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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 30, 1999
COMMISSION FILE NUMBER 33-72574
THE PANTRY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1574463
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1801 DOUGLAS DRIVE, SANFORD, NORTH CAROLINA
(Address of principal executive offices)
27330
(Zip Code)
(919) 774-6700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $0.01 PAR VALUE 18,111,474 SHARES
(Class) (Outstanding at February 7, 2000)
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THE PANTRY, INC.
FORM 10-Q
DECEMBER 30, 1999
TABLE OF CONTENTS
Part I -- Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets............................................ 2
Consolidated Statements of Operations.................................. 3
Consolidated Statements of Cash Flows.................................. 4
Notes to Consolidated Financial Statements............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 30
Part II -- Other Information
Item 6. Exhibits and Reports on Form 8-K................................. 31
PART I--FINANCIAL INFORMATION.
Item 1. Financial Statements.
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands, except per share data)
September 30, December 30,
1999 1999
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 31,157 $ 26,861
Receivables (net of allowances for doubtful
accounts of $766 at September 30, 1999 and $781 at
December 30, 1999)................................ 24,234 27,089
Inventories (Note 3)............................... 76,237 81,423
Prepaid expenses................................... 3,497 3,659
Property held for sale............................. 135 3,816
Deferred income taxes.............................. 4,849 4,849
-------- --------
Total current assets............................... 140,109 147,697
-------- --------
Property and equipment, net......................... 421,685 444,165
-------- --------
Other assets:
Goodwill (net of accumulated amortization of
$18,324 at September 30, 1999 and $19,990 at
December 30, 1999) (Note 2)....................... 197,705 229,963
Deferred financing cost (net of accumulated
amortization of $3,499 at September 30, 1999 and
$4,019 at December 30, 1999)...................... 12,680 14,062
Environmental receivables (Note 4)................. 13,136 13,159
Other noncurrent assets............................ 8,403 10,051
-------- --------
Total other assets................................. 231,924 267,235
-------- --------
Total assets...................................... $793,718 $859,097
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 5)...... $ 10,687 $ 21,436
Current maturities of capital lease obligations.... 1,205 1,205
Accounts payable................................... 89,124 92,663
Accrued interest................................... 9,928 4,680
Accrued compensation and related taxes............. 8,042 7,405
Income tax payable................................. 5,004 1,671
Other accrued taxes................................ 13,834 7,735
Accrued insurance.................................. 8,820 8,298
Other accrued liabilities.......................... 20,976 18,670
-------- --------
Total current liabilities.......................... 167,620 163,763
-------- --------
Long-term debt (Note 5)............................. 430,220 491,187
-------- --------
Other noncurrent liabilities:
Environmental reserves (Note 4).................... 15,402 15,428
Deferred income taxes.............................. 26,245 26,805
Deferred revenue................................... 28,729 35,488
Capital lease obligations.......................... 13,472 13,172
Other.............................................. 7,833 7,009
-------- --------
Total other noncurrent liabilities................. 91,681 97,902
-------- --------
Commitments and contingencies (Notes 4 and 5)
Shareholders' equity (Note 6 and 7):
Common stock, $.01 par value, 50,000,000 shares
authorized; 18,111,474 issued and outstanding at
September 30, 1999 and at December 30, 1999........ 182 182
Additional paid in capital.......................... 128,256 128,029
Shareholder loans................................... (937) (937)
Accumulated deficit................................. (23,304) (21,029)
-------- --------
Total shareholders' equity......................... 104,197 106,245
-------- --------
Total liabilities and shareholders' equity........ $793,718 $859,097
======== ========
See Notes to Consolidated Financial Statements.
2
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands, except per share data)
Three Months Ended
-------------------------
December 24, December 30,
1998 1999
------------ ------------
(13 weeks) (13 weeks)
Revenues:
Merchandise sales................................... $139,390 $209,491
Gasoline sales...................................... 171,789 324,149
Commissions......................................... 4,428 6,750
-------- --------
Total revenues.................................... 315,607 540,390
-------- --------
Cost of sales:
Merchandise......................................... 94,453 139,100
Gasoline............................................ 148,774 292,406
-------- --------
Total cost of sales............................... 243,227 431,506
-------- --------
Gross profit.......................................... 72,380 108,884
-------- --------
Operating expenses:
Store expenses...................................... 43,729 64,290
General and administrative expenses................. 9,968 15,626
Depreciation and amortization....................... 8,190 13,461
-------- --------
Total operating expenses.......................... 61,887 93,377
-------- --------
Income from operations................................ 10,493 15,507
-------- --------
Other income (expense):
Interest (Note 5)................................... (8,912) (11,722)
Miscellaneous....................................... (184) 278
-------- --------
Total other expense............................... (9,096) (11,444)
-------- --------
Income before income taxes............................ 1,397 4,063
Income tax expense.................................... (332) (1,788)
-------- --------
Net income............................................ $ 1,065 $ 2,275
======== ========
Net income applicable to common shareholders.......... $ 353 $ 2,275
======== ========
Earnings per share (Note 7):
Basic............................................... $ 0.03 $ 0.13
Diluted............................................. $ 0.03 $ 0.12
See Notes to Consolidated Financial Statements.
3
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Three Months Ended
-------------------------
December 24, December 30,
1998 1999
------------ ------------
(39 weeks) (39 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 1,065 $ 2,275
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization...................... 8,190 13,461
Provision for deferred income taxes................ -- 560
Loss on sale of property and equipment............. 260 95
Provision for environmental expenses............... 154 26
Changes in operating assets and liabilities, net of
effects of acquisitions (Note 2):
Receivables........................................ (2,566) (1,520)
Inventories........................................ (4,677) (1,614)
Prepaid expenses................................... 878 304
Other noncurrent assets............................ 36 (373)
Accounts payable................................... (480) (3,459)
Other current liabilities and accrued expenses..... (6,172) (20,662)
Other noncurrent liabilities....................... (198) 4,440
-------- --------
Net cash used in operating activities............ (3,510) (6,467)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale................ (42) --
Additions to property and equipment................ (9,540) (10,695)
Proceeds from sale of property held for sale....... 524 --
Proceeds from sale of property and equipment....... 91 703
Acquisitions of related businesses, net of cash
acquired (Note 2)................................. (25,541) (57,083)
-------- --------
Net cash used in investing activities............ (34,508) (67,075)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases.......... (323) (300)
Principal repayments of long-term debt............. (15) (12,884)
Proceeds from issuance of long-term debt........... 16,000 84,600
Proceed from issuance of short-term debt........... 2,000 --
Net proceeds from equity issues.................... 1,088 (227)
Other financing costs.............................. (67) (1,943)
-------- --------
Net cash provided by financing activities........ 18,683 69,246
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS............ (19,335) (4,296)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..... 34,404 31,157
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $ 15,069 $ 26,861
======== ========
See Notes to Consolidated Financial Statements.
4
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
Three Months Ended
-------------------------
December 24, December 30,
1998 1999
------------ ------------
(39 weeks) (39 weeks)
Cash paid during the year:
Interest........................................... $15,095 $16,970
======= =======
Taxes.............................................. $ 285 $12,112
======= =======
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During the three months ended December 24, 1998 and December 30, 1999 we
entered into several business acquisitions. See "Notes to Consolidated
Financial Statements--Note 2--Business Acquisitions."
5
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--The Company
Unaudited Consolidated Financial Statements
The accompanying consolidated financial statements include the accounts of
The Pantry, Inc. and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation. See "Note 8--
Supplemental Guarantor Information."
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. The
interim consolidated financial statements have been prepared from the
accounting records of The Pantry, Inc. and its subsidiaries and all amounts at
December 30, 1999 and for the three months ended December 30, 1999 and
December 24, 1998 are unaudited. References herein to "The Pantry" or "the
Company" shall include all subsidiaries. Pursuant to Regulation S-X, certain
information and note disclosures normally included in annual financial
statements have been condensed or omitted. The information furnished reflects
all adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented, and which are of a
normal, recurring nature.
We suggest that these interim financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in
our Annual Report on Form 10-K for the fiscal year ended September 30, 1999,
our Registration Statement on Form S-1 (No. 333-74221), as amended, and our
Current Report on Form 8-K dated November 11, 1999, as amended.
Our results of operations for the three months ended December 30, 1999 and
December 24, 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 24, 1998. These acquisitions have been
accounted for under the purchase method. See "Note 2--Business Acquisitions."
Furthermore, the convenience store industry in our marketing areas experiences
higher levels of revenues and profit margins during the summer months than
during the winter months. Historically, we have achieved higher revenues and
earnings in our third and fourth quarters. We operate on a 52-53 week fiscal
year ending on the last Thursday in September. Our 2000 fiscal year ends on
September 28, 2000 and is a 52 week year while our 1999 fiscal year was 53
weeks.
The Pantry
As of December 30, 1999, we operated approximately 1,272 convenience stores
located in Florida, North Carolina, South Carolina, Tennessee, Georgia,
Kentucky, Indiana and Virginia. Our stores offer a broad selection of products
and services designed to appeal to the convenience needs of our customers,
including gasoline, car care products and services, tobacco products, beer,
soft drinks, self-service fast food and beverages, publications, dairy
products, groceries, health and beauty aids, video games and money orders. In
our Florida, Georgia, Kentucky, Virginia and Indiana stores, we also sell
lottery products. Self-service gasoline is sold at 1,205 locations, 940 of
which sell gasoline under brand names including Amoco, British Petroleum
("BP"), Chevron, Citgo, Exxon, Shell, and Texaco.
