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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 MARCH 30, 2000
COMMISSION FILE NUMBER 33-72574
THE PANTRY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1574463
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1801 DOUGLAS DRIVE, SANFORD, NORTH CAROLINA
(Address of principal executive offices)
27330
(Zip Code)
(919) 774-6700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $0.01 PAR VALUE 18,111,474 SHARES
(Class) (Outstanding at May 8, 2000)
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THE PANTRY, INC.
FORM 10-Q
MARCH 30, 2000
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.................................................... 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 32
Part II -- Other Information
Item 4. Submission of Matters to a Vote of Security Holders................ 34
Item 6. Exhibits and Reports on Form 8-K................................... 34
PART I -- FINANCIAL INFORMATION.
Item 1. Financial Statements.
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
September 30, March 30,
1999 2000
------------- ----------
(Audited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................... $ 31,157 $ 72,567
Receivables (net of allowances for doubtful accounts
of $776 at September 30, 1999 and $781 at
March 30, 2000).................................... 24,234 25,645
Inventories (Note 3)................................ 76,237 84,454
Income taxes receivable............................. -- 1,354
Prepaid expenses.................................... 3,497 3,561
Property held for sale.............................. 135 282
Deferred income taxes, net.......................... 4,849 4,849
-------- --------
Total current assets................................ 140,109 192,712
-------- --------
Property and equipment, net.......................... 421,685 446,756
-------- --------
Other assets:
Goodwill (net of accumulated amortization of $18,324
at September 30, 1999 and $21,891 at
March 30, 2000).................................... 197,705 227,479
Deferred financing cost (net of accumulated
amortization of $3,499 at September 30, 1999 and
$4,500 at March 30, 2000).......................... 12,680 13,645
Environmental receivables (Note 4).................. 13,136 13,063
Other noncurrent assets............................. 8,403 9,879
-------- --------
Total other assets.................................. 231,924 264,066
-------- --------
Total assets....................................... $793,718 $903,534
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 5)....... $ 10,687 $ 26,982
Current maturities of capital lease obligations..... 1,205 1,205
Accounts payable.................................... 89,124 103,955
Accrued interest.................................... 9,928 11,902
Accrued compensation and related taxes.............. 8,042 9,455
Income tax payable.................................. 5,004 --
Other accrued taxes................................. 13,834 9,789
Accrued insurance................................... 8,820 8,954
Other accrued liabilities........................... 20,976 20,867
-------- --------
Total current liabilities........................... 167,620 193,109
-------- --------
Long-term debt (Note 5).............................. 430,220 508,985
-------- --------
Other noncurrent liabilities:
Environmental reserves (Note 4)..................... 15,402 14,495
Deferred income taxes............................... 26,245 26,763
Deferred revenue.................................... 28,729 36,662
Capital lease obligations........................... 13,472 12,896
Employment obligations.............................. 486 238
Other noncurrent liabilities........................ 7,347 6,655
-------- --------
Total other noncurrent liabilities.................. 91,681 97,709
-------- --------
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 March 30, 2000,
respectively........................................ 182 182
Additional paid in capital........................... 128,256 128,018
Shareholder loans.................................... (937) (912)
Accumulated deficit.................................. (23,304) (23,557)
-------- --------
Total shareholders' equity.......................... 104,197 103,731
-------- --------
Total liabilities and shareholders' equity......... $793,718 $903,534
======== ========
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 Six Months Ended
-------------------- --------------------
March 25, March 30, March 25, March 30,
1999 2000 1999 2000
---------- --------- --------- ---------
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
Revenues:
Merchandise sales............... $164,572 $215,161 $303,962 $ 424,652
Gasoline sales.................. 189,128 361,674 360,917 685,823
Commissions..................... 6,092 7,274 10,520 14,024
-------- -------- -------- ---------
Total revenues................ 359,792 584,109 675,399 1,124,499
-------- -------- -------- ---------
Cost of sales:
Merchandise..................... 110,372 143,616 204,825 282,716
Gasoline........................ 165,859 335,513 314,633 627,919
-------- -------- -------- ---------
Total cost of sales........... 276,231 479,129 519,458 910,635
-------- -------- -------- ---------
Gross profit...................... 83,561 104,980 155,941 213,864
-------- -------- -------- ---------
Operating expenses:
Store expenses.................. 51,486 66,494 95,215 130,784
General and administrative
expenses....................... 12,388 15,760 22,356 31,386
Depreciation and amortization... 9,640 13,834 17,830 27,295
-------- -------- -------- ---------
Total operating expenses...... 73,514 96,088 135,401 189,465
-------- -------- -------- ---------
Income from operations............ 10,047 8,892 20,540 24,399
-------- -------- -------- ---------
Other income (expense):
Interest........................ (9,961) (13,385) (18,873) (25,107)
Miscellaneous................... 312 (21) 128 257
-------- -------- -------- ---------
Total other expense........... (9,649) (13,406) (18,745) (24,850)
-------- -------- -------- ---------
Income before income taxes and
extraordinary loss............... 398 (4,514) 1,795 (451)
Income tax (expense) benefit...... (386) 1,986 (718) 198
-------- -------- -------- ---------
Income (loss) before extraordinary
loss............................. 12 (2,528) 1,077 (253)
Extraordinary loss................ (3,557) -- (3,557) --
-------- -------- -------- ---------
Net loss.......................... $ (3,545) $ (2,528) $ (2,480) $ (253)
======== ======== ======== =========
Net loss applicable to common
shareholders (Note 7)............ $ (4,279) $ (2,528) $ (3,926) $ (253)
======== ======== ======== =========
Earnings per share (Note 7):
Basic........................... $ (0.36) $ (0.14) $ (0.33) $ (0.01)
Diluted......................... $ (0.36) $ (0.14) $ (0.33) $ (0.01)
See Notes to Consolidated Financial Statements.
