay a de minimis amount of
additional tax. The expected settlement is reflected in the financial
statements as a reduction to state net economic losses and a reduction of
deferred tax assets which is fully offset by a corresponding reduction to the
valuation allowance. The Pantry is contesting the Tennessee assessment and
believes that, in the event of a mutual settlement, the assessment amount and
related penalties (approximately $250,000) would be substantially reduced.
Based on this, The Pantry believes the outcome of the audits will not have a
material adverse effect on its financial condition or financial statements.
The Pantry is involved in certain legal actions arising in the normal course
of business. In the opinion of management, based on a review of such legal
proceedings, the ultimate outcome of these actions will not have a material
effect on the consolidated financial statements.
9
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Environmental Liabilities and Contingencies
The Pantry is subject to various federal, state and local environmental laws
and regulations governing underground petroleum storage tanks that require The
Pantry to make certain expenditures for compliance. In particular, at the
federal level, the Resource Conservation and Recovery Act, as amended,
requires the EPA to establish a comprehensive regulatory program for the
detection, prevention, and cleanup of leaking underground storage tanks.
Regulations enacted by the EPA in 1988 established requirements for
. installing underground storage tank systems
. upgrading underground storage tank systems
. taking corrective action in response to releases
. closing underground storage tank systems
. keeping appropriate records
. maintaining evidence of financial responsibility for taking corrective
action and compensating third parties for bodily injury and property
damage resulting from releases
These regulations permit states to develop, administer and enforce their own
regulatory programs, incorporating requirements which are at least as
stringent as the federal standards. The Florida rules for 1998 upgrades are
more stringent than the 1988 EPA regulations. The Pantry facilities in Florida
all meet or exceed such rules. The following is an overview of the
requirements imposed by these regulations:
. Leak Detection: The EPA and states' release detection regulations were
phased in based on the age of the underground storage tanks. All
underground storage tanks were required to comply with leak detection
requirements by December 22, 1993. The Pantry utilizes several approved
leak detection methods for all company-owned underground storage tank
systems. Daily and monthly inventory reconciliations are completed at the
store level and at the corporate support center. The daily and monthly
reconciliation data is also analyzed using statistical inventory
reconciliation which compares the reported volume of gasoline purchased
and sold with the capacity of each underground storage tank system and
highlights discrepancies. The Pantry believes it is in full or
substantial compliance with the leak detection requirements applicable to
underground storage tanks.
. Corrosion Protection: The 1988 EPA regulations require that all
underground storage tank systems have corrosion protection by December
22, 1998. All of The Pantry's underground storage tanks have been
protected from corrosion either through the installation of fiberglass
tanks or upgrading steel underground storage tanks with interior
fiberglass lining and the installation of cathodic protection.
. Overfill/Spill Prevention: The 1988 EPA regulations require that all
sites have overfill/spill prevention devices by December 22, 1998. The
Pantry has installed spill/overfill equipment on all company-owned
underground storage tank systems to meet these regulations.
In addition to the technical standards, The Pantry is required by federal
and state regulations to maintain evidence of financial responsibility for
taking corrective action and compensating third parties in the event of a
release from its underground storage tank systems. In order to comply with
this requirement, The Pantry maintains surety bonds in the aggregate amount of
approximately $900,000 in favor of state environmental enforcement agencies in
the states of North Carolina, Virginia and South Carolina and a letter of
credit in the aggregate amount of approximately $1.1 million issued by a
commercial bank in favor of state environmental enforcement agencies in the
states of Florida, Tennessee, Indiana and Kentucky and relies on
reimbursements from applicable state trust funds. In Florida, The Pantry meets
such financial responsibility requirements by state trust fund coverage
through December 31, 1998 and will meet such requirements thereafter through
private
10
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
commercial liability insurance. The Pantry has sold all of its Georgia stores
but has retained responsibility for pre-closing environmental remediation. The
costs of such remediation and third party claims should be covered by the
state trust fund, subject to applicable deductibles and caps on
reimbursements.
All states in which The Pantry operates or has operated underground storage
tank systems have established trust funds for the sharing, recovering, and
reimbursing of certain cleanup costs and liabilities incurred as a result of
releases from underground storage tank systems. These trust funds, which
essentially provide insurance coverage for the cleanup of environmental
damages caused by the operation of underground storage tank systems, are
funded by a underground storage tank registration fee and a tax on the
wholesale purchase of motor fuels within each state. The Pantry has paid
underground storage tank registration fees and gasoline taxes to each state
where it operates to participate in these programs and has filed claims and
received reimbursement in North Carolina, South Carolina, Kentucky, Indiana,
Florida, Georgia, and Tennessee. The coverage afforded by each state fund
varies but generally provides from $150,000 to $1.0 million per site or
occurrence for the cleanup of environmental contamination, and most provide
coverage for third party liabilities.
Costs for which The Pantry does not receive reimbursement include but are
not limited to, the per-site deductible, costs incurred in connection with
releases occurring or reported to trust funds prior to their
inception, removal and disposal of underground storage tank systems, and costs
incurred in connection with sites otherwise ineligible for reimbursement from
the trust funds. The trust funds require The Pantry to pay deductibles ranging
from $10,000 to $100,000 per occurrence depending on the upgrade status of its
underground storage tank system, the date the release is discovered/reported
and the type of cost for which reimbursement is sought. The Florida trust fund
will not cover releases first reported after December 31, 1998. The Pantry
will meet Florida financial responsibility requirements for remediation and
third party claims arising out of releases reported after December 31, 1998
through a combination of private insurance and a letter of credit. In addition
to material amounts to be spent by The Pantry, a substantial amount will be
expended for remediation on behalf of The Pantry by state trust funds
established in The Pantry's operating areas or other responsible third parties
(including insurers). To the extent such third parties do not pay for
remediation as anticipated by The Pantry, The Pantry will be obligated to make
such payments, which could materially adversely affect The Pantry's financial
condition and results of operations. Reimbursement from state trust funds will
be dependent upon the maintenance and continued solvency of the various funds.
Environmental reserves of $17.1 million and $17.2 million as of September
24, 1998 and March 25, 1999, respectively, represent estimates for future
expenditures for remediation, tank removal and litigation associated with 205
and 207 known contaminated sites, respectively, as a result of releases (e.g.,
overfills, spills and underground storage tank releases) and are based on
current regulations, historical results and certain other factors. As of March
25, 1999 the current average remediation cost per site is $70,000. Remediation
costs for known sites are expected to be incurred over the next one to ten
years. Environmental reserves have been established on an undiscounted basis
with remediation costs based on internal and external estimates for each site.
Future remediation costs for amounts of deductibles under, or amounts not
covered by, state trust fund programs and third party insurance arrangements
and for which the timing of payments can be reasonably estimated are
discounted using a ten-percent rate.
The Pantry anticipates that it will be reimbursed for a portion of these
expenditures from state insurance funds and private insurance. As of September
24, 1998, and March 25, 1999, these anticipated reimbursements of $13.2
million and $12.7 million, respectively, are recorded as long-term
environmental receivables. In Florida, remediation of such contamination
reported before January 1, 1999 will be performed by the state and
substantially all of the costs will be paid by the state trust fund. The
Pantry will perform remediation in other states through independent contractor
firms engaged by The Pantry. For certain sites the trust fund does not cover a
deductible or has a copay which may be less than the cost of such remediation.
Although The Pantry is not aware of releases or contamination at other
locations where it currently operates or has operated stores, any such
11
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
releases or contamination could require substantial remediation expenditures,
some or all of which may not be eligible for reimbursement from state trust
funds.
The Pantry has reserved $500,000 to cover third party claims for
environmental conditions at adjacent real properties that are not covered by
state trust funds or by private insurance. This reserve is based on
management's best estimate of losses that may be incurred over the next
several years based on, among other things, the average remediation costs for
contaminated sites and The Pantry's historical claims experience.
Several of the locations identified as contaminated are being cleaned up by
third parties who have indemnified The Pantry as to responsibility for clean
up matters. Additionally, The Pantry is awaiting closure notices on several
other locations which will release The Pantry from responsibility related to
known contamination at those sites. These sites continue to be included in The
Pantry's environmental reserve until a final closure notice is received.
NOTE 5--LONG-TERM DEBT
At September 24, 1998 and March 25, 1999, long-term debt consisted of the
following (in thousands):
March 25,
1998 1999
-------- ---------
Senior notes payable; due November 15, 2000; interest
payable semi-annually at 12%........................... $ 48,995 $ --
Senior subordinated notes payable; due October 15, 2007;
interest payable semi-annually at 10.25%............... 200,000 200,000
Term loan facility--Tranche A; interest payable monthly
at LIBOR (4.94% at March 25, 1999) plus 3.0%; principal
due in quarterly installments beginning April 30, 1999
through April 30, 2003................................. -- 79,086
Term loan facility--Tranche B; interest payable monthly
at LIBOR (4.94% at March 25, 1999) plus 3.5%; principal
due in quarterly installments beginning April 30, 1999
through April 30, 2004................................. -- 159,939
Acquisition facility; interest payable monthly at LIBOR
(4.94% at March 25, 1999) plus 2.5%; principal due in
quarterly installments through October 31, 2002........ 78,000 19,000
Notes payable to McLane Company, Inc.; zero (0.0%)
interest, with principal due in annual installments
through February 26, 2003.............................. -- 1,380
Other notes payable; various interest rates and maturity
dates.................................................. 319 303
-------- --------
327,314 459,708
Less--current maturities................................ (45) (5,431)
-------- --------
$327,269 $454,277
======== ========
The senior notes and senior subordinated notes are unconditionally
guaranteed, on an unsecured basis, as to the payment of principal, premium, if
any, and interest, jointly and severally, by all subsidiary guarantors. See
"Note 7--Supplemental Guarantor Information". On January 28, 1999, The Pantry
repurchased $49.0 million in principal amount of senior notes plus accrued and
unpaid interest up to, but not including, the date of purchase and a 4% call
premium. The repurchase of 100% of the senior notes outstanding, the payment
of accrued interest and the call premium were financed with proceeds from the
1999 bank credit facility and cash on hand.
On January 28, 1999, The Pantry entered into the 1999 bank credit facility
consisting of
. a $45.0 million revolving credit facility available for working capital
financing, general corporate purposes and issuing commercial and standby
letters of credit
12
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. a $50.0 million acquisition facility available to finance acquisition of
related businesses
. term loan facilities with outstanding borrowings of $239.0 million
The Pantry used the proceeds of the term loan facility and a $5.0 million
initial draw under the revolving credit facility, along with cash on hand, to
.finance the Miller Enterprises acquisition
.refinance $94.0 million outstanding under the 1998 bank credit facility
.redeem the outstanding senior notes in the aggregate principal amount of
$49.0 million
.pay related transaction costs
The annual maturities of notes payable are as follows (in thousands):
Year Ended September:
1999............................................................ $ 2,896
2000............................................................ 10,686
2001............................................................ 17,939
2002............................................................ 20,943
2003............................................................ 37,931
Thereafter...................................................... 369,313
--------
$459,708
========
As of March 25, 1999, The Pantry was in compliance with all covenants and
restrictions relating to all its outstanding borrowings.