6
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Business Acquisitions
During the three months ended December 30, 1999, we acquired the businesses
described below (the "2000 acquisitions"). The 2000 acquisitions were
accounted for by the purchase method of accounting:
2000 Acquisitions
Date Acquired Trade Name Locations Stores
- ------------- ----------- --------- ------
November 11, 1999....... Kangaroo Georgia 49
November 4, 1999........ Cel Oil Charleston, South Carolina 7
October 7, 1999......... Wicker Mart North Carolina 7
Others (less than five 1
stores)................
During fiscal 1999, we acquired the businesses described below (the "1999
acquisitions"). The 1999 acquisitions were accounted for by the purchase
method of accounting:
1999 Acquisitions
Date Acquired Trade Name Locations Stores
- ------------- ------------ --------- ------
July 22, 1999........... Depot Food South Carolina, Northern Georgia 53
July 8, 1999............ Food Chief Eastern South Carolina 29
February 25, 1999....... ETNA North Carolina, Virginia 60
January 28, 1999........ Handy Way North Central Florida 121
November 5, 1998........ Express Stop Southeast North Carolina, Eastern 22
South Carolina
October 22, 1998........ Dash-N East Central North Carolina 10
Others (less than five 2
stores)................
The purchase price allocations for many of these acquisitions are
preliminary estimates, based on available information and certain assumptions
management believes are reasonable. Accordingly, the purchase price
allocations are subject to finalization. Goodwill associated with the 1999
acquisitions and the 2000 acquisitions is being amortized over 30 years using
the straight-line method.
7
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Purchase prices for the 2000 acquisitions have been allocated to the assets
purchased and the liabilities assumed based on the fair values on the dates of
the acquisitions as follows (amounts in thousands):
Assets Acquired:
Receivables.................................................... $ 1,464
Inventories.................................................... 4,368
Prepaid expenses............................................... 466
Property held for sale......................................... 3,647
Property and equipment......................................... 23,140
Other noncurrent assets........................................ 1,208
-------
Total assets................................................. 34,293
-------
Liabilities Assumed:
Accounts payable............................................... 6,998
Other current liabilities and accrued expenses................. 2,517
Deferred revenue............................................... 2,055
Environmental reserves......................................... 50
-------
Total liabilities............................................ 11,620
-------
Net tangible assets acquired................................... 22,673
Goodwill..................................................... 34,410
-------
Total consideration paid, including direct costs, net of cash
acquired.................................................... $57,083
=======
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):
Three Months Ended
-------------------------
December 24, December 30,
1998 1999
------------ ------------
Total revenues................................... $481,961 $553,262
Net income....................................... $ 1,071 $ 2,125
Net income applicable to common shareholders..... $ 359 $ 2,125
Earnings per share applicable to common
shareholders:
Basic:
Net income..................................... $ 0.03 $ 0.12
Diluted:
Net income..................................... $ 0.03 $ 0.11
In management's opinion, the unaudited pro forma information is not
necessarily indicative of actual results that would have occurred had the
acquisitions been consummated at the beginning of fiscal 1999 or fiscal 2000,
or of future operations of the combined companies.
8
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out method, except for gasoline inventories for which
cost is determined using the first-in, first-out method. Inventories consisted
of the following (in thousands):
September 30, December 30,
1999 1999
------------- ------------
Inventories at FIFO cost:
Merchandise....................................... $ 63,941 $ 69,902
Gasoline.......................................... 22,431 22,684
-------- --------
86,372 92,586
Less adjustment to LIFO cost:
Merchandise....................................... (10,135) (11,163)
-------- --------
Total Inventories................................. $ 76,237 $ 81,423
======== ========
Inventories are net of estimated obsolescence reserves of approximately
$200,000 at September 30, 1999 and December 30, 1999, respectively.
Note 4--Environmental Liabilities and Other Contingencies
As of December 30, 1999, we were contingently liable for outstanding letters
of credit in the amount of $18.1 million related primarily to several self-
insured programs, regulatory requirements, and vendor contract terms. The
letters of credit are not to be drawn against unless we default on the timely
payment of related liabilities.
The State of North Carolina and the State of Tennessee have assessed
Sandhills, Inc., a subsidiary of The Pantry, with additional taxes plus
penalties and accrued interest totaling approximately $5.0 million, for the
periods February 1, 1992 to September 26, 1996. For the tax years ending
January 26, 1993 through September 30, 1999, we have reached a preliminary
settlement with the State of North Carolina, which is pending final approval
by the state. Under the proposed settlement, we 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 (and related
valuation allowance). We are contesting the Tennessee assessment and believe
that, in the event of a mutual settlement, the assessment amount and related
penalties (approximately $250,000) would be substantially reduced. Based on
this, we believe the outcome of the audits will not have a material adverse
effect on our financial condition or financial statements.
We are involved in certain legal actions arising in the normal course of
business. In the opinion of management, based on a review of such legal
proceedings, the ultimate outcome of these actions will not have a material
effect on our consolidated financial statements.
Environmental Liabilities and Contingencies
We are subject to various federal, state and local environmental laws. We
make financial expenditures in order to comply with regulations governing
underground storage tanks adopted by federal, state, and local regulatory
agencies. In particular, at the federal level, the Resource Conservation and
Recovery Act of 1976, as amended, requires the EPA to establish a
comprehensive regulatory program for the detection, prevention and cleanup of
leaking underground storage tanks.
9
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Federal and state regulations require us to provide and maintain evidence
that we are taking financial responsibility for corrective action and
compensating third parties in the event of a release from our underground
storage tank systems. In order to comply with the applicable requirements, we
maintain surety bonds in the aggregate amount of approximately $900,000 in
favor of state environmental agencies in the states of North Carolina, South
Carolina, Virginia, and Georgia and a letter of credit in the aggregate amount
of approximately $1.1 million issued by a commercial bank in favor of state
environmental agencies in the states of Florida, Tennessee, Indiana and
Kentucky. We also rely upon the reimbursement provisions of applicable state
trust funds. In Florida, we meet our financial responsibility requirements by
state trust fund coverage through December 31, 1998. After that time we will
meet such requirements through a combination of private commercial liability
insurance and a letter of credit.
Regulations enacted by the EPA in 1988 established requirements for:
. installing underground storage tank systems;
. upgrading underground storage tank systems;
. taking corrective action in response to releases;
. closing underground storage tank systems;
. keeping appropriate records; and
. maintaining evidence of financial responsibility for taking corrective
action and compensating third parties for bodily injury and property
damage resulting from releases.
These regulations permit states to develop, administer and enforce their own
regulatory programs, incorporating requirements which are at least as
stringent as the federal standards. The Florida rules for 1998 upgrades are
more stringent than the 1988 EPA regulations. We believe our facilities in
Florida meet or exceed such rules. We believe all company-owned underground
storage tank systems are in material compliance with these 1998 EPA
regulations and all applicable state environmental regulations.
State Trust Funds. All states in which we operate or have operated
underground storage tank systems have established trust funds for the sharing,
recovering and reimbursing of certain cleanup costs and liabilities incurred
as a result of releases from underground storage tank systems. These trust
funds, which essentially provide insurance coverage for the cleanup of
environmental damages caused by the operation of underground storage tank
systems, are funded by an underground storage tank registration fee and a tax
on the wholesale purchase of motor fuels within each state. We have paid
underground storage tank registration fees and gasoline taxes to each state
where we operate to participate in these trust programs and we have filed
claims and received reimbursement in North Carolina, South Carolina, Kentucky,
Indiana, Georgia, Florida and Tennessee. The coverage afforded by each state
fund varies but generally provides from $150,000 to $1.0 million per site for
the cleanup of environmental contamination, and most provide coverage for
third-party liabilities. Costs for which we do not receive reimbursement
include:
. the per-site deductible;
. costs incurred in connection with releases occurring or reported to
trust funds prior to their inception;
. removal and disposal of underground storage tank systems; and
. costs incurred in connection with sites otherwise ineligible for
reimbursement from the trust funds.
The trust funds 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
10
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
type of cost for which reimbursement is sought. The Florida trust fund will
not cover releases first reported after December 31, 1998. We obtained private
coverage for remediation and third party claims arising out of releases
reported after December 31, 1998. We believe that this coverage exceeds
federal and Florida financial responsibility regulation. During the next five
years, we may spend up to $2.3 million for remediation. In addition, we
estimate that state trust funds established in our operating areas or other
responsible third parties (including insurers) may spend up to $13.2 million
on our behalf. To the extent those third parties do not pay for remediation as
we anticipate, we will be obligated to make such payments. This could
materially adversely affect our financial condition and results of operations.
Reimbursements from state trust funds will be dependent upon the continued
maintenance and continued solvency of the various funds.
Several of the locations identified as contaminated are being cleaned up by
third parties who have indemnified us as to responsibility for cleanup
matters. Additionally, we are awaiting closure notices on several other
locations which will release us from responsibility related to known
contamination at those sites. These sites continue to be included in our
environmental reserve until a final closure notice is received.