3
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Six Months Ended
----------------------
March 25, March 30,
1999 2000
---------- ----------
(26 weeks) (26 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $ (2,480) $ (253)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Extraordinary loss..................................... 3,405 --
Depreciation and amortization.......................... 17,830 27,295
Provision for deferred income taxes.................... 120 515
(Gain) loss on sale of property and equipment.......... (410) 2,184
Reserves for environmental expenses.................... 48 (907)
Changes in operating assets and liabilities, net of
effects of acquisitions:
Receivables............................................ (948) 20
Inventories............................................ (4,628) (2,914)
Prepaid expenses....................................... (18) 402
Other noncurrent assets................................ (2,216) 375
Accounts payable....................................... 7,911 7,833
Other current liabilities and accrued expenses......... (5,686) (9,255)
Other noncurrent liabilities........................... 477 6,649
--------- --------
Net cash provided by operating activities............ 13,405 31,944
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale.................... (93) (655)
Additions to property and equipment.................... (23,166) (21,718)
Proceeds from sale of property held for sale........... 1,495 4,093
Proceeds from sale of property and equipment........... 376 1,148
Acquisitions of related businesses, net of cash
acquired.............................................. (129,900) (65,688)
--------- --------
Net cash used in investing activities................ (151,288) (82,820)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases.............. (631) (576)
Principal repayments of long-term debt................. (143,999) (52,940)
Proceeds from issuance of long-term debt............... 275,000 148,000
Net proceeds from equity issues........................ 1,068 (213)
Other financing costs.................................. (2,960) (1,985)
--------- --------
Net cash provided by financing activities............ 128,478 92,286
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... (9,405) 41,410
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......... 34,404 31,157
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 24,999 $ 72,567
========= ========
See Notes to Consolidated Financial Statements.
4
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
Six Months Ended
---------------------
March 25, March 30,
1999 2000
---------- ----------
(26 weeks) (26 weeks)
Cash paid during the year:
Interest............................................... $19,791 $23,133
======= =======
Taxes.................................................. $ 302 $13,217
======= =======
5
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- The Company and Recent Developments
Unaudited Consolidated Financial Statements
The accompanying consolidated financial statements include the accounts of
The Pantry, Inc. and its wholly-owned subsidiaries. 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
March 30, 2000 and for the three and six months ended March 30, 2000 and March
25, 1999 are unaudited. References herein to "The Pantry" or "the Company"
shall include all subsidiaries. Pursuant to Regulation S-X, certain
information and note disclosures normally included in annual financial
statements have been condensed or omitted. The information furnished reflects
all adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented, and which are of a
normal, recurring nature.
We suggest that these interim financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in
our Annual Report on Form 10-K for the fiscal year ended September 30, 1999,
our Registration Statement on Form S-1 (No. 333-74221), as amended, our
Current Reports on Form 8-K and 8-K/A, and our Quarterly Reports on Form 10-Q
and 10-Q/A for the period ended December 30, 1999, as amended.
Our results of operations for the three and six months ended March 30, 2000
and March 25, 1999 are not necessarily indicative of results to be expected
for the full fiscal year. Our results of operations and comparisons with prior
and subsequent quarters are materially impacted by the results of operations
of businesses acquired since September 24, 1998. These acquisitions have been
accounted for under the purchase method. See "Note 2-- Business Acquisitions."
Furthermore, the convenience store industry in our marketing areas experiences
higher levels of revenues and profit margins during the summer months than
during the winter months. Historically, we have achieved higher revenues and
earnings in our third and fourth quarters. We operate on a 52-53 week fiscal
year ending on the last Thursday in September. Our 2000 fiscal year ends on
September 28, 2000 and is a 52 week year while our 1999 fiscal year was 53
weeks.
The Pantry
As of March 30, 2000, we operated approximately 1,268 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 1,214 locations, 952 of
which sell gasoline under brand names including Amoco, British Petroleum,
Chevron, Citgo, Exxon, Shell, and Texaco.