As of March 25, 1999, substantially all of The Pantry's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
NOTE 6--SHAREHOLDERS' EQUITY
On August 31, 1998, The Pantry adopted the 1998 Stock Subscription Plan. The
Stock Subscription Plan allows us to offer to certain employees the right to
purchase shares of common stock at a purchase price equal to the fair market
value on the date of purchase. During the six months ended March 25, 1999,
2,636 shares, net of repurchases of 123 shares were issued under the Stock
Subscription Plan. These shares were sold at fair value ($575), as determined
by the most recent equity investment (July 1998). In connection with these
sales, The Pantry received $722,000 of secured promissory notes receivable,
bearing an interest rate of 8.8%, due August 31, 2003.
NOTE 7--SUPPLEMENTAL GUARANTOR INFORMATION
Lil' Champ, Sandhills, Inc. and Global Communications, Inc. (the
"Guarantors") jointly and severally, unconditionally guarantee, on an
unsecured senior subordinated basis, the full and prompt performance of The
Pantry's obligations under its senior subordinated notes, its senior notes
indenture and its 1999 bank credit facility.
Management has determined that separate financial statements of the
Guarantors would not provide significant additive information to investors and
in lieu of such separate financial statements, The Pantry has presented
supplemental combining information. This supplemental combining information
includes the consolidated financial statements of the Company's unrestricted
subsidiary, PH and PH's wholly-owned subsidiaries, TC Capital Management,
Inc., and Pantry Properties, Inc. (together, the "Non-Guarantors").
Accordingly, the following supplemental combining information presents
information regarding The Pantry, the Guarantors, the Non-Guarantors, and
related consolidating entries.
The Pantry accounts for its wholly-owned subsidiaries on the equity basis.
Certain reclassifications have been made to conform all of the financial
information to the financial presentation on a consolidated basis. The
principal consolidating entries eliminate investments in subsidiaries and
intercompany balances and transactions.
13
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
Year Ended September 24, 1998
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in thousands)
ASSETS
------
Current assets:
Cash and cash
equivalents.......... $ 24,031 $ 6,300 $4,073 $ -- $ 34,404
Receivables, net...... 11,211 9,263 1,030 (11,597) 9,907
Inventories........... 24,933 22,876 -- -- 47,809
Income taxes
receivable........... 270 (2,098) (472) 2,788 488
Prepaid expenses...... 1,206 1,007 3 -- 2,216
Property held for
sale................. 3,761 -- -- -- 3,761
Deferred income
taxes................ 1,262 2,726 -- -- 3,988
-------- -------- ------ --------- --------
Total current
assets............. 66,674 40,074 4,634 (8,809) 102,573
-------- -------- ------ --------- --------
Investment in
subsidiaries........... 69,317 -- -- (69,317) --
-------- -------- ------ --------- --------
Property and equipment,
net.................... 125,340 175,298 340 -- 300,978
-------- -------- ------ --------- --------
Other assets:
Goodwill, net......... 72,375 47,650 -- -- 120,025
Deferred lease cost,
net.................. 269 -- -- -- 269
Deferred financing
cost, net............ 14,545 -- -- -- 14,545
Environmental
receivables, net..... 11,566 1,621 -- -- 13,187
Intercompany notes
receivable........... 19,803 49,705 -- (69,508) --
Other noncurrent
assets............... 155 3,088 -- -- 3,243
-------- -------- ------ --------- --------
Total other assets.. 118,713 102,064 -- (69,508) 151,269
-------- -------- ------ --------- --------
Total assets........ $380,044 $317,436 $4,974 $(147,634) $554,820
======== ======== ====== ========= ========
14
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS--(Continued)
Year Ended September 24, 1998
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
- -----------------------------
Current liabilities:
Current maturities of long-
term debt................. $ 17 $ 10 $ 18 $ -- $ 45
Current maturities of
capital lease
obligations............... 213 1,027 -- -- 1,240
Accounts payable:
Trade...................... 28,563 20,996 -- -- 49,559
Money orders............... 4,112 1,069 -- -- 5,181
Accrued interest........... 11,564 1,283 1 (1,136) 11,712
Accrued compensation and
related taxes............. 4,366 2,352 1 -- 6,719
Other accrued taxes........ 3,108 3,899 -- -- 7,007
Accrued insurance.......... 3,188 2,557 -- -- 5,745
Other accrued liabilities.. 11,118 18,877 122 (5,769) 24,348
-------- -------- ------ --------- --------
Total current
liabilities............. 66,249 52,070 142 (6,905) 111,556
-------- -------- ------ --------- --------
Long-term debt............... 188,151 139,000 118 -- 327,269
-------- -------- ------ --------- --------
Other noncurrent liabilities:
Environmental reserves..... 13,487 3,650 -- -- 17,137
Deferred income taxes...... (36) 22,001 -- (1,599) 20,366
Capital lease obligations.. 1,534 10,595 -- -- 12,129
Employment obligations..... 934 -- -- -- 934
Accrued dividends on
preferred stock........... 4,391 -- -- -- 4,391
Intercompany note payable.. 50,705 20,822 -- (71,527) --
Other noncurrent
liabilities............... 15,325 5,737 38 634 21,734
-------- -------- ------ --------- --------
Total other noncurrent
liabilities............. 86,340 62,805 38 (72,492) 76,691
-------- -------- ------ --------- --------
SHAREHOLDERS' EQUITY
(DEFICIT):
Preferred stock............ -- -- -- -- --
Common stock............... 2 1 -- (1) 2
Additional paid-in
capital................... 69,054 6,758 5,001 (11,759) 69,054
Shareholder loan........... (215) -- -- -- (215)
Accumulated earnings
(deficit)................. (29,537) 56,802 (325) (56,477) (29,537)
-------- -------- ------ --------- --------
Total shareholders'
equity (deficit)........ 39,304 63,561 4,676 (68,237) 39,304
-------- -------- ------ --------- --------
Total liabilities and
shareholders' equity
(deficit)............... $380,044 $317,436 $4,974 $(147,634) $554,820
======== ======== ====== ========= ========
15
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
March 25, 1999
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in thousands)
ASSETS
------
Current assets:
Cash and cash
equivalents........... $ 9,686 $ 11,089 $4,224 $ -- $ 24,999
Receivables, net....... 19,281 25,878 1,030 (31,360) 14,829
Inventories............ 32,163 29,215 -- -- 61,378
Income taxes
receivable
(payable)............. 1,883 (2,634) (551) 5,883 4,581
Prepaid expenses....... 1,297 1,329 8 -- 2,634
Property held for
sale.................. 82 -- -- -- 82
Deferred income
taxes................. 1,366 2,767 -- -- 4,133
-------- -------- ------ --------- --------
Total current
assets............ 65,758 67,644 4,711 (25,477) 112,636
-------- -------- ------ --------- --------
Investment in
subsidiaries........... 77,188 968 -- (78,156) --
-------- -------- ------ --------- --------
Property and equipment,
net.................... 147,662 257,728 337 -- 405,727
-------- -------- ------ --------- --------
Other assets:
Goodwill, net.......... 97,555 71,876 -- -- 169,431
Deferred lease cost,
net................... 247 -- -- -- 247
Deferred financing
cost, net............. 13,130 -- -- -- 13,130
Environmental
receivables, net...... 11,566 1,166 -- -- 12,732
Intercompany note
receivable............ 257,465 49,705 -- (307,170) --
Other.................. 3,214 4,845 -- 968 9,027
-------- -------- ------ --------- --------
Total other
assets............ 383,177 127,592 -- (306,202) 204,567
-------- -------- ------ --------- --------
Total assets....... $673,785 $453,932 $5,048 $(409,835) $722,930
======== ======== ====== ========= ========
16
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS--(Continued)
March 25, 1999
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
- -----------------------------
Current liabilities:
Current maturities of long-
term debt.................. $ 5,117 $ 296 $ 18 $ -- $ 5,431
Current maturities of
capital lease
obligations................ 213 1,027 -- -- 1,240
Accounts payable:
Trade..................... 35,009 31,297 -- (26) 66,280
Money orders.............. 4,620 3,345 -- -- 7,965
Accrued interest............ 14,373 -- 1 (3,580) 10,794
Accrued compensation and
related taxes.............. 4,019 3,842 1 -- 7,862
Other accrued taxes......... 2,529 6,009 -- -- 8,538
Accrued insurance........... 3,825 4,676 -- -- 8,501
Other accrued liabilities... 24,634 23,464 121 (17,358) 30,861
-------- -------- ------ --------- --------
Total current
liabilities............ 94,339 73,956 141 (20,964) 147,472
-------- -------- ------ --------- --------
Long-term debt............... 453,072 1,097 108 -- 454,277
-------- -------- ------ --------- --------
Other noncurrent liabilities:
Environmental reserves...... 13,566 3,619 -- -- 17,185
Deferred income taxes....... (1,667) 25,081 -- -- 23,414
Capital lease obligations... 1,413 10,085 -- -- 11,498
Employment obligations...... 749 -- -- -- 749
Accrued dividends on
preferred stock............ 5,837 -- -- -- 5,837
Intercompany note payable... 51,705 259,961 -- (311,666) --
Other....................... 18,325 7,690 37 -- 26,052
-------- -------- ------ --------- --------
Total other noncurrent
liabilities............ 89,928 306,436 37 (311,666) 84,735
-------- -------- ------ --------- --------
SHAREHOLDERS' EQUITY
(DEFICIT):
Preferred stock.............. -- -- -- -- --
Common stock................. 2 1 5,001 (5,002) 2
Additional paid-in capital... 70,844 6,882 -- (6,882) 70,844
Shareholder loans............ (937) -- -- -- (937)
Accumulated earnings
(deficit)................... (33,463) 65,560 (239) (65,321) (33,463)
-------- -------- ------ --------- --------
Total shareholders'
equity (deficit)....... 36,446 72,443 4,762 (77,205) 36,446
-------- -------- ------ --------- --------
Total liabilities and
shareholders' equity
(deficit).............. $673,785 $453,932 $5,048 $(409,835) $722,930
======== ======== ====== ========= ========
17
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
Three Months Ended March 26, 1998
The
Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
-------- ------------ ------------- ------------ --------
(dollars in thousands)
Revenues:
Merchandise sales..... $48,733 $ 55,672 $ -- $ -- $104,405
Gasoline sales........ 48,636 64,060 -- -- 112,696
Commissions........... 1,483 2,086 -- -- 3,569
------- -------- ---- ------- --------
Total revenues...... 98,852 121,818 -- -- 220,670
------- -------- ---- ------- --------
Cost of sales:
Merchandise........... 31,272 36,696 -- -- 67,968
Gasoline.............. 43,541 55,874 -- -- 99,415
------- -------- ---- ------- --------
Total cost of
sales.............. 74,813 92,570 -- -- 167,383
------- -------- ---- ------- --------
Gross profit............ 24,039 29,248 -- -- 53,287
------- -------- ---- ------- --------
Operating expenses:
Store expenses........ 18,960 17,723 (59) (2,936) 33,688
General and
administrative
expenses............. 4,146 4,207 7 -- 8,360
Depreciation and
amortization......... 3,317 3,306 1 -- 6,624
------- -------- ---- ------- --------
Total operating
expenses........... 26,423 25,236 (51) (2,936) 48,672
------- -------- ---- ------- --------
Income (loss) from
operations............. (2,384) 4,012 51 2,936 4,615
------- -------- ---- ------- --------
Equity in earnings of
subsidiaries........... 4,098 -- -- (4,098) --
------- -------- ---- ------- --------
Other income (expense):
Interest expense...... (3,977) (4,038) (3) 984 (7,034)
Miscellaneous......... 179 4,097 9 (3,950) 335
------- -------- ---- ------- --------
Total other
expense............ (3,798) 59 6 (2,966) (6,699)
------- -------- ---- ------- --------
Income (loss) before
income taxes and
extraordinary item..... (2,084) 4,071 57 (4,128) (2,084)
Income tax benefit
(expense).............. 504 (1,368) (57) 1,425 504
------- -------- ---- ------- --------
Net income (loss) before