Note 5--Long-Term Debt
At September 30, 1999 and December 30, 1999, long-term debt consisted of the
following (in thousands):
September 30, December 30,
1999 1999
------------- ------------
Senior subordinated notes payable; due October
15, 2007; interest payable semi-annually at
10.25%......................................... $200,000 $200,000
Term loan facility--Tranche A; interest payable
monthly at LIBOR (6.47% at December 30, 1999)
plus 3.0%; principal due in quarterly install-
ments through January 31, 2004................. 70,656 69,782
Term loan facility--Tranche B; interest payable
monthly at LIBOR (6.47% at December 30, 1999)
plus 3.5%; principal due in quarterly install-
ments through January 31, 2006................. 156,794 181,394
Term loan facility--Tranche C; interest payable
monthly at LIBOR (6.47% at December 30, 1999)
plus 3.75%; principal due in quarterly install-
ments through January 31, 2006................. -- 50,000
Acquisition facility; interest payable monthly
at LIBOR (6.47% at December 30, 1999) plus
3.0%; principal due in quarterly installments
through January 31, 2004....................... 12,000 --
Revolving credit facility; interest payable
monthly at LIBOR (6.47% at December 30, 1999)
plus 3.0%; principal due on January 31, 2004... -- 10,000
Notes payable to McLane Company, Inc.; zero
(0.0%) interest, with principal due in annual
installments through February 26, 2003......... 1,185 1,185
Other notes payable; various interest rates and
maturity dates................................. 272 262
-------- --------
440,907 512,623
Less--current maturities........................ (10,687) (21,436)
-------- --------
$430,220 $491,187
======== ========
The senior subordinated notes are unconditionally guaranteed, on an
unsecured basis, as to the payment of principal, premium, if any, and
interest, jointly and severally, by all subsidiary guarantors. See "Note 8--
Supplemental Guarantor Information."
11
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 27, 1999, we entered into an amendment to our bank credit
facility which increased the borrowing capacity to include an additional $75.0
million in term loan borrowings. The term loan facilities bear interest, at
our option, based on margins over a base rate or an adjusted Eurodollar rate.
Proceeds from the term loan facilities were used to prepay amounts outstanding
under the acquisition facility and to fund acquisitions closed subsequent to
September 30, 1999.
On November 30, 1999, we entered into an amendment to our bank credit
facility which increased the aggregate principal amount of the initial Tranche
B term loan facility by an additional $25.0 million.
Our bank credit facility consists of: (i) a $45.0 million revolving credit
facility available for working capital financing, general corporate purposes
and issuing commercial and standby letters of credit with outstanding
borrowings of $10.0 million; (ii) a $50.0 million acquisition facility
available to finance acquisition of related businesses; and (iii) term loan
facilities with outstanding borrowings of $301.2 million. As of December 30,
1999, total outstanding borrowings under our bank credit facility, as amended,
were $311.2 million.
Subsequent to December 30, 1999, we entered into an amendment to our bank
credit facility which increased the borrowing capacity to include an
additional $25.0 million under the Tranche C term loan. Proceeds from the term
loan were invested in a blocked account to fund future acquisitions.
The annual maturities of notes payable are as follows (in thousands):
Year Ended September:
---------------------
2000.......................................................... $ 21,436
2001.......................................................... 18,689
2002.......................................................... 21,693
2003.......................................................... 24,947
2004.......................................................... 38,257
Thereafter.................................................... 387,601
--------
$512,623
========
As of December 30, 1999, we were in compliance with all covenants and
restrictions relating to all our outstanding borrowings.
As of December 30, 1999, substantially all of our net assets (which includes
those of our subsidiaries) are restricted as to payment of dividends and other
distributions.
Note 6--Shareholders' Equity
On June 8, 1999, we offered and sold 6,250,000 shares of common stock, $0.01
par value per share, in our initial public offering. The initial offering
price was $13.00 per share and we received $75.6 million in net proceeds,
before expenses. The net proceeds were used: (i) to repay $19.0 million in
indebtedness under our bank credit facility; (ii) to redeem $17.5 million in
outstanding preferred stock; and (iii) to pay accrued dividends on the
preferred stock of $6.5 million. Of the remaining $32.6 million, $30.2 million
was used to fund acquisitions closed subsequent to the fiscal quarter ended
June 24, 1999 and $2.4 million was reserved to pay fees and expenses
associated with the IPO.
On June 4, 1999 and in connection with the IPO, we effected a 51-for-1 stock
split of our common stock. The accompanying financial statements reflect the
stock split, retroactively applied to all periods presented. In connection
with the stock split, the number of authorized shares of common stock was
increased to 50,000,000 (300,000 shares previously). There was no change in
par values of the common stock as a result of the stock split.
12
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 3, 1999, we adopted a new 1999 stock option plan providing for the
grant of incentive stock options and non-qualified stock options to our
officers, directors, employees and consultants. The plan is administered by
the board of directors or a committee of the board of directors. Options are
granted at prices determined by the board of directors and may be exercisable
in one or more installments. Additionally, the terms and conditions of awards
under the plan may differ from one grant to another. Under the plan, incentive
stock options may only be granted to employees with an exercise price at least
equal to the fair market value of the related common stock on the date the
option is granted. Fair values are based on the most recent common stock
sales. An aggregate of 3,825,000 shares of common stock is reserved for
issuance under the 1999 stock option plan. On June 8, 1999, we granted 200,000
shares to officers and directors. These options will vest in three equal
annual installments, expire in seven years and have an exercise price of
$13.00 per share. See "Note 7--Earnings Per Share."
On August 31, 1998, we adopted the 1998 Stock Subscription Plan. The Stock
Subscription Plan allows us to offer to certain employees the right to
purchase shares of common stock at a purchase price equal to the fair market
value on the date of purchase. During fiscal 1999, 134,436 shares, net of
repurchases of 6,273 shares were issued under the Stock Subscription Plan.
These shares were sold at fair value ($11.27), as determined by the most
recent equity investment (July 1998). In connection with these sales, we
received $722,000 of secured promissory notes receivable, bearing an interest
rate of 8.8%, due August 31, 2003.
Note 7--Earnings Per Share
We compute earnings per share data in accordance with the requirements of
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. Basic earnings per share is computed on the basis of the weighted
average number of common shares outstanding. Diluted earnings per share is
computed on the basis of the weighted average number of common shares
outstanding plus the effect of outstanding warrants and stock options using
the "treasury stock" method. The following table reflects the calculation of
basic and diluted earnings per share.
Three Months Ended
-------------------------
December 24, December 30,
1998 1999
------------ ------------
Net income applicable to common shareholders:
Net income..................................... $ 1,065 $ 2,275
Dividends on preferred stock................... (712) --
------- -------
Net income applicable to common shareholders... $ 353 $ 2,275
======= =======
Earnings per share--basic:
Weighted-average shares outstanding............ 11,850 18,111
======= =======
Net income per share--basic.................... $ 0.03 $ 0.13
======= =======
Earnings per share--diluted:
Weighted-average shares outstanding............ 11,850 18,111
Dilutive impact of options and warrants
outstanding................................... 1,162 699
------- -------
Weighted-average shares and potential dilutive
shares outstanding............................ 13,012 18,810
======= =======
Net income per share--diluted.................... $ 0.03 $ 0.12
======= =======
For the three months ended December 30, 1999, options to purchase 373,110
shares of common stock were not included in the computation of diluted
earnings per share because the options' exercise prices were greater than the
average market price of our common stock for that period and their inclusion
would have been antidilutive.
13
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--Supplemental Guarantor Information
The Pantry's wholly-owned subsidiaries Lil' Champ Food Stores, Inc.,
Sandhills, Inc. and Global Communications, Inc. (the "Guarantors") jointly and
severally, unconditionally guarantee, on an unsecured senior subordinated
basis, the full and prompt performance of our obligations under our senior
subordinated notes and our bank credit facility.
Management has determined that separate financial statements of the
Guarantors would not be material to investors and therefore such financial
statements are not provided. The following supplemental combining financial
statements presents information regarding the Guarantors and the Pantry.
We account for our wholly-owned subsidiaries on the equity basis. Certain
reclassifications have been made to conform all of the financial information
to the financial presentation on a consolidated basis. The principal
eliminating entries eliminate investments in subsidiaries and intercompany
balances and transactions.