6
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2 -- Business Acquisitions:
During the six months ended March 30, 2000, we acquired the businesses
described below (the "2000 acquisitions"). These acquisitions were accounted
for by the purchase method of accounting:
Fiscal 2000 Acquisitions
Date Acquired Trade Name Locations Stores
- ------------- ----------- --------- ------
January 27, 2000........ On-The-Way North Carolina and Southern Virginia 12
November 11, 1999....... Kangaroo Georgia 49
November 4, 1999........ Cel Oil Charleston, South Carolina 7
October 7, 1999......... Wicker Mart North Carolina 7
Others (less than five
stores)................ Various Florida and South Carolina 4
---
Total.................................................................... 79
---
During fiscal 1999, we acquired the businesses described below (the "1999
acquisitions"). These acquisitions were accounted for by the purchase method
of accounting:
Fiscal 1999 Acquisitions
Date Acquired Trade Name Locations Stores
- ------------- ------------ --------- ------
July 22, 1999........... Depot Food South Carolina and Northern Georgia 53
July 8, 1999............ Food Chief Eastern South Carolina 29
February 25, 1999....... ETNA North Carolina and Virginia 60
January 28, 1999........ Handy Way North Central Florida 121
November 5, 1998........ Express Stop Southeast North Carolina and Eastern South 22
Carolina
October 22, 1998........ Dash-N East Central North Carolina 10
Others (less than five
stores)................ Various North Carolina and South Carolina 2
---
Total........................................................................... 297
---
The purchase price allocations for the 2000 acquisitions are preliminary
estimates, based on available information and certain assumptions management
believes are reasonable. Accordingly, such purchase price allocations are
subject to finalization. Goodwill associated with the 1999 acquisitions and
the 2000 acquisitions is being amortized over 30 years using the straight-line
method.
7
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Purchase prices of 2000 acquisitions have been allocated to the assets
purchased and the liabilities assumed based on the fair values on the dates of
the acquisitions as follows (amounts in thousands):
Assets Acquired:
Receivables..................................................... $ 1,464
Inventories..................................................... 5,303
Prepaid expenses................................................ 466
Property held for sale.......................................... 3,586
Property and equipment.......................................... 29,181
Other noncurrent assets......................................... 1,858
-------
Total assets.................................................. 41,358
-------
Liabilities Assumed:
Accounts payable................................................ 6,998
Other current liabilities and accrued expenses.................. 2,016
Other noncurrent liabilities.................................... 594
-------
Total liabilities............................................. 9,608
-------
Net tangible assets acquired.................................... 32,250
Goodwill...................................................... 33,438
-------
Total consideration paid, including direct costs, net of cash
acquired.................................................... $65,688
=======
The following unaudited pro forma information presents a summary of
consolidated results of operations of The Pantry and acquired businesses as if
the transactions occurred at the beginning of the fiscal year for each of the
periods presented (amounts in thousands, except per share data):
Six Months Ended
---------------------
March 25, March 30,
1999 2000
--------- ----------
Total revenues...................................... $947,873 $1,140,875
Income (loss) before extraordinary loss............. 689 (399)
Net loss............................................ (2,868) (399)
Net loss applicable to common shareholders.......... (4,314) (399)
Earnings per share applicable to common
shareholders:
Basic:
Loss before extraordinary item $ (0.06) $ (0.02)
Extraordinary item................................ (0.30) --
-------- ----------
Net loss.......................................... $ (0.36) $ (0.02)
======== ==========
Diluted:
Loss before extraordinary item.................... $ (0.06) $ (0.02)
Extraordinary item................................ (0.30) --
-------- ----------
Net loss.......................................... $ (0.36) $ (0.02)
======== ==========
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, March 30,
1999 2000
------------- ---------
Inventories at FIFO cost:
Merchandise......................................... $63,941 $70,024
Gasoline............................................ 22,431 26,236
------- -------
86,372 96,260
Less adjustment to LIFO cost:
Merchandise......................................... (10,135) (11,806)
------- -------
Inventories at LIFO cost............................ $76,237 $84,454
======= =======
Inventories are net of estimated obsolescence reserves of approximately
$200,000 at September 30, 1999 and March 30, 2000, respectively.
Note 4 -- Environmental Liabilities and Other Contingencies
As of March 30, 2000, we were contingently liable for outstanding letters of
credit in the amount of $17.9 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 26, 1996, we have reached a settlement with
the State of North Carolina. Under the settlement, we will reduce state net
economic loss carryforwards and pay $534,926 in additional tax. The settlement
is reflected in the financial statements as a reduction to state net economic
losses, a reduction of deferred tax assets and the related valuation
allowance. We are contesting the Tennessee assessment and believe that, in the
event of a mutual settlement, the assessment amount and related penalties of
approximately $250,000 would be substantially reduced. Based on this, we
believe the outcome of the audits will not have a material adverse effect on
our financial condition or financial statements.
We are involved in certain legal actions arising in the normal course of
business. In the opinion of management, based on a review of such legal
proceedings, the ultimate outcome of these actions will not have a material
effect on the consolidated financial statements.
Environmental Liabilities and Contingencies
We are subject to various federal, state and local environmental laws. We
make financial expenditures in order to comply with regulations governing
underground storage tanks adopted by federal, state, and local regulatory
agencies. In particular, at the federal level, the Resource Conservation and
Recovery Act of 1976, as amended, requires the EPA to establish a
comprehensive regulatory program for the detection, prevention and cleanup of
leaking underground storage tanks.
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, Georgia and Virgina and a letter of credit in the aggregate amount
of approximately $1.1 million issued by a commercial bank in favor of state
environmental agencies in the states of Florida, Tennessee, Indiana and
Kentucky. We also rely upon the reimbursement provisions of applicable state
trust funds. In Florida, we meet our financial responsibility requirements by
state trust fund coverage through December 31, 1998. After that time we will
meet such requirements through a combination of private commercial liability
insurance and a letter of credit. In Georgia, we meet our financial
responsibility requirements by a combination of state trust fund coverage,
private commercial liability insurance and a surety bond.