extraordinary item..... (1,580) 2,703 -- (2,703) (1,580)
Extraordinary item, net
of taxes............... -- -- -- -- --
------- -------- ---- ------- --------
Net income (loss)....... (1,580) 2,703 -- (2,703) (1,580)
Preferred dividends..... (647) -- -- -- (647)
------- -------- ---- ------- --------
Net income (loss)
applicable to common
shareholders........... $(2,227) $ 2,703 $ -- $(2,703) $ (2,227)
======= ======== ==== ======= ========
18
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
Three Months Ended March 25, 1999
Total
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------- ------------ --------
(dollars in thousands)
Revenues:
Merchandise sales..... $ 86,920 $ 77,652 $ -- $ -- $164,572
Gasoline sales........ 105,111 84,017 -- -- 189,128
Commissions........... 3,786 2,306 -- -- 6,092
-------- -------- ---- ------- --------
Total revenues...... 195,817 163,975 -- -- 359,792
-------- -------- ---- ------- --------
Cost of sales:
Merchandise........... (58,745) 51,627 -- -- 110,372
Gasoline.............. (93,108) 72,751 -- -- 165,859
-------- -------- ---- ------- --------
Total cost of
sales.............. 151,853 124,378 -- -- 276,231
-------- -------- ---- ------- --------
Gross profit............ 43,964 39,597 -- -- 83,561
-------- -------- ---- ------- --------
Operating expenses:
Store expenses........ 33,496 23,802 (60) (5,752) 51,486
General and
administrative
expenses............. 6,174 6,208 6 -- 12,388
Depreciation and
amortization......... 4,583 5,056 1 -- 9,640
-------- -------- ---- ------- --------
Total operating
expenses........... 44,253 35,066 (53) (5,752) 73,514
-------- -------- ---- ------- --------
Income (loss) from
operations............. (289) 4,531 53 5,752 10,047
-------- -------- ---- ------- --------
Equity in earnings of
subsidiaries........... 6,425 16 -- 6,441 --
-------- -------- ---- ------- --------
Other income (expense):
Interest expense...... (5,792) (5,447) 2 1,280 (9,961)
Miscellaneous......... 54 7,235 38 7,015 312
-------- -------- ---- ------- --------
Total other
expenses........... (5,738) 1,788 36 (5,735) (9,649)
-------- -------- ---- ------- --------
Income (loss) before
income taxes and
extraordinary loss..... 398 6,335 89 (6,424) 398
Income tax benefit
(expense).............. (386) (2,306) 34 2,340 (386)
-------- -------- ---- ------- --------
Net income (loss) before
extraordinary item..... 12 4,029 55 (4,084) 12
Extraordinary loss...... (3,557) -- -- -- (3,557)
-------- -------- ---- ------- --------
Net income (loss)....... (3,545) 4,029 55 (4,084) (3,545)
Preferred dividends..... (734) -- -- -- (734)
-------- -------- ---- ------- --------
Net income (loss)
applicable to common
shareholders........... $ (4,279) $ 4,029 $ 55 $(4,084) $ (4,279)
======== ======== ==== ======= ========
19
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
Six Months Ended March 26, 1998
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(dollars in thousands)
Revenues:
Merchandise sales..... $ 99,613 $ 94,152 $ -- $ -- $193,765
Gasoline sales........ 105,466 110,252 -- -- 215,718
Commissions........... 2,915 3,443 -- -- 6,358
-------- -------- ----- ------- --------
Total revenues...... 207,994 207,847 -- -- 415,841
-------- -------- ----- ------- --------
Cost of sales:
Merchandise........... 64,374 62,491 -- -- 126,865
Gasoline.............. 93,984 96,340 -- -- 190,324
-------- -------- ----- ------- --------
Total cost of
sales.............. 158,358 158,831 -- -- 317,189
-------- -------- ----- ------- --------
Gross profit............ 49,636 49,016 -- -- 98,652
-------- -------- ----- ------- --------
Operating expenses:
Store expenses........ 37,962 30,212 (119) (6,202) 61,853
General and
administrative
expenses............. 8,481 7,039 12 -- 15,532
Depreciation and
amortization......... 6,187 5,585 3 -- 11,775
-------- -------- ----- ------- --------
Total operating
expenses........... 52,630 42,836 (104) (6,202) 89,160
-------- -------- ----- ------- --------
Income (loss) from
operations............. (2,994) 6,180 104 6,202 9,492
-------- -------- ----- ------- --------
Equity in earnings of
subsidiaries........... 8,071 -- -- (8,071) --
-------- -------- ----- ------- --------
Other income (expense):
Interest expense...... (8,125) (6,785) (6) 2,065 (12,851)
Miscellaneous......... 463 8,562 15 (8,266) 774
-------- -------- ----- ------- --------
Total other
expense............ (7,662) 1,777 9 (6,201) (12,077)
-------- -------- ----- ------- --------
Income (loss) before
income taxes and
extraordinary item..... (2,585) 7,957 113 (8,070) (2,585)
Income tax benefit
(expense).............. 916 (2,755) (132) 2,887 916
-------- -------- ----- ------- --------
Net income (loss) before
extraordinary item..... (1,669) 5,202 (19) (5,183) (1,669)
Extraordinary item, net
of taxes............... (6,800) -- -- -- (6,800)
-------- -------- ----- ------- --------
Net income (loss)....... (8,469) 5,202 (19) (5,183) (8,469)
Preferred dividends..... (1,586) -- -- -- (1,586)
-------- -------- ----- ------- --------
Net income (loss)
applicable to common
shareholders........... $(10,055) $ 5,202 $ (19) $(5,183) $(10,055)
======== ======== ===== ======= ========
20
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF OPERATIONS
Six Months Ended March 25, 1999
Total
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------- ------------ --------
(dollars in thousands)
Revenues:
Merchandise sales..... $170,297 $133,665 $ -- $ -- $303,962
Gasoline sales........ 212,186 148,731 -- -- 360,917
Commissions........... 6,294 4,226 -- -- 10,520
-------- -------- ----- -------- --------
Total revenues...... 388,777 286,622 -- -- 675,399
-------- -------- ----- -------- --------
Cost of sales:
Merchandise........... 115,711 89,114 -- -- 204,825
Gasoline.............. 186,555 128,078 -- -- 314,633
-------- -------- ----- -------- --------
Total cost of
sales.............. 302,266 217,192 -- -- 519,458
-------- -------- ----- -------- --------
Gross profit............ 86,511 69,430 -- -- 155,941
-------- -------- ----- -------- --------
Operating expenses:
Store expenses........ 65,635 41,158 (121) (11,457) 95,215
General and
administrative
expenses............. 11,849 10,496 11 -- 22,356
Depreciation and
amortization......... 9,119 8,708 3 -- 17,830
-------- -------- ----- -------- --------
Total operating
expenses........... 86,603 60,362 (107) (11,457) 135,401
-------- -------- ----- -------- --------
Income (loss) from
operations............. (92) 9,068 107 11,457 20,540
-------- -------- ----- -------- --------
Equity in earnings of
subsidiaries........... 13,677 16 -- (13,693) --
-------- -------- ----- -------- --------
Other income (expense):
Interest expense...... (11,564) (9,819) (5) 2,515 (18,873)
Miscellaneous......... (226) 14,237 72 (13,955) 128
-------- -------- ----- -------- --------
Total other
expense............ (11,790) 4,418 67 (11,440) (18,745)
-------- -------- ----- -------- --------
Income (loss) before
income taxes and
extraordinary loss..... 1,795 13,502 174 (13,676) 1,795
Income tax benefit
(expense).............. (718) (4,717) (89) 4,806 (718)
-------- -------- ----- -------- --------
Net income (loss) before
extraordinary loss..... 1,077 8,785 85 (8,870) 1,077
Extraordinary loss...... (3,557) -- -- -- (3,557)
-------- -------- ----- -------- --------
Net income (loss)....... (2,480) 8,785 85 (8,870) (2,480)
Preferred dividends..... (1,466) -- -- -- (1,466)
-------- -------- ----- -------- --------
Net income (loss)
applicable to common
shareholders........... $ (3,926) $ 8,785 $ 85 $ (8,870) $ (3,926)
======== ======== ===== ======== ========
21
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
Six Months Ended March 25, 1998
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ ---------
(Dollars in Thousands)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)....... $ (8,469) $ 5,202 $(19) $(5,183) $ (8,469)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Extraordinary loss.... 6,800 -- -- -- 6,800
Depreciation and
amortization......... 6,193 5,580 2 -- 11,775
Provision for deferred
income taxes......... (1,398) -- (17) -- (1,415)
(Gain) loss on sale of
property and
equipment............ 100 109 -- -- 209
Reserves for
environmental
issues............... 57 -- -- -- 57
Equity earnings of
affiliates........... (5,183) -- -- 5,183 --
Changes in operating
assets and liabilities,
net:
Receivables........... (3,068) (6,891) 26 6,175 (3,758)
Inventories........... 1,501 (2,282) -- -- (781)
Prepaid expenses...... 423 462 (6) -- 879
Other noncurrent
assets............... (15) (386) -- 5,767 5,366
Accounts payable...... (661) 2,056 -- 2 1,397
Other current
liabilities and
accrued expenses..... 5,883 3,462 136 (7,922) 1,559
Employment
obligations.......... (185) -- -- -- (185)
Other noncurrent
liabilities.......... 2,675 1,543 -- -- 4,218
-------- --------- ---- ------- ---------
Net cash provided by
operating activities... 4,653 8,855 122 4,022 17,652
-------- --------- ---- ------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale.......... (2,648) -- -- -- (2,648)
Additions to property
and equipment.......... (11,324) (6,490) -- -- (17,814)
Proceeds from sale of
property held for
sale................... 2,025 -- -- -- 2,025
Proceeds from sale of
property and
equipment.............. 316 366 -- -- 682
Intercompany notes
receivable (payable)... 4,048 -- (26) (4,022) --
Acquisitions of related
businesses, net of cash
acquired of $10,487.... (9,500) (135,898) -- -- (145,398)
-------- --------- ---- ------- ---------
Net cash used in
investing activities... (17,083) (142,022) (26) (4,022) (163,153)
-------- --------- ---- ------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases... (151) (426) -- -- (577)
Principal repayments of
long-term debt......... (57,000) -- (9) -- (57,009)
Proceeds from issuance
of long-term debt...... 63,267 145,755 -- -- 209,022
Net proceeds from equity
issue.................. 31,936 -- -- -- 31,936
Other financing costs... (12,674) -- -- -- (12,674)
-------- --------- ---- ------- ---------
Net cash provided by
(used in) financing
activities............. 25,378 145,329 (9) -- 170,698
-------- --------- ---- ------- ---------
NET INCREASE IN CASH.... 12,948 12,162 87 -- 25,197
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD.... 2,247 279 821 -- 3,347
-------- --------- ---- ------- ---------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD................. $ 15,195 $ 12,441 $908 $ -- $ 28,544
======== ========= ==== ======= =========
22
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
Six Months Ended March 25, 1999
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ ---------
(Dollars in Thousands)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)....... $ (2,480) $ 8,785 $ 85 $ (8,870) $ (2,480)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Extraordinary loss.... 3,405 -- -- -- 3,405
Depreciation and
amortization......... 9,119 8,708 3 -- 17,830
Provision for deferred
income taxes......... (136) 256 -- -- 120
(Gain) loss on sale of
property and
equipment............ (741) 344 -- (13) (410)
Reserves for
environmental
issues............... 79 (31) -- -- 48
Provision for closed
stores............... -- -- -- -- --
Equity earnings of
affiliates........... (8,950) -- -- 8,950 --
Changes in operating
assets and liabilities,
net:
Receivables........... (9,311) (7,685) 569 15,479 (948)
Inventories........... (3,668) (960) -- -- (4,628)
Prepaid expenses...... (44) 31 (5) -- (18)
Other noncurrent
assets............... (218) (2,011) -- 13 (2,216)
Accounts payable...... 6,914 997 -- -- 7,911
Other current
liabilities and
accrued expenses..... 16,036 (9,863) (490) (11,369) (5,686)
Employment
obligations.......... (185) -- -- -- (185)
Accrued dividends..... -- -- -- -- --
Other noncurrent
liabilities.......... 2,999 (1,703) (1) (633) 662
-------- ------- ------ -------- ---------
Net cash provided by
(used in) operating
activities............. 12,819 (3,132) 161 3,557 13,405