14
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING BALANCE SHEETS
YEAR ENDED SEPTEMBER 30, 1999
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in Thousands)
ASSETS
Current assets:
Cash and cash
equivalents........... $ 16,446 $ 9,870 $ 4,841 $ -- $ 31,157
Receivables, net....... 34,761 46,179 3,119 (59,825) 24,234
Inventories............ 40,714 35,523 -- -- 76,237
Prepaid expenses....... 2,186 958 353 -- 3,497
Property held for
sale.................. 135 -- -- -- 135
Deferred income taxes.. 2,220 2,621 8 -- 4,849
-------- -------- ------- --------- --------
Total current assets... 96,462 95,151 8,321 (59,825) 140,109
-------- -------- ------- --------- --------
Investment in
subsidiaries........... 119,590 -- -- (119,590) --
-------- -------- ------- --------- --------
Property and equipment,
net.................... 160,809 244,622 16,254 -- 421,685
-------- -------- ------- --------- --------
Other assets:
Goodwill, net.......... 127,056 70,649 -- -- 197,705
Deferred financing
cost, net............. 12,680 -- -- -- 12,680
Environmental
receivables........... 11,959 1,177 -- -- 13,136
Intercompany notes
receivable............ 248,650 49,705 17,124 (315,479) --
Other noncurrent
assets................ 3,782 4,053 568 -- 8,403
-------- -------- ------- --------- --------
Total other assets..... 404,127 125,584 17,692 (315,479) 231,924
-------- -------- ------- --------- --------
Total assets............ $780,988 $465,357 $42,267 $(494,894) $793,718
======== ======== ======= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Current maturities of
long-term debt........ $ 10,370 $ 296 $ 21 $ -- $ 10,687
Current maturities of
capital lease
obligations........... 178 1,027 -- -- 1,205
Accounts payable....... 51,641 34,698 2,919 (134) 89,124
Accrued interest....... 16,060 -- 1 (6,133) 9,928
Accrued compensation
and related taxes..... 4,730 3,310 2 -- 8,042
Income taxes payable... 6,784 12,499 447 (14,726) 5,004
Other accrued taxes.... 5,041 8,793 -- -- 13,834
Accrued insurance...... 3,401 5,419 -- -- 8,820
Other accrued
liabilities........... 36,480 13,846 4,366 (33,716) 20,976
-------- -------- ------- --------- --------
Total current
liabilities........... 134,685 79,888 7,756 (54,709) 167,620
-------- -------- ------- --------- --------
Long-term debt.......... 429,235 889 96 -- 430,220
-------- -------- ------- --------- --------
Other noncurrent
liabilities:
Environmental
reserves.............. 13,010 2,392 -- -- 15,402
Deferred income taxes.. 2,810 21,766 1,669 -- 26,245
Deferred revenue....... 20,705 8,024 -- -- 28,729
Capital lease
obligations........... 4,063 9,409 -- -- 13,472
Intercompany notes
payable............... 68,829 249,715 3,997 (322,541) --
Other.................. 3,454 4,143 36 200 7,833
-------- -------- ------- --------- --------
Total other noncurrent
liabilities........... 112,871 295,449 5,702 (322,341) 91,681
-------- -------- ------- --------- --------
SHAREHOLDERS' EQUITY
(DEFICIT):
Common stock........... 182 1 5,001 (5,002) 182
Additional paid-in
capital............... 128,256 6,882 24,212 (31,094) 128,256
Shareholder loans (937) -- -- -- (937)
Accumulated earnings
(deficit)............. (23,304) 82,248 (500) (81,748) (23,304)
-------- -------- ------- --------- --------
Total shareholders'
equity (deficit)....... 104,197 89,131 28,713 (117,844) 104,197
-------- -------- ------- --------- --------
Total liabilities and
shareholders' equity
(deficit).............. $780,988 $465,357 $42,267 $(494,894) $793,718
======== ======== ======= ========= ========
15
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING BALANCE SHEETS
DECEMBER 30, 1999
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in Thousands)
ASSETS
Current assets:
Cash and cash
equivalents........... $ 15,742 $ 9,817 $ 1,302 $ -- $ 26,861
Receivables, net....... 40,535 59,428 4,276 (77,150) 27,089
Inventories............ 45,215 36,208 -- -- 81,423
Prepaid expenses....... 2,520 789 350 -- 3,659
Property held for
sale.................. 3,816 -- -- -- 3,816
Deferred income taxes.. 2,220 2,621 8 -- 4,849
-------- -------- ------- --------- --------
Total current assets... 110,048 108,863 5,936 (77,150) 147,697
-------- -------- ------- --------- --------
Investment in
subsidiaries........... 123,257 -- -- (123,257) --
-------- -------- ------- --------- --------
Property and equipment,
net.................... 182,810 245,103 16,252 -- 444,165
-------- -------- ------- --------- --------
Other assets:
Goodwill, net.......... 160,535 69,428 -- -- 229,963
Deferred financing
cost, net............. 14,062 -- -- -- 14,062
Environmental
receivables, net...... 11,959 1,200 -- -- 13,159
Intercompany notes
receivable............ 258,414 49,705 17,124 (325,243) --
Other noncurrent
assets................ 5,099 4,398 568 (14) 10,051
-------- -------- ------- --------- --------
Total other assets..... 450,069 124,731 17,692 (325,257) 267,235
-------- -------- ------- --------- --------
Total assets............ $866,184 $478,697 $39,880 $(525,664) $859,097
======== ======== ======= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Current maturities of
long-term debt........ $ 21,119 296 21 -- $ 21,436
Current maturities of
capital lease
obligations........... 178 1,027 -- -- 1,205
Accounts payable....... 57,396 35,428 -- (161) 92,663
Accrued interest....... 12,098 -- 1 (7,419) 4,680
Accrued compensation
and related taxes..... 4,712 2,692 1 -- 7,405
Income taxes payable... 1,671 16,965 (200) (16,765) 1,671
Other accrued taxes.... 2,365 5,370 -- -- 7,735
Accrued insurance...... 3,001 5,297 -- -- 8,298
Other accrued
liabilities........... 48,728 15,208 120 (45,386) 18,670
-------- -------- ------- --------- --------
Total current
liabilities........... 151,268 82,283 (57) (69,731) 163,763
-------- -------- ------- --------- --------
Long-term debt.......... 490,207 889 91 -- 491,187
-------- -------- ------- --------- --------
Other noncurrent
liabilities:
Environmental
reserves.............. 13,077 2,351 -- -- 15,428
Deferred income taxes.. 3,265 21,871 1,669 -- 26,805
Deferred revenue....... 26,273 9,215 -- -- 35,488
Capital lease
obligations........... 4,018 9,154 -- -- 13,172
Intercompany notes
payable............... 68,829 251,959 9,386 (330,174) --
Other.................. 3,002 3,972 35 -- 7,009
-------- -------- ------- --------- --------
Total other noncurrent
liabilities........... 118,464 298,522 11,090 (330,174) 97,902
-------- -------- ------- --------- --------
SHAREHOLDERS' EQUITY
(DEFICIT):
Common stock........... 182 1 5,001 (5,002) 182
Additional paid-in
capital............... 128,029 6,882 24,212 (31,094) 128,029
Shareholder loans...... (937) -- -- -- (937)
Accumulated earnings
(deficit)............. (21,029) 90,120 (457) (89,663) (21,029)
-------- -------- ------- --------- --------
Total shareholders'
equity (deficit)...... 106,245 97,003 28,756 (125,759) 106,245
-------- -------- ------- --------- --------
Total liabilities and
shareholders' equity
(deficit).............. $866,184 $478,697 $39,880 $(525,664) $859,097
======== ======== ======= ========= ========
16
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED DECEMBER 24, 1998
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in Thousands)
Revenues:
Merchandise sales..... $83,377 $56,013 $ -- $ -- $139,390
Gasoline sales........ 107,075 64,714 -- -- 171,789
Commissions........... 2,508 1,920 -- -- 4,428
------- ------- ----- ------- --------
Total revenues...... 192,960 122,647 -- -- 315,607
------- ------- ----- ------- --------
Cost of sales:
Merchandise........... 56,966 37,487 -- -- 94,453
Gasoline.............. 93,447 55,327 -- -- 148,774
------- ------- ----- ------- --------
Total cost of
sales.............. 150,413 92,814 -- -- 243,227
------- ------- ----- ------- --------
Gross profit............ 42,547 29,833 -- -- 72,380
------- ------- ----- ------- --------
Operating expenses:
Store expenses........ 32,139 17,356 (61) (5,705) 43,729
General and
administrative
expenses............. 5,675 4,288 5 -- 9,968
Depreciation and
amortization......... 4,536 3,652 2 -- 8,190
------- ------- ----- ------- --------
Total operating
expenses........... 42,350 25,296 (54) (5,705) 61,887
------- ------- ----- ------- --------
Income (loss) from
operations............. 197 4,537 54 5,705 10,493
------- ------- ----- ------- --------
Equity in earnings of
subsidiaries......... 7,252 -- -- (7,252) --
------- ------- ----- ------- --------
Other income (expense):
Interest.............. (5,772) (4,372) (3) 1,235 (8,912)
Miscellaneous......... (280) 7,002 34 (6,940) (184)
------- ------- ----- ------- --------
Total other income
(expense).......... (6,052) 2,630 31 (5,705) (9,096)
------- ------- ----- ------- --------
Income (loss) before
income taxes........... 1,397 7,167 85 (7,252) 1,397
Income tax benefit
(expense).............. (332) (2,411) (55) 2,466 (332)
------- ------- ----- ------- --------
Net income (loss)....... 1,065 4,756 30 (4,786) 1,065
Preferred stock
dividends.............. (712) -- -- -- (712)
------- ------- ----- ------- --------
Net income (loss)
applicable to common
shareholders........... $ 353 $ 4,756 $ 30 $(4,786) $ 353
======= ======= ===== ======= ========
17
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED DECEMBER 30, 1999
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in Thousands)
Revenues:
Merchandise sales..... $120,593 $ 88,898 $ -- $ -- $209,491
Gasoline sales........ 211,288 112,861 -- -- 324,149
Commissions........... 4,068 2,682 -- -- 6,750
-------- -------- ----- -------- --------
Total revenues...... 335,949 204,441 -- -- 540,390
-------- -------- ----- -------- --------