Regulations enacted by the EPA in 1988 established requirements for:
. installing underground storage tank systems;
. upgrading underground storage tank systems;
. taking corrective action in response to releases;
. closing underground storage tank systems;
. keeping appropriate records; and
. maintaining evidence of financial responsibility for taking corrective
action and compensating third parties for bodily injury and property
damage resulting from releases.
These regulations permit states to develop, administer and enforce their own
regulatory programs, incorporating requirements which are at least as
stringent as the federal standards. The Florida rules for 1998 upgrades are
more stringent than the 1988 EPA regulations. We believe our facilities in
Florida meet or exceed such rules. We believe all company-owned underground
storage tank systems are in material compliance with these 1998 EPA
regulations and all applicable state environmental regulations.
State Trust Funds. All states in which we operate or have operated
underground storage tank systems have established trust funds for the sharing,
recovering and reimbursing of certain cleanup costs and liabilities incurred
as a result of releases from underground storage tank systems. These trust
funds, which essentially provide insurance coverage for the cleanup of
environmental damages caused by the operation of underground storage tank
systems, are funded by an underground storage tank registration fee and a tax
on the wholesale purchase of motor fuels within each state. We have paid
underground storage tank registration fees and gasoline taxes to each state
where we operate to participate in these trust programs and we have filed
claims and received reimbursement in North Carolina, South Carolina, Kentucky,
Indiana, Georgia, Florida and Tennessee. The coverage afforded by each state
fund varies but generally provides from $150,000 to $1.0 million per site for
the cleanup of environmental contamination, and most provide coverage for
third-party liabilities. Costs for which we do not receive reimbursement
include:
. the per-site deductible;
. costs incurred in connection with releases occurring or reported to trust
funds prior to their inception;
. removal and disposal of underground storage tank systems; and
. costs incurred in connection with sites otherwise ineligible for
reimbursement from the trust funds.
The trust funds require us to pay deductibles ranging from $10,000 to
$150,000 per occurrence depending on the upgrade status of our underground
storage tank system, the date the release is discovered/reported and the
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 regulations. During the next five
years, we may spend up to $1.4 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 $13.1 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 March 30, 2000, long-term debt consisted of the
following (in thousands):
September 30, March 30,
1999 2000
------------- ---------
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 (5.88% at March 30, 2000) plus
3.0%; principal due in quarterly installments
through January 31, 2004......................... 70,656 68,906
Term loan facility--Tranche B; interest payable
monthly at LIBOR (5.88% at March 30, 2000) plus
3.5%; principal due in quarterly installments
through January 31, 2006......................... 156,794 180,920
Term loan facility--Tranche C; interest payable
monthly at LIBOR (5.88% at March 30, 2000) plus
3.75%; principal due in quarterly installments
through January 31, 2006......................... -- 75,000
Acquisition facility; interest payable monthly at
LIBOR (5.88% at March 30, 2000) plus 3.5%;
principal due in quarterly installments through
January 31, 2004................................. 12,000 --
Revolving credit facility; interest payable
monthly at LIBOR (5.88% at March 30, 2000) plus
3.0%; principal due 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........... 1,185 889
Other notes payable; various interest rates and
maturity dates................................... 272 252
-------- --------
440,907 535,967
Less--current maturities.......................... (10,687) (26,982)
-------- --------
$430,220 $508,985
======== ========
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)
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 $324.8 million. As of March 30,
2000, total outstanding borrowings under our bank credit facility, as amended,
were $334.8 million.
During the second quarter, we borrowed 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.......................... $ 18,343
2001.......................... 18,984
2002.......................... 21,987
2003.......................... 25,241
2004.......................... 43,404
Thereafter.................... 408,008
--------
$535,967
========
As of March 30, 2000, we were in compliance with all covenants and
restrictions relating to all its outstanding borrowings.
As of March 30, 2000, substantially all of our net assets (which includes
those of our subsidiaries) are restricted as to payment of dividends and other
distributions.
Note 6 -- Shareholders' Equity
On June 8, 1999, the Company offered and sold 6,250,000 shares of common
stock, $0.01 par value per share, in our initial public offering. The initial
offering price was $13.00 per share and the Company received $75.6 million in
net proceeds, before expenses. The net proceeds were used: (i) to repay $19.0
million in indebtedness under our bank credit facility; (ii) to redeem $17.5
million in outstanding preferred stock; and (iii) to pay accrued dividends on
the preferred stock of $6.5 million. Of the remaining $32.6 million, $30.2
million was used to fund acquisitions closed subsequent during 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.
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
12
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (amounts in thousands, except per share
data).