-------- ------- ------ -------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale.......... (93) -- -- -- (93)
Additions to property
and equipment.......... (12,259) (10,907) -- -- (23,166)
Proceeds from sale of
property held for
sale................... 1,495 -- -- -- 1,495
Proceeds from sale of
property and
equipment.............. 376 -- -- -- 376
Intercompany notes
receivable (payable)... (2,081) 100,139 -- (98,058) --
Acquisitions of related
businesses, net of cash
acquired .............. (143,610) (80,791) -- 94,501 (129,900)
-------- ------- ------ -------- ---------
Net cash provided by
(used in) investing
activities............. (156,172) 8,441 -- (3,557) (151,288)
-------- ------- ------ -------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital leases... (121) (510) -- -- (631)
Proceeds from issuance
of capital leases...... -- -- -- -- --
Principal repayments of
long-term debt......... (143,979) (10) (10) -- (143,999)
Proceeds from issuance
of long-term debt...... 275,000 -- -- -- 275,000
Loan to shareholder..... -- -- -- -- --
Net proceeds from equity
issues................. 1,068 -- -- -- 1,068
Other financing costs... (2,960) -- -- -- (2,960)
-------- ------- ------ -------- ---------
Net cash provided by
(used in) financing
activities............. 129,008 (520) (10) -- 128,478
-------- ------- ------ -------- ---------
NET INCREASE (DECREASE)
IN CASH................ (14,345) 4,789 151 -- (9,405)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF YEAR...... 24,031 6,300 4,073 -- 34,404
-------- ------- ------ -------- ---------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD ................ $ 9,686 $11,089 $4,224 $ -- $ 24,999
======== ======= ====== ======== =========
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's discussion and analysis should be read in conjunction with the
financial statements and notes thereto. Further information is contained in
our Annual Report on Form 10-K for the year ended September 24, 1998, our
Registration Statement on Form S-1 (File No. 333-74221) and our Quarterly
Report on Form 10-Q for the period ended December 24, 1998. This Quarterly
Report on Form 10-Q contains "forward-looking statements" within the meaning
of Section 27-A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. These statements include
without limitation the words "believes," "anticipates," "estimates,"
"intends," "expects," and words of similar import. All statements other than
statements of historical fact included in statements under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation" include forward-looking information and may reflect certain
judgements by management. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of The Pantry or the convenience store
industry to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
potential risks and uncertainties include, but are not limited to, those
identified in The Pantry's Registration Statement on Form S-1, as amended
(File No. 333-74221). The Pantry disclaims any obligation to update any such
factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
Introduction
The Pantry is a leading convenience store operator in the southeastern
United States. Our stores offer a broad selection of merchandise and gasoline
as well as ancillary services designed to appeal to the convenience needs of
our customers.
Since the arrival of our current management team in fiscal 1996, we have
grown through a combination of management initiatives and strategic
acquisitions. Specific elements of our operating strategy include:
. enhancing our merchandising to increase same store merchandise sales
growth and margins
. improving our gasoline offering in order to increase customer traffic
and same store gasoline volume growth
. reducing expenses through strengthened vendor relationships and
tightened expense controls
. increasing expenditures for facilities improvement and store automation
. growing through acquisitions and new store development
As a result, we have experienced increases in total revenue, same store
merchandise sales and gasoline volume growth and income from operations.
Additionally, we have expanded the geographic scope of our operations which we
believe will result in less seasonality from period to period. We intend to
continue our acquisition strategy and, accordingly, future results may not be
necessarily comparable to historic results.
We believe that there is significant opportunity to continue to increase
profitability at our existing and new stores. We continue to focus on same
store sales and profit growth through upgraded facilities, improved
technology, new service offerings, competitive merchandise and gasoline prices
and cost savings initiatives. We are upgrading our management information
systems and continue to remodel our stores. Finally, we continue to seek
acquisitions and believe that there is a large number of attractive
acquisition opportunities in our markets.
We believe that our arrangements with vendors, including McLane, have
enabled us to decrease the operating expenses of acquired companies after we
complete an acquisition. We purchase over 50% of our general merchandise,
including most tobacco products and grocery items, from a single wholesale
grocer, McLane. In addition, McLane supplies health and beauty aids, toys and
seasonal items to all of our stores. We have a contract with McLane until
2003. Although we believe there are adequate alternative supply sources, a
change of suppliers, especially McLane, could have a material adverse affect
on our cost of goods and results of operations.
On March 11, 1999, we filed a registration statement to offer up to $115.0
million of our common stock for sale to the public. No assurance can be given
that this offering will be consummated.
24
Acquisition History
Our acquisition strategy focuses on acquiring convenience stores within or
contiguous to our existing market areas. We believe acquiring locations with
demonstrated revenue volumes involves lower risk and is an economically
attractive alternative to traditional site selection and new store
development.
The table below provides information concerning the eleven largest
acquisitions we have completed since fiscal 1996:
Number of
Date Acquired Company Trade Name Locations Stores
----------------- ------------------------------ ------------ -------------------------------- ---------
February 25, 1999 Taylor Oil Company ETNA North Carolina, Virginia 60
January 28, 1999 Miller Enterprises, Inc. Handy Way North-central Florida 121
November 5, 1998 Express Stop, Inc. Express Stop Southeast North Carolina, 22
Eastern South Carolina
October 22, 1998 A.G. Oil Company, Inc. Dash-N East-central North Carolina 10
July 15, 1998 Stallings Oil Company, Inc. Zip Mart Central North Carolina, Virginia 42
July 2, 1998 Quick Stop Food Mart, Inc. Quick Stop Southeast North Carolina, 75
Coastal South Carolina
May 2, 1998 United Fuels Corporation, Inc. Sprint Gainesville, Florida 10
March 19, 1998 Wooten Oil Company, Inc. Kwik Mart Eastern North Carolina 23
October 23, 1997 Lil' Champ Food Stores, Inc. Lil' Champ Northeast Florida 440(a)
June 12, 1997 Carolina Ice Company, Inc. Freshway Eastern North Carolina 15
April 17, 1997 Gregorie Oil Co., Inc. Gregorie Oil Charleston, South Carolina 15
- --------
(a) Net of the disposition of 48 convenience stores located throughout eastern
Georgia.
Impact of Acquisitions. The acquisitions highlighted above and related
transactions have had a significant impact on our financial condition and
results of operations since their respective transaction dates. All of these
acquisitions were accounted for under the purchase method and as a result the
consolidated statements of operations herein include the results of operations
of acquired stores from the date of acquisition only. See "PART I.--Financial
Information--Item 1. Financial Statements--Notes to Consolidated Financial
Statements--Note 2--Business Acquisitions". Moreover, the consolidated balance
sheet as of September 24, 1998 does not include the assets and liabilities
relating to those acquisitions consummated after September 24, 1998. As a
result, comparisons to prior operating results and prior balance sheets are
materially impacted.
Letters of Intent. We have recently entered into two non-binding letters of
intent with respect to the acquisition of an aggregate of 83 convenience
stores located in the Southeast. The letters of intent are subject to numerous
conditions, including negotiation and execution of definitive purchase
agreements and completion of due diligence. There can be no assurance that
these acquisitions will be completed.
Results of Operations
Six Months Ended March 25, 1999 Compared to the Six Months Ended March 26,
1998
Total Revenue. Total revenue for the six months ended March 25, 1999 was
$675.4 million compared to $415.8 million during the six months ended March
26, 1998, an increase of $259.6 million or 62.4%. The increase in total
revenue is primarily attributable to the revenue from stores acquired or
opened since March 26, 1998 of $213.0 million, as well as an additional month
of Lil' Champ revenue of $38.0 million and same store merchandise sales growth
of 11.4% (or $10.9 million). Our total revenue increase was partially offset
by a lower average retail gasoline price of $0.99 for the six months ended
March 25, 1999 compared to $1.14 for the six months ended March 26, 1998.
25
Merchandise Revenue. Merchandise revenue for the six months ended March 25,
1999 was $304.0 million compared to $193.8 million during the six months ended
March 26, 1998, an increase of $110.2 million or 56.9%. The increase in
merchandise revenue is primarily attributable to the revenue from stores
acquired or opened since March 26, 1998 of $77.5 million, as well as an
additional month of Lil' Champ merchandise revenue of $17.3 million and same
store merchandise sales growth of $10.9 million. Same store merchandise
revenue for the six months ended March 25, 1999 increased 11.4% over the six
months ended March 26, 1998. The increase in same store merchandise revenue is
primarily attributable to increased customer traffic, higher average
transaction size and general economic and market conditions. The increases in
store traffic and average transaction size are primarily attributable to
focused store merchandising, more competitive gasoline pricing, enhanced store
appearance and increased in-store promotional activity.
Gasoline Revenue and Gallons. Gasoline revenue for the six months ended
March 25, 1999 was $360.9 million compared to $215.7 million during the six
months ended March 26, 1998, an increase of $145.2 million or 67.3%. The
increase in gasoline revenue is primarily attributable to the revenue from
stores acquired or opened since March 26, 1998 of $132.5 million, as well as
an additional month of Lil' Champ gasoline revenue of $20.1 million. Gasoline
revenue growth was partially offset by a $0.15 or 13.3% decrease in average
gasoline retail prices compared to the six months ended March 26, 1998. The
revenue impact of the average retail price decline was approximately $54.8
million.
In the six months ended March 25, 1999, gasoline gallons sold were 365.3
million compared to 189.3 million during the six months ended March 26, 1998,
an increase of 176.0 million gallons or 93.0%. The increase is primarily
attributable to the gasoline gallons sold by stores acquired or opened since
March 26, 1998 of 136.9 million, as well as an additional month of Lil' Champ
gasoline gallons of 18.5 million and same store gallon growth of 6.3 million.
Same store gasoline gallon sales for the six months ended March 25, 1999
increased 6.8% over the six months ended March 26, 1998. The same store gallon
increase is primarily attributable to increased customer traffic resulting
from more competitive gasoline pricing, rebranding and promotional activity,
gasoline equipment upgrades, enhanced store appearance and general economic
and market conditions.