Cost of sales:
Merchandise........... 80,818 58,282 -- -- 139,100
Gasoline.............. 191,365 101,041 -- -- 292,406
-------- -------- ----- -------- --------
Total cost of
sales.............. 272,183 159,323 -- -- 431,506
-------- -------- ----- -------- --------
Gross profit............ 63,766 45,118 -- -- 108,884
-------- -------- ----- -------- --------
Operating expenses:
Store expenses........ 48,127 26,157 (61) (9,933) 64,290
General and
administrative
expenses............. 8,868 6,752 6 -- 15,626
Depreciation and
amortization......... 7,909 5,551 1 -- 13,461
-------- -------- ----- -------- --------
Total operating
expenses........... 64,904 38,460 (54) (9,933) 93,377
-------- -------- ----- -------- --------
Income (loss) from
operations............. (1,138) 6,658 54 9,933 15,507
-------- -------- ----- -------- --------
Equity in earnings of
subsidiaries........... 12,115 -- -- (12,115) --
-------- -------- ----- -------- --------
Other income (expense):
Interest.............. (6,915) (6,091) (2) 1,286 (11,722)
Miscellaneous......... 1 11,456 42 (11,221) 278
-------- -------- ----- -------- --------
Total other income
(expense).......... (6,914) 5,365 40 (9,935) (11,444)
-------- -------- ----- -------- --------
Income (loss) before
income taxes........... 4,063 12,023 94 (12,117) 4,063
Income tax benefit
(expense).............. (1,788) (4,151) (51) 4,202 (1,788)
-------- -------- ----- -------- --------
Net income (loss)....... $ 2,275 $ 7,872 $ 43 $ (7,915) $ 2,275
======== ======== ===== ======== ========
Net income (loss)
applicable to common
shareholders........... $ 2,275 $ 7,872 $ 43 $ (7,915) $ 2,275
======== ======== ===== ======== ========
18
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 24, 1998
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net Income (loss)....... $ 1,065 $ 4,756 $ 30 $ (4,786) $ 1,065
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating ac-
tivities:
Depreciation and
amortization......... 4,536 3,650 4 -- 8,190
(Gain) loss on sale of
property and
equipment............ 176 86 (2) -- 260
Provision for
environmental
expenses............. 154 -- -- -- 154
Equity earnings of
affiliates........... (4,786) -- -- 4,786 --
Changes in operating as-
sets and liabilities,
net:
Receivables........... (15,444) (6,857) 17 19,718 (2,566)
Inventories........... (2,451) (2,226) -- -- (4,677)
Prepaid expenses...... 260 615 3 -- 878
Other noncurrent
assets............... (4) 40 -- -- 36
Accounts payable...... 1,861 (2,315) -- (26) (480)
Other current
liabilities and
accrued expenses..... 5,621 5,336 29 (17,158) (6,172)
Other noncurrent
liabilities.......... 532 (95) (1) (634) (198)
-------- ------- ------ -------- --------
Net cash provided by
(used in) operating ac-
tivities............... (8,480) 2,990 80 1,900 (3,510)
-------- ------- ------ -------- --------
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Additions to property
held for sale........ (42) -- -- -- (42)
Additions to property
and equipment........ (5,474) (4,066) -- -- (9,540)
Proceeds from sale of
property held for
sale................. 524 -- -- -- 524
Proceeds from sale of
property and
equipment............ 75 16 -- -- 91
Intercompany notes
receivable
(payable)............ 2,080 (180) -- (1,900) --
Acquisitions of
related businesses,
net of cash
acquired............. (25,541) -- -- -- (25,541)
-------- ------- ------ -------- --------
Net cash used in invest-
ing activities......... (28,378) (4,230) -- (1,900) (34,508)
-------- ------- ------ -------- --------
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Principal repayments
under capital
leases............... (68) (255) -- -- (323)
Principal repayments
of long-term debt.... (4) (6) (5) -- (15)
Proceeds from issuance
of short-term debt... 2,000 -- -- -- 2,000
Proceeds from issuance
of long-term debt.... 16,000 -- -- -- 16,000
Net proceeds from
equity issue......... 1,088 -- -- -- 1,088
Other financing
costs................ (67) -- -- -- (67)
-------- ------- ------ -------- --------
Net cash provided by
(used in) financing ac-
tivities............... 18,949 (261) (5) -- 18,683
-------- ------- ------ -------- --------
NET DECREASE IN CASH AND
CASH EQUIVALENTS....... (17,909) (1,501) 75 -- (19,335)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. 24,031 6,300 4,073 -- 34,404
-------- ------- ------ -------- --------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 6,122 $ 4,799 $4,148 $ -- $ 15,069
======== ======= ====== ======== ========
19
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 30, 1999
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
---------- ------------ ------------- ------------ --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss).................... $ 2,275 $ 7,873 $ 42 $ (7,915) $ 2,275
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization...... 7,909 5,551 1 -- 13,461
Change in deferred income taxes.... 455 105 -- -- 560
(Gain) loss on sale of property and
equipment......................... 102 (7) -- -- 95
Provision for environmental
expenses.......................... 67 (41) -- -- 26
Equity earnings of affiliates...... (3,667) -- -- 3,667 --
Changes in operating assets and
liabilities, net:
Receivables........................ (4,416) (13,273) (1,156) 17,325 (1,520)
Inventories........................ (929) (685) -- -- (1,614)
Prepaid expenses................... 132 169 3 -- 304
Other noncurrent assets............ (30) (347) -- 4 (373)
Accounts payable................... (1,243) 730 (2,919) (27) (3,459)
Other current liabilities and
accrued expenses.................. (2,438) 1,665 (4,894) (14,995) (20,662)
Other noncurrent liabilities....... 3,621 1,020 -- (201) 4,440
--------- -------- ------- -------- --------
Net cash provided by (used in)
operating activities................ 1,838 2,760 (8,923) (2,142) (6,467)
--------- -------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment......................... (4,878) (5,818) -- 1 (10,695)
Proceeds from sale of property and
equipment......................... 296 407 -- -- 703
Intercompany notes receivable
(payable)......................... 84,737 2,244 5,389 (92,370) --
Acquisitions of related businesses,
net of cash acquired.............. (152,203) 609 -- 94,511 (57,083)
--------- -------- ------- -------- --------
Net cash provided by (used in)
investing activities................ (72,048) (2,558) 5,389 2,142 (67,075)
--------- -------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital
leases............................ (45) (255) -- -- (300)
Principal repayments of long-term
debt.............................. (12,879) -- (5) -- (12,884)
Proceeds from issuance of long-term
debt.............................. 84,600 -- -- -- 84,600
Net proceeds from initial public
offering.......................... (227) -- -- -- (227)
Other financing costs.............. (1,943) -- -- -- (1,943)
--------- -------- ------- -------- --------
Net cash provided by (used in)
financing activities................ 69,506 (255) (5) -- 69,246
--------- -------- ------- -------- --------
NET DECREASE IN CASH AND CASH
EQUIVALENTS......................... (704) (53) (3,539) (4,296)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD........................... 16,446 9,843 4,868 -- 31,157
--------- -------- ------- -------- --------
CASH AND CASH EQUIVALENTS, END OF
PERIOD.............................. $ 15,742 $ 9,790 $ 1,329 $ -- $ 26,861
========= ======== ======= ======== ========
20
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Subsequent Events
On January 27, 2000, we acquired certain operating assets of McKight Oil
Company. McKight Oil Company is a leading operator of convenience stores in
Virginia and North Carolina, operating 12 stores under the name "On The Way
Food Stores." On January 27, 2000, we acquired certain operating assets of
Grooms Texaco, Inc. Grooms Texaco, Inc. is an operator of convenience stores
in South Carolina, operating 3 stores under the name "Grooms Texaco." The
purchase price and the fees and expenses associated with these acquisitions
were financed with borrowings under our bank credit facility and cash on hand.
Subsequent to December 30, 1999, we entered into an amendment to our bank
credit facility which increased the borrowing capacity to include an
additional $25.0 million under the Tranche C term loan. Proceeds from the term
loan were invested in a blocked account to fund future acquisitions.
21
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 30, 1999, our
Registration Statement on Form S-1 (File No. 333-74221), as amended, effective
June 8, 1999 and our Current Reports on Form 8-K and 8-K/A filed with the
Securities and Exchange Commission.
Introduction
The Pantry is a leading convenience store operator in the southeastern
United States and the second largest independent operator in the 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.
Specific elements of our operating strategy include (i) enhancing our
merchandising to increase same store merchandise sales growth and margins,
(ii) improving our gasoline offering in order to increase customer traffic and
same store gasoline volume growth, (iii) reducing expenses through
strengthened vendor relationships and tightened expense controls, (iv) making
capital investments in store remodels and store automation and (v) expanding
our market position through acquisitions and new store development. As a
result of these and other factors, we have experienced increases for the
quarter over the same quarter of the previous fiscal year in total revenue of
71.2%, same store merchandise sales of 11.7% and net income of 113.6%.