Three Months Ended Six Months Ended
------------------- -------------------
March 25, March 30, March 25, March 30,
1999 2000 1999 2000
--------- --------- --------- ---------
Net loss applicable to common
shareholders:
Net income (loss) before extraordinary
loss................................. $ 12 $(2,528) $ 1,077 $ (253)
Dividends on preferred stock.......... (734) -- (1,446) --
------- ------- ------- -------
Loss applicable to common shareholders
before extraordinary loss............ $ (722) $(2,528) $ (369) $ (253)
Extraordinary loss.................... (3,557) -- (3,557) --
------- ------- ------- -------
Net income loss applicable to common
shareholders......................... $(4,279) $(2,528) $(3,926) $ (253)
======= ======= ======= =======
Earnings per share--basic:
Weighted-average shares outstanding... 11,864 18,111 11,857 18,111
Loss per share before extraordinary loss
per share --basic...................... $ (0.06) $ (0.14) $ (0.03) $ (0.01)
Extraordinary loss per share--basic..... (0.30) -- (0.30) --
------- ------- ------- -------
Net loss per share--basic............. $ (0.36) $ (0.14) $ (0.33) $ (0.01)
======= ======= ======= =======
Earnings per share--diluted:
Weighted-average shares outstanding... 11,864 18,111 11,857 18,111
Dilutive impact of options and
warrants
outstanding.......................... -- -- -- --
------- ------- ------- -------
Weighted-average shares and potential
dilutive shares outstanding.......... 11,864 18,111 11,857 18,111
======= ======= ======= =======
Loss per share before extraordinary
loss--diluted.......................... $ (0.06) $ (0.14) $ (0.03) $ (0.01)
Extraordinary loss per share--diluted... (0.30) -- (0.30) --
------- ------- ------- -------
Net loss per share--diluted............. $ (0.36) $ (0.14) $ (0.33) $ (0.01)
======= ======= ======= =======
13
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the quarter and six months ended March 30, 2000, 3,162,861 shares of
common stock were not included in the computation of diluted earnings per
share because the exercise prices of the options to purchase such shares were
greater than the average market price of our common stock for that period and
their inclusion would have been antidilutive.
Note 8 -- Supplemental Guarantor Information
The Pantry's wholly-owned subsidiaries Lil' Champ Food Stores, Inc.,
Sandhills, Inc. and Global Communications, Inc. and Lil' Champ Food Stores'
wholly-owned subsidiary Miller Enterprises, 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING BALANCE SHEETS
SEPTEMBER 30, 1999
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiaries 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, net...... 11,959 1,177 -- -- 13,136
Intercompany notes
receivable............ 248,650 49,705 17,124 (315,479) --
Other noncurrent
assets................ 3,782 4,053 568 -- 8,403
-------- -------- ------- --------- --------
Total other assets..... 404,127 125,584 17,692 (315,479) 231,924
-------- -------- ------- --------- --------
Total assets............ $780,988 $465,357 $42,267 $(494,894) $793,718
======== ======== ======= ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Current liabilities:
Current maturities of
long-term debt........ $ 10,370 $ 296 $ 21 $ -- $ 10,687
Current maturities of
capital lease
obligations........... 178 1,027 -- -- 1,205
Accounts payable:
Trade................. 50,866 31,360 2,919 (134) 85,011
Money orders.......... 775 3,338 -- -- 4,113
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
Employment
obligations........... 486 -- -- -- 486
Intercompany notes
payable............... 68,829 249,715 3,997 (322,541) --
Other noncurrent
liabilities........... 2,968 4,143 36 200 7,347
-------- -------- ------- --------- --------
Total other noncurrent
liabilities........... 112,871 295,449 5,702 (322,341) 91,681
-------- -------- ------- --------- --------
SHAREHOLDERS' EQUITY:
Common stock........... 182 1 5,001 (5,002) 182
Additional paid-in
capital............... 128,256 6,882 24,212 (31,094) 128,256
Shareholder loans...... (937) -- -- -- (937)
Accumulated earnings
(deficit)............. (23,304) 82,248 (500) (81,748) (23,304)
-------- -------- ------- --------- --------
Total shareholders'
equity................ 104,197 89,131 28,713 (117,844) 104,197
-------- -------- ------- --------- --------
Total liabilities and
shareholders' equity... $780,988 $465,357 $42,267 $(494,894) $793,718
======== ======== ======= ========= ========
15
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING BALANCE SHEETS
MARCH 30, 2000
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in Thousands)
ASSETS
Current assets:
Cash and cash
equivalents........... $ 49,881 $ 21,275 $ 1,411 $ -- $ 72,567
Receivables, net....... 46,380 72,109 4,276 (97,120) 25,645
Inventories............ 47,988 36,466 -- -- 84,454
Income taxes
receivable............ 1,354 -- -- -- 1,354
Prepaid expenses....... 2,475 736 350 -- 3,561
Property held for
sale.................. 282 -- -- -- 282
Deferred income taxes,
net................... 2,220 2,621 8 -- 4,849
-------- -------- ------- --------- --------
Total current assets... 150,580 133,207 6,045 (97,120) 192,712
-------- -------- ------- --------- --------
Investment in
subsidiaries........... 130,848 -- -- (130,848) --