Commission Revenue. Commission revenue for the six months ended March 25,
1999 was $10.5 million compared to $6.4 million during the six months ended
March 26, 1998, an increase of $4.1 million or 64.1%. The increase in
commission revenue is primarily attributable to the revenue from stores
acquired or opened since March 26, 1998 of $3.0 million, as well as an
additional month of Lil' Champ lottery commissions of $0.6 million. Commission
revenue includes lottery commissions, video gaming income, money order
commissions, telephone income and revenue from other ancillary product and
service offerings.
Total Gross Profit. Total gross profit for the six months ended March 25,
1999 was $155.9 million compared to $98.7 million for the six months ended
March 26, 1998, an increase of $57.2 million or 58.0%. The increase in gross
profit is primarily attributable to the profits from stores acquired or opened
since March 26, 1998 of $43.7 million, as well as an additional month of Lil'
Champ gross profit of approximately $8.7 million and same store gross profit
increases of approximately $3.6 million. The total gross profit increases were
achieved despite a decrease in total gross margin to 23.1% for the six months
ended March 25, 1999 from 23.7% for the six months ended March 26, 1998.
Merchandise Gross Profit and Margin. Merchandise gross profit was $99.1
million for the six months ended March 25, 1999 compared to $66.9 million for
the six months ended March 26, 1998, an increase of $32.2 million or 48.1%.
This increase is primarily attributable to the profits from stores acquired or
opened since March 26, 1998 of $24.5 million, as well as an additional month
of Lil' Champ merchandise gross profit of $5.9 million and same store profit
increases of $1.7 million. The decline in merchandise gross margin to 32.6%
for the six months ended March 25, 1999 from 34.5% for the six months ended
March 26, 1998 is attributable to the addition of stores acquired or opened
since March 26, 1998 which, on average reported merchandise margins of 31.6%
for the six months ended March 25, 1999 and the impact of product cost
increases in our tobacco category.
26
Gasoline Gross Profit and Per Gallon Margin. Gasoline gross profit was $46.3
million for the six months ended March 25, 1999 compared to $25.4 million for
the six months ended March 26, 1998, an increase of $20.9 million or 82.3%.
This increase is primarily attributable to the profits from stores acquired or
opened since March 26, 1998 of $16.2 million, as well as an additional month
of Lil' Champ gasoline gross profit of $2.2 million and same store profit
increases of $0.9 million. The gasoline gross profit per gallon was $0.127 for
the six months ended March 25, 1999 compared to $0.134 for the six months
ended March 26, 1998, a 5.2% decrease in gasoline margin per gallon.
Store Operating and General and Administrative Expenses. Store operating
expenses for the six months ended March 25, 1999 were $95.2 million compared
to $61.9 million for the six months ended March 26, 1998, an increase of $33.3
million or 53.8%. The increase in store operating expenses is primarily
attributable to the personnel and lease expenses associated with the stores
acquired or opened since March 26, 1998 of $25.8 million, as well as an
additional month of Lil' Champ store operating expenses of $5.1 million. As a
percentage of total revenue, store operating expenses decreased to 14.3% in
the six months ended March 25, 1999 from 14.9% in the six months ended March
26, 1998.
General and administrative expenses for the six months ended March 25, 1999
were $22.4 million compared to $15.5 million during the six months ended March
26, 1998, an increase of $6.9 million or 44.5%. The increase in general and
administrative expenses is attributable to increased administrative expenses
associated with the stores acquired or opened since March 26, 1998 of $5.4
million, as well as an additional month of Lil' Champ general and
administrative expenses of $1.0 million. As a percentage of total revenue,
general and administrative expenses decreased to 3.3% in the six months ended
March 25, 1999 from 3.7% in the six months ended March 26, 1998.
Income from Operations. Income from operations was $20.5 million for the six
months ended March 25, 1999 compared to $9.5 million during the six months
ended March 26, 1998, an increase of $11.0 million or 115.8%. The increase in
operating income was partially offset by a $6.1 million increase in
depreciation and amortization. The increase in depreciation and amortization
expense is primarily attributed to an additional amount of Lil' Champ
depreciation and amortization expense of $1.2 million, the depreciation and
amortization of goodwill expense associated with other businesses acquired, as
well as increases in depreciation associated with other capital improvements
and the amortization of deferred financing costs. As a percentage of total
revenue, income from operations increased to 3.0% in the six months ended
March 25, 1999 from 2.3% in the six months ended March 26, 1998.
EBITDA. EBITDA represents income from operations before depreciation,
amortization and extraordinary and unusual items. EBITDA for the six months
ended March 25, 1999 was $38.4 million compared to $21.3 million for the six
months ended March 26, 1998, an increase of $17.1 million or 80.3%. The
increase is attributable to the items discussed above.
EBITDA is not a measure of performance under generally accepted accounting
principles, and should not be considered as a substitute for net income, cash
flows from operating activities and other income or cash flow statement data
prepared in accordance with generally accepted accounting principles, or as a
measure of profitability or liquidity. We have included information concerning
EBITDA as one measure of our cash flow and historical ability to service debt.
EBITDA as defined may not be comparable to similarly titled measures reported
by other companies.
Interest Expense. Interest expense is primarily interest on our senior
subordinated notes, borrowings under our 1999 and 1998 bank credit facilities
and our previously outstanding senior notes. Interest expense for the six
months ended March 25, 1999 was $18.9 million compared to $12.9 million for
the six months ended March 26, 1998, an increase of $6.0 million or 46.5%. The
increase in interest expense is attributable to an additional month
27
of interest on the senior subordinated notes of $1.6 million and interest on
borrowings under our 1999 and 1998 bank credit facilities of $5.9 million. The
interest expense increase is partially offset by:
. the interest savings of $0.1 million associated with the October 23,
1997 redemption and refinancing of $51.0 million of our 12% senior notes
with proceeds from our senior subordinated notes and
. the interest savings of approximately $0.3 million associated with the
January 28, 1999 redemption and refinancing of the remaining $49.0
million of our 12% senior notes; the $49.0 million in principal was
refinanced with proceeds from our 1999 bank credit facility at a
floating interest rate currently set at 8.3%.
Income Tax Benefit (Expense). The income tax expense for the six months
ended March 25, 1999 was $0.7 million compared to income tax benefit of $0.9
million for the six months ended March 26, 1998. This increase was primarily
attributable to the increase in income before income taxes. Income tax benefit
(expense) is recorded net of changes in a valuation allowance to reduce
federal and state deferred tax assets to a net amount which we believe more
likely than not will be realized, based on estimates of future earnings and
the expected timing of temporary difference reversals.
Extraordinary Item. In the six months ended March 25, 1999, we recognized an
extraordinary loss, net of taxes, of approximately $3.6 million in connection
with the January 28, 1999 redemption of the remaining $49.0 million in
outstanding principal amount of our senior notes and the replacement of our
1998 bank credit facility with the 1999 bank credit facility. The loss was the
sum, net of taxes, of a $1.2 million call premium, and the write-off of
deferred financing costs associated with the senior notes and 1998 bank credit
facility of $2.4 million.
In the six months ended March 26, 1998, we recognized an extraordinary loss,
net of taxes, of approximately $6.8 million in connection with the October 23,
1997 redemption of $51.0 million in principal amount of our outstanding senior
notes and related consents obtained from the holders of the senior notes to
amendments and waivers to covenants contained in the indenture. The loss was
the sum, net of taxes, of the premium paid for the early redemption of $51.0
million in principal amount of the senior notes, the respective portion of the
consent fees paid, and the write-off of a respective portion of the deferred
financing cost associated with the senior notes.
Net Loss. The net loss for the six months ended March 25, 1999 was $2.5
million compared to a net loss of $8.5 million for the six months ended March
26, 1998. In the six months ended March 25, 1999 and March 26, 1998, we
recognized extraordinary losses as discussed above. The Pantry's income before
extraordinary loss was $1.1 million for the six months ended March 25, 1999
compared to a loss of $1.7 million during the six months ended March 26, 1998,
an increase of $2.8 million.
Second Quarter Ended March 25, 1999 Compared to the Second Quarter Ended March
26, 1998
Total Revenue. Total revenue for the three months ended March 25, 1999 was
$359.8 million compared to $220.7 million for the three months ended March 26,
1998, an increase of $139.1 million or 63.0%. The increase in total revenue is
primarily attributable to the revenue from stores acquired or opened since
March 26, 1998 of $131.1 million and same store merchandise sales and gallon
growth. In the three months ended March 25, 1999, total revenue increases were
partially offset by a lower average retail gasoline price of $0.96 for the
three months ended March 25, 1999 compared to $1.10 for the three months ended
March 26, 1998.
Merchandise Revenue. Merchandise revenue for the three months ended March
25, 1999 was $164.6 million compared to $104.4 million during the three months
ended March 26, 1998, an increase of $60.2 million or 57.7%. The increase in
merchandise revenue is primarily attributable to the revenue from stores
acquired or opened since March 26, 1998 of $50.4 million, merchandise revenue
and same store merchandise sales growth.
28
Same store merchandise revenue for the three months ended March 25, 1999
increased 12.4% over the three months ended March 26, 1998. The increase in
same store merchandise revenue is primarily attributable to the November
increase in cigarette prices (see "Inflation"), increased customer traffic,
higher average transaction size and general economic and market conditions.
The increases in store traffic and average transaction size are primarily
attributable to store merchandising, more competitive gasoline pricing,
enhanced store appearance and increased in-store promotional activity.
Gasoline Revenue and Gallons. Gasoline revenue for the three months ended
March 25, 1999 was $189.1 million compared to $112.7 million during the three
months ended March 26, 1998, an increase of $76.4 million or 67.8%. The
increase in gasoline revenue is primarily attributable to the revenue from
stores acquired or opened since March 26, 1998 of $78.7 million, gasoline
revenue and same store gallon sales growth. The gasoline revenue increase for
the three months ended March 25, 1999 was partially offset by a $0.14 or 12.6%
decrease in average gasoline retail prices compared to three months ended
March 26, 1998.
In the three months ended March 25, 1999, gasoline gallons sold were 196.3
million compared to 102.2 million during the three months ended March 26,
1998, an increase of 94.1 million gallons or 92.1%. The increase is primarily
attributable to the gasoline sold by stores acquired or opened since March 26,
1998 of 82.9 million and same store gallon growth. Same store gasoline gallon
sales for the three months ended March 25, 1999 increased 8.5% over the three
months ended March 26, 1998. The same store gallon increase is primarily
attributable to increased customer traffic resulting from more competitive
gasoline pricing, rebranding and promotional activity, enhanced store
appearance and general economic and market conditions.
Commission Revenue. Commission revenue for the three months ended March 25,
1999 was $6.1 million compared to $3.6 million during the three months ended
March 26, 1998, an increase of $2.5 million or 69.4%. The increase is
primarily attributable to the revenue from stores acquired or opened since
March 26, 1998 of $2.0 million and same store commission revenue increases.
Total Gross Profit. Total gross profit for the three months ended March 25,
1999 was $83.6 million compared to $53.3 million during the three months ended
March 26, 1998, an increase of $30.3 million or 56.8%. The increase in gross
profit is primarily attributable to the profits from stores acquired or opened
since March 26, 1998 of $27.5 million and same store gross profit increases.
Merchandise Gross Profit and Margin. Merchandise gross profit was $54.2
million for the three months ended March 25, 1999 compared to $36.4 million
for the three months ended March 26, 1998, an increase of $17.8 million or
48.9%. This increase is primarily attributable to the profits from stores
acquired or opened since March 26, 1998 of $16.5 million and same store profit
increases. The decline in merchandise gross margin from 34.9% for the three
months ended March 26, 1998 to 32.9% for the three months ended March 25, 1999
is attributable to the addition of several lower margin stores acquired or
opened since March 26, 1998 and lower gross margin on cigarettes. See "--
Inflation."