Additionally, we have expanded the geographic scope of our operations which we
believe will result in less seasonality from period to period.
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. As part of our
efforts we are upgrading our management information systems and continue to
remodel our stores. Finally, we continue to seek acquisitions and believe that
there is a large number of attractive acquisition opportunities in our
markets. Subsequent to December 30, 1999, we completed two acquisitions
bringing our store count as of February 7, 2000 to 1,287 stores.
Acquisition History
Our acquisition strategy focuses on acquiring high-volume 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 2000 acquisitions (as of
December 30, 1999) and the 1999 acquisitions:
Number of
Date Acquired Trade Name Locations Stores
------------- ------------ --------- ---------
Fiscal 2000
Acquisitions:
November 11, 1999....... Kangaroo Georgia 49
November 4, 1999........ Cel Oil Charleston, South Carolina 7
October 7, 1999......... Wicker Mart North Carolina 7
Other (less than five
stores)................ 1
Fiscal 1999 Acquisi-
tions:
July 22, 1999........... Depot Food South Carolina, Northern Georgia 53
July 8, 1999............ Food Chief Eastern South Carolina 29
February 25, 1999....... ETNA North Carolina, Virginia 60
January 28, 1999........ Handy Way North Central Florida 121
November 5, 1998........ Express Stop Southeast North Carolina, Eastern South Carolina 22
October 22, 1998........ Dash-N East Central North Carolina 10
Other (less than five 2
stores)................
22
Impact of Acquisitions. The acquisitions highlighted above and related
transactions have had a significant impact on our financial condition and
results of operations since their respective transaction dates. All of these
acquisitions were accounted for under the purchase method and as a result the
consolidated statements of operations herein include the results of operations
of acquired stores from the date of acquisition only. Moreover, the
consolidated balance sheet as of September 30, 1999 does not include the
assets and liabilities relating to those acquisitions consummated after
September 30, 1999. As a result, comparisons to prior operating results and
prior balance sheets are materially impacted. Subsequent to the quarter ended
December 30, 1999, we acquired 15 stores in two separate transactions. These
transactions were funded with borrowings under our bank credit facility and
cash on hand. We intend to continue our acquisition strategy and, accordingly,
future results may not be necessarily comparable to historic results.
Results of Operations
Three Months Ended December 30, 1999 Compared to the Three Months Ended
December 24, 1998
Total Revenue. Total revenue for the three months ended December 30, 1999
was $540.4 million compared to $315.6 million for the three months ended
December 24, 1998, an increase of $224.8 million or 71.2%. The increase in
total revenue is primarily attributable to revenue from stores acquired or
opened since December 25, 1998 of $165.5 million, an increase in retail
gasoline prices, and same store merchandise sales growth. Total revenue
increases were also inflated by a higher average retail gasoline gallon price
of $1.26 for the quarter compared to $1.02 for the first quarter of fiscal
1999, or an increase of 23.5%.
Merchandise Revenue. Merchandise revenue for the first quarter of fiscal
2000 was $209.5 million compared to $139.4 million during the first quarter of
fiscal 1999, an increase of $70.1 million or 50.3%. The increase in
merchandise revenue is primarily attributable to revenue from stores acquired
or opened since December 25, 1998 of $54.4 million and same store merchandise
sales growth.
Same store merchandise revenue for the quarter increased 11.7% over the
comparable period in 1999. 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. We estimate the cigarette price
increase accounted for 3-4% of the same store gain. We believe the increases
in store traffic and average transaction size are primarily attributable to
store merchandising, more competitive gasoline pricing, enhanced store
appearance and increased promotional activity.
Gasoline Revenue and Gallons. Gasoline revenue for the first quarter of
fiscal 2000 was $324.1 million compared to $171.8 million during the first
quarter of fiscal 1999, an increase of $152.3 million or 88.7%. The increase
in gasoline revenue is primarily attributable to revenue from stores acquired
or opened since December 25, 1998 of $109.4 million and a $0.24 or 23.5%
increase in average gasoline retail prices compared to the comparable period
in fiscal 1999.
In the three months ended December 30, 1999, gasoline gallons sold were
257.8 million compared to 169.0 million during the three months ended December
24, 1998, an increase of 88.8 million gallons or 52.5%. The increase is
primarily attributable to gasoline sold by stores acquired or opened since
December 25, 1998 of 88.5 million. Same store gasoline gallon sales for the
quarter decreased 0.7% over the comparable period in fiscal 1999. The same
store gallon decrease is primarily attributable to the increased average
retail price per gallon associated with increasing world crude prices.
Commission Revenue. Commission revenue for the three months ended December
30, 1999 was $6.8 million compared to $4.4 million during the three months
ended December 24, 1998, an increase of $2.4 million or 52.4%. The increase is
primarily attributable to revenue from stores acquired or opened since
December 25, 1998 of $1.8 million, same store commission revenue increases and
the introduction of new ancillary service programs.
23
Total Gross Profit. Total gross profit for the first quarter of fiscal 2000
was $108.9 million compared to $72.4 million during the first quarter of
fiscal 1999, an increase of $36.5 million or 50.4%. The increase in gross
profit is primarily attributable to profits from stores acquired or opened
since December 25, 1998 of $30.8 million and same store gross profit
increases.
Merchandise Gross Profit and Margin. Merchandise gross profit was $70.4
million for the three months ended December 30, 1999 compared to $44.9 million
for the three months ended December 24, 1998, an increase of $25.5 million or
56.6%. This increase is primarily attributable to profits from stores acquired
or opened since December 25, 1998 of $19.1 million and same store profit
increases. The increase in merchandise gross margin to 33.6% for the quarter
from 32.2% for the comparable period in fiscal 1999 is primarily attributable
to the addition of higher margin food service locations, lower product costs
and increased volume rebates.
Gasoline Gross Profit and Per Gallon Margin. Gasoline gross profit was $31.7
million for the three months ended December 30, 1999 compared to $23.0 million
for the three months ended December 24, 1998, an increase of $8.7 million or
37.9%. This increase is primarily attributable to profits from stores acquired
or opened since December 25, 1998 of $10.0 million offset by the lower
gasoline margin associated with rising oil prices. Gasoline gross profit per
gallon was $0.123 in the three months ended December 30, 1999 compared to
$0.136 for the three months ended December 24, 1998.
Store Operating and General and Administrative Expenses. Store operating
expenses for the first quarter of fiscal 2000 totaled $64.3 million compared
to store operating expenses of $43.7 million for the first quarter of fiscal
1999, an increase of $20.6 million or 47.0%. The increase in store expenses is
primarily attributable to operating and lease expenses associated with the
stores acquired or opened since December 25, 1998 of $19.3 million. As a
percentage of total revenue, store operating expenses decreased to 11.9% in
the quarter from 13.9% in the comparable period of fiscal 1999.
General and administrative expenses for the three months ended December 30,
1999 was $15.6 million compared to $10.0 million during the three months ended
December 24, 1998, an increase of $5.6 million or 56.8%. The increase in
general and administrative expenses is attributable to increased
administrative expenses associated with the stores acquired or opened since
December 25, 1998 of $3.0 million. As a percentage of total revenue, general
and administrative expenses decreased to 2.9% in the quarter from 3.2% in the
comparable period of fiscal 1999.
Income from Operations. Income from operations totaled $15.5 million for the
three months ended December 30, 1999 compared to $10.5 million during the
three months ended December 24, 1998, an increase of $5.0 million or 47.8%.
The increase is attributable to the factors discussed above and is partially
reduced by a $5.3 million increase in depreciation and amortization.
EBITDA. EBITDA for the first quarter of fiscal 2000 totaled $29.0 million
compared to EBITDA of $18.7 million during the first quarter of fiscal 1999,
an increase of $10.3 million or 55.0%. The increase is attributable to the
items discussed above.
EBITDA is not a measure of performance under generally accepted accounting
principles, and should not be considered as a substitute for net income, cash
flows from operating activities and other income or cash flow statement data
prepared in accordance with generally accepted accounting principles, or as a
measure of profitability or liquidity. EBITDA as defined may not be comparable
to similarly-titled measures reported by other companies. We have included
information concerning EBITDA as one measure of our cash flow and historical
ability to service debt and because we believe investors find this information
useful.
Interest Expense. Interest expense is primarily interest on our senior
subordinated notes and borrowings under our bank credit facility. Interest
expense for the three months ended December 30, 1999 totaled $11.7
24
million compared to $8.9 million for the three months ended December 24, 1998,
an increase of $2.8 million or 31.5%. The increase in interest expense is
attributable to the increased borrowings under our bank credit facility
associated with acquisition activity.
Income Tax Expense. Income tax expense totaled $1.8 million for the three
months ended December 30, 1999 compared to $0.3 million for the three months
ended December 24, 1998. The increase in income tax expense was primarily
attributable to the increase in income before income taxes. Income tax expense
is recorded net of changes in valuation allowance to reduce federal and state
deferred tax assets to a net amount which we believe will be realized, based
on estimates of future earnings and the expected timing of temporary book/tax
difference reversals. The Company's effective tax rate for the three months
ended December 30, 1999 was 44%.