-------- -------- ------- --------- --------
Property and equipment,
net.................... 185,676 244,829 16,251 -- 446,756
-------- -------- ------- --------- --------
Other assets:
Goodwill, net.......... 156,115 71,364 -- -- 227,479
Deferred financing
cost, net............. 13,645 -- -- -- 13,645
Environmental
receivables, net...... 11,959 1,104 -- -- 13,063
Intercompany notes
receivable............ 252,213 49,705 17,124 (319,042) --
Other noncurrent
assets................ 5,501 3,978 568 (168) 9,879
-------- -------- ------- --------- --------
Total other assets..... 439,433 126,151 17,692 (319,210) 264,066
-------- -------- ------- --------- --------
Total assets............ $906,537 $504,187 $39,988 $(547,178) $903,534
======== ======== ======= ========= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Current liabilities:
Current maturities of
long-term debt........ $ 26,665 $ 296 $ 21 $ -- $ 26,982
Current maturities of
capital lease
obligations........... 178 1,027 -- -- 1,205
Accounts payable....... 61,279 42,862 -- (186) 103,955
Accrued interest....... 20,643 -- 1 (8,742) 11,902
Accrued compensation
and related taxes..... 5,147 4,307 1 -- 9,455
Income taxes payable... -- 21,023 (145) (20,878) --
Other accrued taxes.... 2,452 7,337 -- -- 9,789
Accrued insurance...... 3,504 5,450 -- -- 8,954
Other accrued
liabilities........... 57,272 17,404 119 (53,928) 20,867
-------- -------- ------- --------- --------
Total current
liabilities........... 177,140 99,706 (3) (83,734) 193,109
-------- -------- ------- --------- --------
Long-term debt.......... 508,307 592 86 -- 508,985
-------- -------- ------- --------- --------
Other noncurrent
liabilities:
Environmental
expenses.............. 12,391 2,104 -- -- 14,495
Deferred income taxes.. 3,265 21,829 1,669 -- 26,763
Deferred revenue....... 25,654 11,008 -- -- 36,662
Capital lease
obligations........... 3,973 8,923 -- -- 12,896
Employment
obligations........... 238 -- -- -- 238
Intercompany notes
payable............... 68,828 251,879 9,386 (330,095) --
Other noncurrent
liabilities........... 3,010 3,612 35 -- 6,655
-------- -------- ------- --------- --------
Total other noncurrent
liabilities........... 117,359 299,355 11,090 (330,095) 97,709
-------- -------- ------- --------- --------
SHAREHOLDERS' EQUITY:
Common stock........... 182 1 5,001 (5,002) 182
Additional paid-in
capital............... 128,018 6,882 24,212 (31,094) 128,018
Shareholder loans...... (912) -- -- -- (912)
Accumulated earnings
(deficit)............. (23,557) 97,651 (398) (97,253) (23,557)
-------- -------- ------- --------- --------
Total shareholders'
equity................ 103,731 104,534 28,815 (133,349) 103,731
-------- -------- ------- --------- --------
Total liabilities and
shareholders equity.... $906,537 $504,187 $39,988 $(547,178) $903,534
======== ======== ======= ========= ========
16
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 25, 1999
Total
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in Thousands)
Revenues:
Merchandise sales..... $ 86,920 $ 77,652 $ -- $ -- $164,572
Gasoline sales........ 105,111 84,017 -- -- 189,128
Commissions........... 3,786 2,306 -- -- 6,092
-------- -------- ----- ------- --------
Total revenues...... 195,817 163,975 -- -- 359,792
-------- -------- ----- ------- --------
Cost of sales:
Merchandise........... (58,745) $ 51,627 -- -- 110,372
Gasoline.............. (93,108) 72,751 -- -- 165,859
-------- -------- ----- ------- --------
Total cost of
sales.............. 151,853 124,378 -- -- 276,231
-------- -------- ----- ------- --------
Gross profit............ 43,964 39,597 -- -- 83,561
-------- -------- ----- ------- --------
Operating expenses:
Store expenses........ 33,496 23,802 (60) (5,752) 51,486
General and
administrative
expenses............. 6,174 6,208 6 -- 12,388
Depreciation and
amortization......... 4,583 5,056 1 -- 9,640
-------- -------- ----- ------- --------
Total operating
expenses........... 44,253 35,066 (53) (5,752) 73,514
-------- -------- ----- ------- --------
Income (loss) from
operations............. (289) 4,531 53 5,752 10,047
-------- -------- ----- ------- --------
Equity in earnings of
subsidiaries........... 6,425 16 -- (6,441) --
-------- -------- ----- ------- --------
Other income (expense):
Interest expense...... (5,792) (5,447) (2) 1,280 (9,961)
Miscellaneous......... 54 7,235 38 (7,015) 312
-------- -------- ----- ------- --------
Total other income
(expense).......... (5,738) 1,788 36 (5,735) (9,649)
-------- -------- ----- ------- --------
Income (loss) before
income taxes and
extraordinary loss..... 398 6,335 89 (6,424) 398
Income tax benefit
(expense).............. (386) (2,306) (34) 2,340 (386)
-------- -------- ----- ------- --------
Net income (loss) before
extraordinary item..... 12 4,029 55 (4,084) 12
Extraordinary loss...... (3,557) -- -- -- (3,557)
-------- -------- ----- ------- --------
Net income (loss)....... (3,545) 4,029 55 (4,084) (3,545)
Preferred dividends..... (734) -- -- -- (734)
-------- -------- ----- ------- --------
Net income (loss)
applicable to common
shareholders........... $ (4,279) $ 4,029 $ 55 $(4,084) $ (4,279)
======== ======== ===== ======= ========
17
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 30, 2000