Gasoline Gross Profit and Per Gallon Margin. Gasoline gross profit was $23.3
million for the three months ended March 25, 1999 compared to $13.3 million
for the three months ended March 26, 1998, an increase of $10.0 million or
75.2%. This increase is primarily attributable to the profits from stores
acquired or opened since March 26, 1998 of $9.0 million and same store profit
increases. The gasoline gross profit per gallon was $0.118 in the three months
ended March 25, 1999 compared to $0.122 for the three months ended March 26,
1998.
Store Operating and General and Administrative Expenses. Store operating
expenses for the three months ended March 25, 1999 totaled $51.5 million
compared to store operating expenses of $33.7 million for the three months
ended March 26, 1998, an increase of $17.8 million or 52.8%. The increase in
store expenses is primarily attributable to the operating and lease expenses
associated with the stores acquired or opened since March 26, 1998 of
$17.1 million. As a percentage of total revenue, store operating expenses
decreased from 15.3% in the three months ended March 26, 1998 to 14.3% in the
three months ended March 25, 1999.
29
General and administrative expenses for the three months ended March 25,
1999 was $12.4 million compared to $8.4 million during the three months ended
March 26, 1998, an increase of $4.0 million or 47.6%. The increase in general
and administrative expenses is attributable to increased administrative
expenses associated with the stores acquired or opened since March 26, 1998 of
$3.3 million. As a percentage of total revenue, general and administrative
expenses decreased from 3.8% in the three months ended March 26, 1998 to 3.4%
in the three months ended March 25, 1999.
Income from Operations. Income from operations totaled $10.0 million for the
three months ended March 25, 1999 compared to $4.6 million during the three
months ended March 26, 1998, an increase of $5.4 million or 117.4%. The
increase is attributable to the factors discussed above and is partially
reduced by the $3.0 million increase in depreciation and amortization.
EBITDA. EBITDA for the three months ended March 25, 1999 totaled $19.7
million compared to EBITDA of $11.2 million during the three months ended
March 26, 1998, an increase of $8.5 million or 75.9%. The increase is
attributable to the items discussed above.
Interest Expense. Interest expense is primarily interest on our senior
subordinated notes, borrowing under our 1999 and 1998 bank credit facilities
and our senior notes. Interest expense for the three months ended March 25,
1999 totaled $10.0 million compared to $7.0 million for the three months ended
March 26, 1998, an increase of $3.0 million or 42.9%. The increase in interest
expense is attributable to increased borrowings under our 1999 bank credit
facility, which is partially offset by the interest savings related to the
repurchase of $49.0 million in principal amount of senior notes at the lower
interest rates associated with our 1999 bank credit facility. See "PART I.--
Financial Information--Item 1. Financial Statements--Notes to Consolidated
Financial Statements--Note 1--Recent Developments" and "Note 5--Long-Term
Debt."
Income Tax Benefit (Expense). The income tax expense of $0.4 million for the
three months ended March 25, 1999 was computed using an estimate of our
estimated income tax rate for fiscal year 1999. This was primarily
attributable to the increase in income before income taxes, and is offset by
the income tax benefit associated with the extraordinary loss. Income tax
benefit (expense) is recorded net of changes in valuation allowance to reduce
federal and state deferred tax assets to a net amount which we believe is more
likely than not will be realized, based on estimates of future earnings and
the expected timing of temporary difference reversals.
Extraordinary Item. In the three months ended March 25, 1999, we recognized
an extraordinary loss, net of taxes, of approximately $3.6 million in
connection with the January 28, 1999 redemption of the remaining $49.0 million
in outstanding principal amount of our senior notes and the replacement of our
1998 bank credit facility. The loss was the sum, net of taxes, of a $1.2
million call premium paid and the write-off of deferred financing costs
associated with the senior notes of $0.8 million and the write-off of deferred
financing costs associated with the bank credit facility of $1.6 million.
Net Loss. The net loss for three months ended March 25, 1999 was $3.5
million compared to a net loss of $1.6 million for the three months ended
March 26, 1998. In the three months ended March 26, 1998, the Company
recognized extraordinary losses as discussed above.
Liquidity and Capital Resources
Cash Flows from Operations. Due to the nature of our business, substantially
all sales are for cash, and cash provided by operations is our primary source
of liquidity. Capital expenditures, acquisitions and interest expense
represent our primary uses of funds. We rely primarily upon cash provided by
operating activities, supplemented as necessary from time to time by
borrowings under our bank facilities, sale-leaseback transactions, asset
dispositions and equity investments to finance our operations, pay interest,
and fund capital expenditures and acquisitions. Cash provided by operating
activities decreased from $17.7 million for the six
30
months ended March 26, 1998 to $13.4 million for the six months ended March
25, 1999, due to increases in inventory and receivables and a decrease in
accrued interest. We had $25.0 million of cash and cash equivalents on hand at
March 25, 1999.
1999 Acquisitions. To date in fiscal 1999, we have acquired a total of 214
convenience stores in five transactions for approximately $145.2 million.
These acquisitions were funded with borrowings under our bank credit facility
and cash on hand.
Capital Expenditures. Capital expenditures (excluding all acquisitions) were
approximately $20.5 million in the six months ended March 26, 1998 and
approximately $23.2 million in the six months ended March 25, 1999. Capital
expenditures are primarily expenditures for existing store improvements, store
equipment, new store development, information systems and expenditures to
comply with regulatory statutes, including those related to environmental
matters.
We finance our capital expenditures and new store development through cash
flow from operations, a sale-leaseback program or similar lease activity,
vendor reimbursements and asset dispositions. Our sale-leaseback program
includes the packaging of our owned convenience store real estate, both land
and buildings, for sale to investors in return for their agreement to
leaseback the property to The Pantry under long-term leases. Generally, the
leases are operating leases at market rates with terms of twenty years with
four five-year renewal options. The lease payment is based on market rates
ranging from 10.5% to 11.5% applied to the cost of each respective property.
We retain ownership of all personal property and gasoline marketing equipment.
The 1999 bank credit facility limits or caps the proceeds of sale-leasebacks
that The Pantry can use to fund its operations or capital expenditures. Vendor
reimbursements primarily relate to oil company payments to either enter into
long term supply agreements or to upgrade gasoline marketing equipment
including canopies, gasoline dispensers and signs. Under our sale-leaseback
program The Pantry received $1.5 million during the six months ended March 25,
1999.
In the six months ended March 25, 1999, we received approximately $4.5
million from sale-leaseback proceeds, asset dispositions, and vendor
reimbursements for capital improvements. Net capital expenditures, excluding
all acquisitions, for the six months ended March 25, 1999 were $18.7 million.
We anticipate net capital expenditures for fiscal 1999 will be approximately
$45.0 million, of which $23.2 million has been expended to date.
Long-Term Debt. At April 30, 1999, our long-term debt consisted primarily of
$200.0 million of senior subordinated notes and $258.0 million outstanding
under the 1999 bank credit facility. We are currently in compliance with our
debt covenants.
In January 1999, we restructured and expanded our 1998 bank credit facility
in connection with the Miller acquisition and the redemption of our senior
notes. Our 1999 bank credit facility consists of
. a $45.0 million revolving credit facility available for working capital
financing, general corporate purposes and issuing commercial and standby
letters of credit
. a $79.1 million tranche A term loan facility and a $159.9 million
Tranche B term loan facility, both of which are borrowed
. a $50.0 million acquisition term facility which is available through
January 31, 2001 to finance acquisitions of related businesses, $19.0
million of which was drawn in connection with the ETNA acquisition and
will be repaid with the proceeds of our contemplated common stock
offering
As of April 30, 1999, we had $15.7 million in letters of credit outstanding
and $29.3 million available for borrowing or additional letters of credit
under the revolving credit facility and $31.0 million available for borrowing
under the acquisition term facility.
31
If we successfully complete the public offering of our common stock, the
1999 bank credit facility lenders have agreed, subject to completion of the
offering, to amend the facility to:
. permit the use of offering proceeds to redeem our outstanding preferred
stock (and pay related accrued dividends)
. permit us to use up to $50.5 of offering proceeds for acquisitions
during the nine month period after the offering; any of the $50.5
million of offering proceeds that has not been used for acquisitions
prior to the end of the nine months must be used to reduce the term
loans under our bank credit facility
. permit the repayment of $19.0 million outstanding under the acquisition
term facility and maintain the acquisition term facility at $50.0
million in available borrowings
. permit the authorization of preferred stock
. amend the debt to pro forma EBITDA ratio to 4.75 to 1.00 in fiscal 1999
and 2000, 4:25 to 1:00 in fiscal 2001, 4:00 to 1:00 in fiscal 2002, 3:50
to 1:00 in fiscal 2003 and 3:25 to 1:00 in fiscal 2004 and thereafter
. increase our maximum permitted capital expenditures to $46.0 million for
fiscal 1999 and $40.0 million in fiscal 2000 and thereafter
On January 31, 2001, all amounts then outstanding under the acquisition term
facility convert into a three year term loan. The Tranche A and acquisition
term facilities mature in January 2004, and the Tranche B term loan facility
matures in January 2006. The Tranche A and Tranche B term loan facilities
require quarterly payments of principal beginning in April 1999, with annual
payments of principal totaling approximately $2.6 million in fiscal 1999,
$10.3 million in fiscal 2000, $17.6 million in fiscal 2001, $20.6 million in
fiscal 2002, $23.9 million in fiscal 2003, $45.1 million in fiscal 2004, $76.0
million in fiscal 2005, and $44.0 million in fiscal 2006. The acquisition term
facility requires quarterly payments of principal beginning in April 2001 in
an amount equal to 8.33%, or 8.37% with respect to the installment payable in
January 2004, of the aggregate acquisition term loans outstanding at January
31, 2001.
We are also required to pay down our 1999 bank credit facility as follows:
. with net proceeds from asset sales, subject to exceptions for sale-
leaseback transactions
. with 50% of the proceeds from the issuance of any of our equity
securities other than sales of our equity securities to our management
employees and the proceeds of the contemplated common stock offering
. with all of the proceeds from the issuance of new debt other than debt
of the types permitted under our bank credit facility
. with 50% of our excess cash flow
The loans under the 1999 bank credit facility are secured by a first
priority security interest in most of our tangible and intangible assets
including the stock of our subsidiaries, whether we own these assets now or
acquire them in the future. In addition, all of our subsidiaries except PH
Holding and its subsidiaries guaranteed our obligations under the 1999 bank
credit facility and these guarantees are secured by a first priority security
interest in most of the tangible and intangible assets of each of the
guarantors.
The interest rates we pay on borrowings under the 1999 bank credit facility
are variable and are based, at our option, on either a Eurodollar rate plus a
percentage or a base rate plus a percentage. If we choose the Eurodollar base
rate, we pay 3.0% per year in addition to the Eurodollar base rate for our
Revolving Credit Facility, our Acquisition Facility, and our Tranche A Term
Loan Facility. For the Tranche B Term Loan Facility, the Company pays 3.5% per
year in addition to the Eurodollar base rate. If we opt for the base rate, we
pay 1.5% per year in addition to the base rate for our Revolving Credit
Facility, the Acquisition Facility, and the Tranche A Term Loan Facility. For
our Tranche B Term Loan Facility, we pay 2.0% per year in addition to the base
rate. On March 2, 1999, we entered into an interest rate swap arrangement to
reduce our exposure to interest rate fluctuations with respect to
$45.0 million of borrowings under our Tranche A and Tranche B Term Loan
Facilities. The interest rate swap arrangement fixes the interest rate on
these borrowings at 8.62% for the Tranche A facility and 9.12% for the Tranche
B facility for approximately two years.