Net Income. The net income for the first quarter of fiscal 2000 was $2.3
million compared to a net income of $1.1 million for the first quarter of
fiscal 1999, an increase of $1.2 million or 113.6%. In the three months ended
December 24, 1998, we recorded preferred stock dividends of $712 thousand
which is subtracted from net income applicable to common shareholders in the
calculation of earnings per share.
Liquidity and Capital Resources
Cash Flows from Operations. Due to the nature of our business, substantially
all sales are for cash, and cash provided by operations is our primary source
of liquidity. Capital expenditures, acquisitions and interest expense
represent our primary uses of funds. We rely primarily upon cash provided by
operating activities, supplemented as necessary from time to time by
borrowings under our bank facilities, sale-leaseback transactions, asset
dispositions and equity investments to finance our operations, pay interest,
and fund capital expenditures and acquisitions. Cash provided by operating
activities decreased to a shortfall of $6.5 million for the three months ended
December 30, 1999, compared to a shortfall of $3.5 million for the three
months ended December 24, 1998. We had $26.9 million of cash and cash
equivalents on hand at December 30, 1999.
Fiscal 2000 Acquisitions. During the quarter we acquired a total of 64
convenience stores in four transactions for approximately $57.1 million, net
of cash acquired. These acquisitions were funded with borrowings under our
bank credit facility and cash on hand. Subsequent to December 30, 1999, the
Company acquired 15 additional convenience stores and funded these
transactions with proceeds from borrowings under our bank credit facility and
cash on hand.
Capital Expenditures. Capital expenditures (excluding all acquisitions) were
approximately $10.7 million in the three months ended December 30, 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 lease
the property back to us under long-term leases. Generally, the leases are
operating leases at market rates with terms of twenty years with four five-
year renewal options. The lease payment is based on market rates applied to
the cost of each respective property. We retain ownership of all personal
property and gasoline marketing equipment. Our bank credit facility limits or
caps the proceeds of sale-leasebacks that we can use to fund our operations or
capital expenditures. 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. We did not receive any proceeds from our sale-leaseback program during
the three months ended December 30, 1999.
In the three months ended December 30, 1999, we received approximately $2.4
million from vendor reimbursements for capital improvements. Net capital
expenditures, excluding all acquisitions, for the three
25
months ended December 30, 1999 were $8.3 million. We anticipate net capital
expenditures for fiscal 2000 will be approximately $45.0 million.
Long-Term Debt. As of February 2, 2000, our long-term debt consisted
primarily of $200.0 million of 10 1/4% senior subordinated notes due 2007 and
$311.2 million outstanding under our bank credit facility. On September 30,
1999, we had $239.5 outstanding under our bank credit facility.
On October 27, 1999 we entered into an amendment to our bank credit facility
which increased the borrowing capacity to include an additional $75.0 million
Tranche C term loan facility. The Tranche C term loan facility bears interest,
at our option, at 3.75% per year in addition to the Eurodollar base rate or
2.25% in addition to a base rate. Proceeds from the Tranche C term loan were
used to prepay amounts outstanding under our acquisition facility and to fund
acquisitions after September 30, 1999.
On November 30, 1999, we entered into an amendment to our bank credit
facility which increased the aggregate principal amount of the initial Tranche
B term loan facility by an additional $25.0 million.
Subsequent to December 30, 1999, we entered into an amendment to our bank
credit facility which increased the borrowing capacity to include an
additional $25.0 million under the Tranche C term loan. Proceeds from the term
loan were invested in a blocked account to fund future acquisitions.
Our bank credit facility consists of: (i) a $45.0 million revolving credit
facility available for working capital financing, general corporate purposes
and issuing commercial and standby letters of credit; (ii) term loan
facilities with outstanding borrowings of $301.2 million and (iii) a $50.0
million acquisition term facility which is available through January 31, 2001
to finance acquisitions of related businesses. As of February 2, 2000, we had
$16.9 million available for borrowing or additional letters of credit under
the revolving credit facility, $50.0 million available for borrowing under the
acquisition term facility and $25.0 million available in a blocked acquisition
account.
The interest rates we pay on borrowings under our bank credit facility are
variable and are based, at our option, on either a Eurodollar rate plus a
percentage or a base rate plus a percentage. If we choose the Eurodollar base
rate, we pay 3.0% per year in addition to the Eurodollar base rate for our
revolving credit facility, our acquisition term facility, and our Tranche A
term loan facility. For the Tranche B term loan facility, the Company pays
3.5% per year in addition to the Eurodollar base rate. If we opt for the base
rate, we pay 1.5% per year in addition to the base rate for our revolving
credit facility, the acquisition term facility, and the Tranche A term loan
facility. For our Tranche B term loan facility, we pay 2.0% per year in
addition to the base rate.
In order to reduce our exposure to interest rate fluctuations we have
entered into two interest rate swap arrangements, in which we agree to
exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated by reference to an agreed upon notional amount.
The interest rate differential is reflected as an adjustment to interest
expense over the life of the swaps. On March 2, 1999, we entered into a swap
arrangement with a notional amount of $45 million that fixes our Eurodollar
rate at 5.62% through January 2001. On November 30, 1999, we entered into a
swap arrangement with a notional amount of $50 million that fixes our
Eurodollar rate at 6.28% through November 2001.
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 and Tranche C term
loan facilities mature in January 2006. The Tranche A and Tranche B term loan
facilities require quarterly payments of principal and the Tranche C term loan
facility requires quarterly payments of principal beginning in January 2000,
with annual payments of principal totaling approximately $9.7 million in
fiscal 2000, $18.4 million in fiscal 2001, $21.4 million in fiscal 2002, $24.6
million in fiscal 2003, $38.2 million in fiscal 2004, $76.8 million in fiscal
2005, and $112.3 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.
26
Cash Flows from Financing Activities. During the three months ended December
30, 1999, we used proceeds from our bank credit facility and cash on hand to
finance our 2000 acquisitions, principal repayments and related fees and
expenses.
Cash Requirements. We believe that cash on hand, cash flow anticipated to be
generated from operations, short-term borrowing for seasonal working capital
needs and permitted borrowings under our credit facilities will be sufficient
to enable us to satisfy anticipated cash requirements for operating, investing
and financing activities, including debt service, for the next twelve months.
To continue our acquisition strategy after that time, we will have to obtain
additional debt or equity financing. There can be no assurance that such
financing will be available on favorable terms, or at all.
Shareholders' Equity. As of December 30, 1999, our shareholders' equity
totaled $106.2 million. The $2.0 million increase in shareholders' equity from
September 30, 1999 is attributed to net income for the first quarter of fiscal
2000.
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 we maintain surety bonds in the
aggregate amount of approximately $900,000 in favor of state environmental
agencies in the states of North Carolina, South Carolina, Georgia and Virginia
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. We also
rely on reimbursements from applicable state trust funds. In Florida, we also
meet such financial responsibility requirements through a combination of
private commercial liability insurance and a letter of credit.
All states in which we operate or have operated underground storage tank
systems have established trust funds for the sharing, recovering, and
reimbursing of cleanup costs and liabilities incurred as a result of releases
from underground storage tank systems. These trust funds, which essentially
provide insurance coverage for the cleanup of environmental damages caused by
the operation of underground storage tank systems, are funded by an
underground storage tank registration fee and a tax on the wholesale purchase
of motor fuels within each state. We have paid underground storage tank
registration fees and gasoline taxes to each state where we operate to
participate in these programs and have filed claims and received reimbursement
in North Carolina, South Carolina, Kentucky, Indiana, Georgia, Florida and
Tennessee. The coverage afforded by each state fund varies but generally
provides from $150,000 to $1.0 million per site or occurrence for the cleanup
of environmental contamination, and most provide coverage for third party
liabilities.
Costs for which we do not receive reimbursement include but are not limited
to the per-site deductible; costs incurred in connection with releases
occurring or reported to trust funds prior to their inception; removal and
disposal of underground storage tank systems; and costs incurred in connection
with sites otherwise ineligible for reimbursement from the trust funds. The
trust funds require us to pay deductibles ranging from $10,000 to $100,000 per
occurrence depending on the upgrade status of our underground storage tank
system, the date the release is discovered/reported and the type of cost for
which reimbursement is sought. The Florida trust fund will not cover releases
first reported after December 31, 1998. We meet Florida financial
responsibility requirements for remediation and third party claims arising out
of releases reported after December 31, 1998 through a combination of private
insurance and a letter of credit (described above). In addition to up to $2.3
million that we may expend for remediation, we estimate that up to $13.2
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.
27
Environmental reserves of $15.4 million as of December 30, 1999 represent
estimates for future expenditures for remediation, tank removal and litigation
associated with 429 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
December 30, 1999, amounts which are probable of reimbursement (based on our
experience) from those sources total $13.2 million and are recorded as long-
term environmental receivables. These receivables are expected to be collected
within a period of twelve to eighteen months after the reimbursement claim has
been submitted. In Florida, remediation of such contamination reported before
January 1, 1999 will be performed by the state and we expect that
substantially all of the costs will be paid by the state trust fund. We will
perform remediation in other states through independent contractor firms that
we have engaged. We do have locations where the applicable trust fund does not
cover a deductible or has a co-pay which may be less than the cost of such
remediation. Although we are not aware of releases or 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 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 have resulted in system interruptions,
miscalculations or failures causing disruptions of operations.