Total
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------- ------------ -------
(Dollars in Thousands)
Revenues:
Merchandise sales..... 122,782 92,379 -- -- 215,161
Gasoline sales........ 231,923 129,751 -- -- 361,674
Commissions........... 4,530 2,744 -- -- 7,274
------- ------- --- ------- -------
Total revenues...... 359,235 224,874 -- -- 584,109
------- ------- --- ------- -------
Cost of sales:
Merchandise........... 83,707 59,909 -- -- 143,616
Gasoline.............. 215,360 120,153 -- -- 335,513
------- ------- --- ------- -------
Total cost of
sales.............. 299,067 180,062 -- -- 479,129
------- ------- --- ------- -------
Gross profit............ 60,168 44,812 -- -- 104,980
------- ------- --- ------- -------
Operating expenses:
Store expenses........ 51,026 26,108 (62) (10,578) 66,494
General and
administrative
expenses............. 8,446 7,301 13 -- 15,760
Depreciation and
amortization......... 8,012 5,820 2 -- 13,834
------- ------- --- ------- -------
Total operating
expenses........... 67,484 39,229 (47) (10,578) 96,088
------- ------- --- ------- -------
Income (loss) from
operations............. (7,316) 5,583 47 10,578 8,892
------- ------- --- ------- -------
Equity in earnings of
subsidiaries........... 11,480 -- -- (11,480) --
------- ------- --- ------- -------
Other income (expense):
Interest expense...... (8,607) (6,099) (2) 1,323 (13,385)
Miscellaneous......... (71) 11,881 69 (11,900) (21)
------- ------- --- ------- -------
Total other income
(expense).......... (8,678) 5,782 67 (10,577) (13,406)
------- ------- --- ------- -------
Income (loss) before
income taxes and
extraordinary loss..... (4,514) 11,365 114 (11,479) (4,514)
Income tax benefit
(expense).............. 1,986 (3,820) (55) 3,875 1,986
------- ------- --- ------- -------
Net income (loss)
applicable to common
shareholders........... $(2,528) $ 7,545 $59 $(7,604) $(2,528)
======= ======= === ======= =======
18
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 25, 1999
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in Thousands)
Revenues:
Merchandise sales..... $170,297 $133,665 $ -- $ -- $303,962
Gasoline sales........ 212,186 148,731 -- -- 360,917
Commissions........... 6,294 4,226 -- -- 10,520
-------- -------- ----- ------- --------
Total revenues...... 388,777 286,622 -- -- 675,399
-------- -------- ----- ------- --------
Cost of sales:
Merchandise........... 115,711 89,114 -- -- 204,825
Gasoline.............. 186,555 128,078 -- -- 314,633
-------- -------- ----- ------- --------
Total cost of
sales.............. 302,266 217,192 -- -- 519,458
-------- -------- ----- ------- --------
Gross profit............ 86,511 69,430 -- -- 155,941
-------- -------- ----- ------- --------
Operating expenses:
Store expenses........ 65,635 41,158 (121) (11,457) 95,215
General and
administrative
expenses............. 11,849 10,496 11 -- 22,356
Depreciation and
amortization......... 9,119 8,708 3 -- 17,830
-------- -------- ----- ------- --------
Total operating
expenses........... 86,603 60,362 (107) (11,457) 135,401
-------- -------- ----- ------- --------
Income (loss) from
operations............. (92) 9,068 107 11,457 20,540
-------- -------- ----- ------- --------
Equity in earnings of
subsidiaries........... 13,677 16 -- (13,693) --
-------- -------- ----- ------- --------
Other income (expense):
Interest.............. (11,564) (9,819) (5) 2,515 (18,873)
Miscellaneous......... (226) 14,237 72 (13,955) 128
-------- -------- ----- ------- --------
Total other income
(expense).......... (11,790) 4,418 67 (11,440) (18,745)
-------- -------- ----- ------- --------
Income (loss) before
income taxes and
extraordinary item..... 1,795 13,502 174 (13,676) 1,795
Income tax benefit
(expense).............. (718) (4,717) (89) 4,806 (718)
-------- -------- ----- ------- --------
Net income (loss) before
extraordinary loss..... 1,077 8,785 85 (8,870) 1,077
Extraordinary loss...... (3,557) -- -- -- (3,557)
-------- -------- ----- ------- --------
Net income (loss)....... (2,480) 8,785 85 (8,870) (2,480)
Preferred dividends..... (1,446) -- -- -- (1,446)
-------- -------- ----- ------- --------
Net income (loss)
applicable to common
shareholders........... $ (3,926) $ 8,785 $ 85 $(8,870) $ (3,926)
======== ======== ===== ======= ========
19
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 30, 2000
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------- ------------ ----------
(Dollars in Thousands)
Revenues:
Merchandise sales..... $243,375 $181,277 $ -- $ -- $ 424,652
Gasoline sales........ 443,211 242,612 -- -- 685,823
Commissions........... 8,598 5,426 -- -- 14,024
-------- -------- ----- -------- ----------
Total revenues...... 695,184 429,315 -- -- 1,124,499
-------- -------- ----- -------- ----------
Cost of sales:
Merchandise........... 164,525 118,191 -- -- 282,716
Gasoline.............. 406,725 221,194 -- -- 627,919
-------- -------- ----- -------- ----------
Total cost of
sales.............. 571,250 339,385 -- -- 910,635
-------- -------- ----- -------- ----------
Gross profit............ 123,934 89,930 -- -- 213,864
-------- -------- ----- -------- ----------
Operating expenses:
Store expenses........ 99,153 52,265 (123) (20,511) 130,784
General and
administrative