32
The 1999 bank credit facility contains covenants restricting our ability to,
among other things:
. declare dividends or redeem or repurchase capital stock, except that we
may repurchase common stock owned by our employees upon their
termination in an amount not to exceed $0.5 million
. prepay, redeem or purchase debt
. incur liens, except liens incurred under the bank credit facility
itself, liens arising from acquisitions or capital leases otherwise
allowed under the bank credit facility and liens to secure indebtedness,
so long as the amount does not exceed $3.0 million
. make loans and investments, except that
. we may make additional investments in PH Holding and its
subsidiaries, so long as the amount of these investments does not
exceed $4.5 million
. we may make loans to our employees, so long as the amount of the
loans does not exceed a total of $1.0 million, so they can purchase
our common stock and
. we may make other investments in a total amount of $1.0 million
. engage in mergers, acquisitions or asset sales, except that
. we may sell assets with a fair market value that does not exceed
$10.0 million and we may engage in sale/leaseback transactions
otherwise permitted by the bank credit facility, in either case so
long as we receive cash consideration for the fair market value of
the assets and we use the proceeds to prepay our indebtedness under
the bank credit facility
. we may make acquisitions so long as the consideration we pay does
not exceed $50.0 million, including any assumption of debt
. we may transfer properties or assets in transactions where 80% of
the consideration we receive consists of assets we will use in our
business, so long as the fair market value of the assets we transfer
does not exceed $20.0 million in any one year
. engage in transactions with affiliates
Our 1999 bank credit facility also provides that our revenues and assets
related to gaming may not exceed 4% of our total revenues. Also, our 1999 bank
credit facility limits our capital expenditures to $46.0 million in fiscal
1999 and $34.0 million each year thereafter. It also prohibits us from
incurring debt other than under the bank credit facility itself except for:
. up to $3.0 million for contingent obligations
. up to $30.0 million for capital leases used or debt incurred to acquire,
construct or improve our business assets
. intercompany debt
. $0.7 million of pre-existing debt
. up to $200.0 million of debt under our senior subordinated notes
. up to $50.0 million for other similar subordinated debt we may wish to
incur in the future
. up to $5.0 million in any type of debt
Our 1999 bank credit facility requires us to remain in compliance with
various financial ratios. Our EBITDA for any consecutive four-quarter period
must be at least $82.0 million in fiscal 1999 increasing each year to $100.0
million in fiscal 2004. Our debt to pro forma EBITDA ratio, as defined under
the 1999 bank credit facility, must not exceed 5 to 1 in fiscal 1999
decreasing each year to 3.25 to 1 in fiscal 2004. Our ratio of EBITDA plus
rental payments to interest expense plus rental payments must be at least 1.5
to 1 in fiscal 1999 increasing each year to 2 to 1 in fiscal 2004.
33
We also have outstanding $200.0 million of 10 1/4% senior subordinated notes
due 2007. Interest on the senior subordinated notes is due on October 15 and
April 15 of each year. The senior subordinated notes are unconditionally
guaranteed, on an unsecured basis, as to the payment of principal, premium, if
any, and interest, jointly and severally, by our subsidiaries, except for PH
Holding and its subsidiaries. The senior subordinated notes contain covenants
that, among other things, restrict our ability and any restricted subsidiary's
ability to:
. pay dividends or make distributions, except
. in amounts not in excess of a percentage of our net income proceeds
of debt or equity issuances
. in amounts not in excess of $5.0 million
. issue stock of subsidiaries
. make investments in non affiliated entities, except
. employee loans of up to $3.0 million
. repurchase stock, except
. common stock owned by employees in amounts not in excess of $2.0
million
. with the proceeds from debt or equity issuances
. incur liens not securing debt permitted under the senior subordinated
notes
. enter into transactions with affiliates
. enter into sale-leaseback transactions
. engage in mergers or consolidations
We can incur debt under the senior subordinated notes if our ratio of pro
forma EBITDA to fixed charges, after giving effect to such incurrence, is at
least 2 to 1. Even if we don't meet this ratio we can incur:
. bank credit facility debt of up to $50.0 million of acquisition debt and
other debt in an amount equal to the greater of $45.0 million or an
amount equal to 4.0% times our annualized revenues
. capital leases or acquisition debt in amounts not to exceed in the
aggregate 10% of our tangible assets at time of incurrence
. intercompany debt
. pre-existing debt
. up to $15.0 million in any type of debt
. debt for refinancing of the above described debt
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
1999 bank credit facility or other senior debt or to offer to redeem our
senior subordinated notes with any asset sale proceeds not so used. Up to 35%
of the senior subordinated notes may be redeemed prior to October 15, 2000 at
a redemption price of 110.25% plus accrued interest with the net proceeds of
one or more public equity offerings. All of the senior subordinated notes may
be redeemed after October 15, 2002 at a redemption price which begins at
105.125% and decreases to 100.0% after October 2005.
On January 28, 1999, we redeemed all remaining $49.0 million of our senior
notes at 104% of their principal amount plus accrued and unpaid interest.
These payments were financed with proceeds from the 1999 bank credit facility.
We recognized an extraordinary loss, net of taxes, of approximately $3.6
million resulting from the refinancing of our debt. This loss included the
payment of the call premium, fees paid in connection with the replacement of
our 1998 bank credit facility and the write-off of deferred financing costs.
34
Pro forma for the contemplated common stock offering and the application of
the net proceeds from such offering, our long-term debt will consist of
$200.0 million of senior subordinated notes and approximately $239.0 million
outstanding under our 1999 bank credit facility. Restrictive covenants in our
debt agreements may restrict our ability to implement our acquisition
strategy.
Cash Flows From Financing Activities. During the six months ended March 25,
1999, we financed our 1999 acquisitions, the redemption of $49.0 million of
senior notes and the related fees and expenses with proceeds from our 1999
bank credit facility, cash on hand and the net proceeds of approximately $1.1
million from the sale of common stock to employees under our stock
subscription plan.
Cash Requirements. We believe that cash on hand, together with the proceeds
of the contemplated common stock offering, cash flow anticipated to be
generated from operations, short-term borrowing for seasonal working capital
needs and permitted borrowings under our credit facilities will be sufficient
to enable us to satisfy anticipated cash requirements for operating, investing
and financing activities, including debt service, for the next twelve to
sixteen months. To continue our acquisition strategy after that time, we will
have to obtain additional debt or equity financing. There can be no assurance
that such financing will be available on favorable terms, or at all.
Shareholders' Equity. As of March 25, 1999, our shareholders' equity totaled
$36.4 million. The $2.9 million decrease in shareholders' equity is attributed
to our net loss of $2.5 million and dividends and interest on the Series B
preferred stock of $1.5 million. The decrease was partially offset by the net
proceeds of $1.1 million from the sale of common stock to employees under our
stock subscription plan.
Additional paid-in-capital is impacted by the accounting treatment applied
to the 1987 leveraged buyout of the outstanding common stock of our
predecessor which resulted in a debit to equity of $17.1 million. This debit
had the effect, among others, of offsetting $7.0 million of equity capital
invested by our former shareholders.
The accumulated deficit as of March 25, 1999 includes the cumulative effect
of the accrued dividends on previously outstanding preferred stock of $5.0
million, the accrued dividends on the series B preferred stock of $5.8
million, the net cost of equity transactions and the cumulative results of
operations, which include extraordinary losses and cumulative effect of
accounting changes, interest expense of $17.2 million on previously
outstanding subordinated debentures and preferred stock obligations. This
interest and the related subordinated debt and these dividends and the related
preferred stock were paid or redeemed in full with a portion of the proceeds
from the fiscal 1994 sale of the senior notes.
Environmental Considerations
We are required by federal and state regulations to maintain evidence of
financial responsibility for taking corrective action and compensating third
parties in the event of a release from our underground storage tank systems.
In order to comply with this requirement, as of April 30, 1999, we maintain
surety bonds in the aggregate amount of approximately $900,000 in favor of
state environmental enforcement agencies in the states of North Carolina,
South Carolina and Virginia and a letter of credit in the amount of
approximately $1.1 million issued by a commercial bank in favor of state
environmental enforcement agencies in the states of Florida, Tennessee,
Indiana and Kentucky and rely on reimbursements from applicable state trust
funds. In Florida, we also meet such financial responsibility requirements
through private commercial liability insurance.
All states in which we operate or have operated underground storage tank
systems have established trust funds for the sharing, recovering, and
reimbursing of cleanup costs and liabilities incurred as a result of releases
from underground storage tank systems. These trust funds, which essentially
provide insurance coverage for the cleanup of environmental damages caused by
the operation of underground storage tank systems, are funded by an
underground storage tank registration fee and a tax on the wholesale purchase
of motor fuels within each state. We have paid underground storage tank
registration fees and gasoline taxes to each state where we operate to
participate in these programs and have filed claims and received reimbursement
in North Carolina, South
35
Carolina, Kentucky, Indiana, Georgia, Florida and Tennessee. The coverage
afforded by each state fund varies but generally provides from $150,000 to
$1.0 million per site or occurrence for the cleanup of environmental
contamination, and most provide coverage for third party liabilities.
Costs for which we do not receive reimbursement include but are not limited
to the per-site deductible; costs incurred in connection with releases
occurring or reported to trust funds prior to their inception; removal and
disposal of underground storage tank systems; and costs incurred in connection
with sites otherwise ineligible for reimbursement from the trust funds. The
trust funds require us to pay deductibles ranging from $10,000 to $100,000 per
occurrence depending on the upgrade status of our underground storage tank
system, the date the release is discovered/reported and the type of cost for
which reimbursement is sought. The Florida trust fund will not cover releases
first reported after December 31, 1998. We meet Florida financial
responsibility requirements for remediation and third party claims arising out
of releases reported after December 31, 1998 through a combination of private
insurance and a letter credit (described above). In addition to up to $4.5
million that we may expend for remediation, we estimate that up to $12.7
million may be expended for remediation on our behalf by state trust funds
established in our operating areas and other responsible third parties
including insurers. To the extent such third parties do not pay for
remediation as we anticipate, we will be obligated to make such payments,
which could materially adversely affect our financial condition and results of
operations. Reimbursement from state trust funds will be dependent upon the
maintenance and continued solvency of the various funds.
Environmental reserves of $17.2 million as of March 25, 1999 represent
estimates for future expenditures for remediation, tank removal and litigation
associated with 207 known contaminated sites as a result of releases, e.g.,
overfills, spills and underground storage tank releases, and are based on
current regulations, historical results and other factors. Although we can
make no assurances, we anticipate that we will be reimbursed for a portion of
these expenditures from state insurance funds and private insurance. As of
March 25, 1999, amounts which are probable of reimbursement (based on our
experience) from those sources total $12.7 million and are recorded as long-
term environmental receivables. These receivables are expected to be collected
within a period of twelve to eighteen months after the reimbursement claim has
been submitted. In Florida, remediation of such contamination reported before
January 1, 1999 will be performed by the state and we expect that
substantially all of the costs will be paid by the state trust fund. We will
perform remediation in other states through independent contractor firms that
we have engaged. We do have locations where applicable trust fund does not
cover a deductible or has a co-pay which may be less than the cost of such
remediation. Although we are not aware of releases or contamination at other
locations where we currently operate or have operated stores, any such
releases or contamination could require substantial remediation expenditures,
some or all of which may not be eligible for reimbursement from state trust
funds.