We completed 90% of our assessment phase of Year 2000 vulnerability early in
fiscal year 1998, and 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. We reviewed the assets acquired since our original assessment for
Year 2000 compliance. This included the acquisition of other companies, as
well as procurement and service arrangements. We completed testing, modifying
and replacement of existing systems and related hardware which did not
properly interpret dates beyond December 31, 1999 in November 1999.
We also initiated communications with our significant vendors, suppliers,
and financial institutions to determine the extent to which we were vulnerable
to those third-parties' failure to be Year 2000 compliant. Based on these
communications we did not anticipate any material effects related to vendor,
supplier, or financial institution compliance. Additionally, due to the nature
of our business, Year 2000 compliance with respect to our customers was not
relevant.
We implemented a Year 2000 contingency plan which provided for emergency
technical and system support, business interruption plans and alternative
procedures related to credit card processing, store accounting and payroll
processing. We also expanded help desk coverage at our support center on the
January 1st weekend.
The direct and indirect costs of Year 2000 compliance were not material to
our operations or operating results. Our expenditures, which were funded
through operating cash flow, consisted primarily of internal costs and
expenses associated with third-party contractors and totaled approximately
$350,000. We do not anticipate any additional spending during fiscal 2000.
28
As a result of the efforts discussed above, we successfully avoided any
significant disruption from the Year 2000 issue related to the century
rollover. We will continue to monitor all critical systems for the appearance
of delayed complications or disruptions as well as problems relating to the
leap year. We do not anticipate any material effect on our results of
operations or financial condition resulting from the Year 2000 issue.
Recently Issued Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June 1999, the
effective date of SFAS No. 133 was extended for one year and consequently the
statement is now effective for the first fiscal quarter of fiscal 2001.
Earlier application of all of the provisions of SFAS No. 133 is encouraged. As
of December 30, 1999, we have not evaluated the effect SFAS No. 133 on our
consolidated financial statements, however, we do not believe adoption of this
accounting standard will have a material impact on our financial condition.
Inflation
As reported by the Bureau of Labor Statistics the consumer price index for
the category labeled "cigarettes" increased approximately 33.4% during fiscal
1999 and an additional 3.0% during the three months ending December 30, 1999.
The largest increase occurred on November 23, 1998, when major cigarette
manufacturers increased prices by $0.45 per pack. In September 1999,
manufacturers raised cigarette prices an additional $0.10 per pack. In
general, we have passed price increases to our customers. However, during the
quarter as in previous quarters, major cigarette manufacturers offered rebates
to retailers, and we passed along those rebates to our customers. For the
first quarter of fiscal 2000 we estimate that cigarette inflation accounted
for 3%-4% of the 11.7% increase in comparable store merchandise sales.
During the three months ending December 30, 1999, wholesale gasoline fuel
prices continued to increase. Average cost per barrel for the three months
ending December 30, 1999 were $25 compared to $13 per barrel for the quarter
ending December 24, 1998. Generally we pass along wholesale gasoline cost
changes to our customers through retail price changes. Gasoline price
inflation has had an impact on total revenue, gross profit dollars and gross
margin percentage.
General CPI, excluding energy, increased 0.62% during the three months
ending December 30, 1999 and food at home, which is most indicative of our
merchandise inventory, increased 0.67%. While we have generally been able to
pass along these price increases to our customers, we make no assurances that
continued inflation will not have a material adverse effect on our sales and
gross profit dollars.
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. 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,
our industry, and related economic conditions, include among other things:
.Our anticipated acquisitions and growth strategies
.Anticipated trends in our business
.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 control costs, including our ability to achieve cost savings
in connection with our acquisitions
29
We have tried, whenever possible, to identify forward-looking statements by
using words such as "anticipate," "believe," "estimate," "expect," "intend,"
and similar expressions. These forward-looking statements are subject to
numerous risks and uncertainties, including without limitation 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 Exhibit 99.1 to this Quarterly
Report on Form 10-Q. As a result of these risks, actual results may differ
from these forward-looking statements included in this Quarterly Report on
Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Quantitative Disclosures. We are exposed to market risks inherent in our
financial instruments. These instruments arise from transactions entered into
in the normal course of business and, in some cases, relate to our
acquisitions of related businesses. We are subject to interest rate risk on
our existing long-term debt and any future financing requirements. Our fixed
rate debt consists primarily of outstanding balances on our senior
subordinated notes and our variable rate debt relates to borrowings under the
1999 bank credit facility.
In order to reduce our exposure to interest rate fluctuations we have
entered into two interest rate swap arrangements, in which we agree to
exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated by reference to an agreed upon notional amount.
The interest rate differential is reflected as an adjustment to interest
expense over the life of the swaps. On March 2, 1999, we entered into a swap
arrangement with a notional amount of $45 million that fixes our Eurodollar
rate at 5.62% through January 2001. On November 30, 1999, we entered into a
swap arrangement with a notional amount of $50 million that fixes our
Eurodollar rate at 6.28% through November 2001.
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 February
2, 2000.
Expected Maturity Date (as of December 30, 1999)
Fiscal Fiscal Fiscal Fiscal Fiscal Fair
2000 2001 2002 2003 2004 Thereafter Total Value
------- ------- ------- ------- ------- ---------- -------- --------
Long-term debt.......... $21,436 $18,689 $21,693 $24,947 $38,257 $387,601 $512,623 $502,876
Weighted average
Interest rate......... 9.94% 10.00% 10.08% 10.11% 10.13% 10.21% 10.09%
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, and
. the impact of interest rate movements on our ability to obtain adequate
financing to fund future acquisitions.
We manage interest rate risk on our outstanding long-term and short-term
debt through our use of fixed and variable rate debt. We expect the interest
rate swaps mentioned above will reduce our exposure to short-term interest
rate fluctuations. While we cannot predict or manage our ability to refinance
existing debt or the impact interest rate movements will have on our existing
debt, management evaluates our financial position on an ongoing basis.
30
PART II--OTHER INFORMATION.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule.
99.1 Risk Factors
(b) Reports on Form 8-K.
(1) On October 5, 1999, The Pantry filed a Current Report on Form 8-K/A
(Amendment No. 1) which provided the following financial statements for the
acquisition of 100% of the outstanding capital stock of R&H Maxxon, Inc
("Maxxon") on July 22, 1999:
Audited financial statements of Maxxon as of June 30, 1999, 1998 and
1997, and for each of the three years in the period ended June 30, 1999:
(1) Report of Independent Certified Public Accountants
(2) Balance Sheets
(3) Statements of Income
(4) Statements of Changes in Stockholders' Equity
(5) Statements of Cash Flows
(6) Notes to Financial Statements
Unaudited pro forma consolidated financial data:
(1) Introduction to Unaudited Pro Forma Data
(2) Unaudited Pro Forma Balance Sheet Data as of June 24, 1999
(3) Notes to Unaudited Pro Forma Balance Sheet Data
(4) Unaudited Pro Forma Statement of Operations Data for the Nine-
Month Period Ended June 24, 1999
(5) Unaudited Pro Forma Statement of Operations Data for the Year
Ended September 24, 1998
(6) Notes to Unaudited Pro Forma Statement of Operations Data
(2) On November 25, 1999, The Pantry filed a Current Report on Form 8-K
announcing its acquisition of 100% of the outstanding stock of Kangaroo,
Inc ("Kangaroo") on November 11, 1999.
(3) On January 3, 2000, The Pantry filed a Current Report on Form 8-K/A
(Amendment No. 2) to amend and restate Item 7 to its Current Report on Form
8-K/A, filed on October 5, 1999, to revise footnote (k) to the Notes to
Unaudited Pro Forma Statement of Operations Data to reflect an accounting
adjustment to third quarter financial results for The Pantry.
(4) On January 25, 2000, The Pantry filed a Current Report on Form 8-K/A
(Amendment No. 1) which provided the following financial statements for the
acquisition of 100% of the outstanding capital stock of Kangaroo on
November 11, 1999:
Audited financial statements of Kangaroo as of October 31, 1999 and 1998,
and for each of the two years in the period ended October 31, 1999:
(1) Report of Independent Auditor's Report
(2) Balance Sheets
31
(3) Statements of Income and Retained Earnings
(4) Statements of Cash Flows
(5) Notes to Financial Statements
Unaudited pro forma financial data:
(1) Introduction to Unaudited Pro Forma Financial Data
(2) Unaudited Pro Forma Balance Sheet Data as of September 30, 1999
(3) Notes to Unaudited Pro Forma Balance Sheet Data
(4) Unaudited Pro Forma Statement of Operations Data for the Year
Ended September 30, 1999
(5) Notes to Unaudited Pro Forma Statements of Operations Data
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PANTRY, INC.
Date: February 14, 2000
/s/ WILLIAM T. FLYG
By: _________________________________
William T. Flyg
Senior Vice President Finance and
Secretary
(Authorized Officer and Principal
Financial Officer)
33
EXHIBIT INDEX
Exhibit No. Description of Document
----------- -----------------------
27.1 Financial Data Schedule.
99.1 Risk Factors.
34