We have reserved $500,000 to cover third party claims for environmental
conditions at adjacent real properties that are not covered by state trust
funds or by private insurance. This reserve is based on management's best
estimate of losses that may be incurred over the next several years based on,
among other things, the average remediation cost for contaminated sites and
our historical claims experience.
Several of our locations identified as contaminated are being cleaned up by
third parties who have assumed responsibility for such clean up matters.
Additionally, we are awaiting closure notices on several other locations which
will release us from responsibility related to known contamination at those
sites. These sites continue to be included in our environmental reserve until
a final closure notice is received.
Year 2000 Initiative
The following discussion about the implementation of our Year 2000 program,
the costs expected to be associated with the program and the results we expect
to achieve constitute forward-looking information. As noted below, there are
many uncertainties involved with the Year 2000 issue, including the extent to
which we will be able to adequately provide for contingencies that may arise,
as well as the broader scope of the Year 2000 issue as it may affect third
parties and our trading partners. Accordingly, the costs and results of our
Year 2000 program and the extent of any impact on our results of operations
could vary materially from that stated herein.
36
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year in respective date
fields. We use a combination of hardware devices run by computer programs at
our support centers and retail locations to process transactions and other
data which are essential to our business operations. The Year 2000 issue and
its impact on data integrity could result in system interruptions,
miscalculations or failures causing disruption of operations.
We completed 90% of our assessment phase of Year 2000 vulnerability early in
fiscal 1998, after a formal third-party assessment was completed in November
1997. Assessment activities found that 30% of our systems would require
remediation and 20% of our systems were planned for replacement or would be
best served if replaced. Based on this third-party assessment, internal
assessment and project results as of March 25, 1999, we believe all system
modifications, hardware and software replacements or upgrades and related
testing will be completed by September 1999. In order to meet this date, we
have engaged outside consultants and contractors to assist in the overall
project and remediation effort.
We have tested, modified or replaced, or plan to modify or replace our
existing systems and related hardware which did not properly interpret dates
beyond December 31, 1999 to ensure Year 2000 compliance. We have assessed
software and technology infrastructures, embedded systems such as point-of-
sale systems, fuel consoles and office equipment, and building facilities such
as telephone-related systems, HVAC and security. Our testing methodology
includes, but is not limited to, rolling dates forward to critical dates in
the future and simulating transactions, inclusion of several critical date
scenarios and utilizing software programs which test for compliance on
equipment. To date 20% of our applications requiring remediation have been
tested and 75% of the systems being replaced have been implemented and are in
use.
We have initiated communications with our significant vendors, suppliers and
financial institutions to determine the extent to which we are vulnerable to
those third parties' failure to be Year 2000 compliant. To date, 80% of those
surveyed have responded. The replies indicate that they will be Year 2000
compliant before the end of the calendar year. Specifically, our grocery
wholesaler, McLane, has stated in their "Year 2000 Readiness Disclosure" that
they are "committed to identifying and correcting all business critical Year
2000 problems by June 1, 1999." Based on these communications and presently
available information, we do not anticipate any material effects related to
vendor, supplier, third-party credit card processing company or financial
institution compliance. Additionally, due to the nature of our business,
Year 2000 compliance with respect to our customers is not relevant.
Noncompliance by vendors, suppliers, credit card processing companies and
financial institutions utilized by us could result in a material adverse
effect on our financial condition and results of operations. The Pantry will
continue to update its assessment of the readiness of key vendors, suppliers
and financial institutions until they are compliant. If during this ongoing
assessment, we determine a third party's level of compliance will have an
adverse effect on The Pantry, we will seek an alternate third party to provide
similar products or services. We believe that the worst case scenario in the
event of a Year 2000 related failure would be delays in the receipt of payment
from credit card processing companies and a return to manual accounting
processing at our individual stores.
37
In addition, we have reviewed the assets acquired since our original
assessment for Year 2000 compliance. This includes the acquisition of other
companies, as well as procurement and service arrangements. We believe that
our recently acquired assets will be Year 2000 compliant by September 1999.
The assessments have been conducted through the due diligence process, vendor
compliance communications and requests for disclosure statements as part of
contract negotiations. In general, the systems and suppliers of acquired
companies are the same as those used in our existing operations.
State of Readiness as of April 22, 1999
Estimated Estimated
Percent Completion
Phase Complete Date(a)
----- --------- ---------------
Awareness...................................... 95% December, 1999
Assessment..................................... 90% June, 1999
Remediation.................................... 55% September, 1999
Replacement.................................... 75% September, 1999
Testing........................................ 35% September, 1999
Contingency Planning........................... 5% September, 1999
- --------
(a) Indicates month when work should be substantially completed. We will
continue to reevaluate awareness, assess acquired assets and update
contingency plans as needed.
We do not believe either the direct or indirect costs of Year 2000
compliance will be material to our operations or operating results. Our
expenditures, which will be funded through operating cash flow, consist
primarily of internal costs and expenses associated with third-party
contractors. To date, our spending with contractors and consultants has been
$75,000. We anticipate spending for the remainder of the fiscal year to be
approximately $300,000.
While we believe our planning efforts are adequate to address our Year 2000
concerns, there can be no assurances that the systems of other companies on
which our systems and operations rely will be converted on a timely basis and
will not have a material impact on us. We are in the process of formulating a
contingency plan to address possible noncompliance by our vendors, suppliers,
financial institutions and credit card processors. These plans will be drafted
and in place by September 1999, leaving the fourth calendar quarter to address
low priority and low impact issues.
Recently Issued Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. Statement of Financial Accounting Standards No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. Statement of Financial Accounting
Standards No. 133 is effective for the first fiscal quarter of fiscal 2000;
earlier application is encouraged. As of March 25, 1999, we have not
determined the effect of Statement of Financial Accounting Standards No. 133
on our consolidated financial statements.
Inflation
General inflation has not had a significant impact on The Pantry over the
past three years. As reported by the Bureau of Labor Statistics for the six
months ended March 25, 1999, the consumer price index increased less than one
percent. For the same period, the producer price index, a measure of wholesale
cost inflation, decreased approximately one percent. We do not expect general
inflation to have a significant impact on our results of operations or
financial condition in the foreseeable future.
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As reported by the Bureau of Labor Statistics for the six months ended March
25, 1999, the consumer price index for the category labeled "cigarettes"
increased approximately 19.3%. For the same period, the producer price index
for the category labeled "cigarettes" increased 30.9%. On November 23, 1998,
major cigarette manufacturers that supply The Pantry increased prices by $0.45
per pack. During the first fiscal quarter 1999, the cigarette cost increase
was directly offset by cigarette manufacturer support, including cigarette
rebates and other incentives. Since December 24, 1998, these increases have
been passed on in higher retail prices throughout the chain. Because we expect
to pass cigarette cost increases on to our customers through higher retail
prices, these cost increases are expected to reduce our gross margin
percentage for the cigarette category, but are not expected to have a material
impact on the cigarette category gross profit dollars. Although it is too
early to determine the potential impact on cigarette unit volume, management
believes it can pass along these and other cost increases to our customers
over the long term and, therefore, does not expect cigarette inflation to have
a significant impact on our results of operations or financial condition in
the foreseeable future.
Quantitative and Qualitative Disclosures about Market Risk
Quantitative Disclosures. We are exposed to market risks inherent in our
financial instruments. These instruments arise from transactions entered into
in the normal course of business and, in some cases, relate to our
acquisitions of related businesses. We are subject to interest rate risk on
our existing long-term debt and any future financing requirements. Our fixed
rate debt consists primarily of outstanding balances on our Senior
Subordinated Notes and our variable rate debt relates to borrowings under the
1999 bank credit facility.
On March 2, 1999, we entered into an interest rate swap arrangement with
respect to $45.0 million of borrowings under our outstanding Tranche A and
Tranche B term loan facilities. The interest rate swap arrangement fixes the
interest rate on these borrowings at 8.62% for the Tranche A facility and
9.12% for the Tranche B facility for approximately two years.
The following tables presents the future principal cash flows and weighted-
average interest rates expected on our existing long-term debt instruments.
Fair values have been determined based on quoted market prices as of April 30,
1999.
Expected Maturity Date
(as of March 25, 1999)
------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fair
1999 2000 2001 2002 2003 Thereafter Total Value
------ ------- ------- ------- ------- ---------- -------- --------
Long-term debt.......... $2,896 $10,686 $17,939 $20,943 $37,931 $369,313 $459,708 $469,208
Weighted average
Interest rate.......... 9.08% 9.10% 9.14% 9.20% 9.27% 9.38% 9.07%
Qualitative Disclosures. Our primary exposure relates to:
. interest rate risk on long-term and short-term borrowings
. our ability to pay or refinance long-term borrowings at maturity at
market rates
. the impact of interest rate movements on our ability to meet interest
expense requirements and exceed financial covenants
. the impact of interest rate movements on our ability to obtain adequate
financing to fund future acquisitions
We manage interest rate risk on our outstanding long-term and short-term
debt through our use of fixed and variable rate debt. The interest rate swap
mentioned above will reduce our exposure to short-term interest rate
fluctuations. While we can not predict or manage our ability to refinance
existing debt or the impact interest rate movements will have on our existing
debt, management evaluates our financial position on an ongoing basis.
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Forward-Looking Statements
This Quarterly Report includes forward-looking statements. Such forward-
looking statements can be identified by the use of forward-looking terminology
such as "may," "will," "expect," "anticipate," "estimate," "believe," or
"continuance," or the negative thereof or other various thereof or comparable
terminology. We have based these forward-looking statements on our current
expectations and projections about future events. These forward-looking
statements, which are subject to numerous risks, uncertainties, and
assumptions about The Pantry, include, among other things:
. our anticipated acquisition and growth strategies, including our
strategy to double our store base
. anticipated trends in our businesses
. future expenditures for capital projects including the cost of
environmental compliance
. our ability to pass along cigarette price increases to our customers
without a decrease in cigarette sales
. our ability to successfully deal with Year 2000 issues that may arise in
our or third party operations
. our ability to control costs, including our ability to achieve cost
savings in connection with our acquisitions
These forward-looking statements are subject to numerous risks and
uncertainties, including risks related to our dependence on gasoline and
tobacco sales, our acquisition strategy, our rapid growth since 1996, our
dependence on one principal wholesaler, the intense competition in the
convenience store and retail gasoline industries, our dependence on favorable
weather conditions in spring and summer months, the concentration of our
stores in the southeastern United States, our history of losses, extensive
environmental regulation of our business, governmental regulation, control of
The Pantry by one principal stockholder, our dependence on senior management,
the failure of The Pantry and others to be year 2000 compliant and other risk
factors identified in our Registration Statement relating to our contemplated
common stock offering under the caption "Risk Factors." As a result of these
risks actual results may differ from these forward looking statements included
in this prospectus.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 1 to the undersigned's Quarterly
Report on Form 10-Q to be signed on its behalf by the undersigned thereunto
duly authorized.
THE PANTRY, INC.
Date: June 4, 1999
/s/ William T. Flyg
By: _________________________________
William T. Flyg
Senior Vice President Finance and
Secretary
(Authorized Officer and Principal
Financial Officer)
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