expenses............. 17,314 14,053 19 -- 31,386
Depreciation and
amortization......... 15,921 11,371 3 -- 27,295
-------- -------- ----- -------- ----------
Total operating
expenses........... 132,388 77,689 (101) (20,511) 189,465
-------- -------- ----- -------- ----------
Income (loss) from
operations............. (8,454) 12,241 101 20,511 24,399
-------- -------- ----- -------- ----------
Equity in earnings of
subsidiaries........... 23,595 -- -- (23,595) --
-------- -------- ----- -------- ----------
Other income (expense):
Interest expense...... (15,522) (12,190) (4) 2,609 (25,107)
Miscellaneous......... (70) 23,337 111 (23,121) 257
-------- -------- ----- -------- ----------
Total other income
(expense).......... (15,592) 11,147 107 (20,512) (24,850)
-------- -------- ----- -------- ----------
Income (loss) before
income taxes........... (451) 23,388 208 (23,596) (451)
Income tax benefit
(expense).............. 198 (7,971) (106) 8,077 198
-------- -------- ----- -------- ----------
Net income (loss)
applicable to common
shareholders........... $ (253) $ 15,417 $ 102 $(15,519) $ (253)
======== ======== ===== ======== ==========
20
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 25, 1999
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------- ------------ --------
(Dollars in Thousands)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)....... $ (2,480) $ 8,785 $ 85 $ (8,870) $ (2,480)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Extraordinary loss.... 3,405 -- -- -- 3,405
Depreciation and
amortization......... 9,119 8,708 3 -- 17,830
Provision for deferred
income taxes......... (136) 256 -- -- 120
(Gain) Loss on sale of
property and
equipment............ (741) 344 -- (13) (410)
Reserves for
environmental
issues............... 79 (31) -- -- 48
Equity earnings of
affiliates........... (8,950) -- -- 8,950 --
Changes in operating
assets and liabilities,
net:
Receivables........... (9,311) (7,685) 569 15,479 (948)
Inventories........... (3,668) (960) -- -- (4,628)
Prepaid expenses...... (44) 31 (5) -- (18)
Other noncurrent
assets............... (218) (2,011) -- 13 (2,216)
Accounts payable...... 6,914 997 -- -- 7,911
Other current
liabilities and
accrued expenses..... 16,036 (9,863) (490) (11,369) (5,686)
Employment
obligations.......... (185) -- -- -- (185)
Other noncurrent
liabilities.......... 2,999 (1,703) (1) (633) 662
-------- -------- ------ -------- --------
Net cash provided by
(used in) operating
activities............. 12,819 (3,132) 161 3,557 13,405
-------- -------- ------ -------- --------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to property
held for sale........ (93) -- -- -- (93)
Additions to property
and equipment........ (12,259) (10,907) -- -- (23,166)
Proceeds from sale of
property held for
sale................. 1,495 -- -- -- 1,495
Proceeds from sale of
property and
equipment............ 376 -- -- -- 376
Intercompany notes
receivable
(payable)............ (2,081) 100,139 -- (98,058) --
Acquisitions of
related businesses,
net of cash
acquired............. (143,610) (80,791) -- 94,501 (129,900)
-------- -------- ------ -------- --------
Net cash provided by
(used in) investing
activities............. (156,172) 8,441 -- (3,557) (151,288)
-------- -------- ------ -------- --------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal repayments
under capital
leases............... (121) (510) -- -- (631)
Principal repayments
of long-term debt.... (143,979) (10) (10) -- (143,999)
Proceeds from issuance
of long-term debt.... 275,000 -- -- -- 275,000
Net proceeds from
equity issue......... 1,068 -- -- -- 1,068
Other financing
costs................ (2,960) -- -- -- (2,960)
-------- -------- ------ -------- --------
Net cash provided by
(used in) financing
activities............. 129,008 (520) (10) -- 128,478
-------- -------- ------ -------- --------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (14,345) 4,789 151 -- (9,405)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. 24,031 6,300 4,073 -- 34,404
-------- -------- ------ -------- --------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 9,686 $ 11,089 $4,224 $ -- $ 24,999
======== ======== ====== ======== ========
21
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 30, 2000
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------- ------------ --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ (253) $ 15,403 $ 102 $(15,505) $ (253)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization...................... 15,921 11,371 3 -- 27,295
Change in deferred income taxes.................... 455 63 -- (3) 515
Loss on sale of property and equipment............. 885 1,299 -- -- 2,184
Reserves for environmental issues.................. (619) (288) -- -- (907)
Equity earnings of affiliates...................... (11,258) -- -- 11,258 --
Changes in operating assets and liabilities, net:
Receivables........................................ (10,262) (25,858) (1,157) 37,297 20
Inventories........................................ (1,991) (923) -- -- (2,914)
Prepaid expenses................................... 177 222 3 -- 402
Other noncurrent assets............................ 137 70 -- 168 375
Accounts payable................................... 2,640 8,164 (2,919) (52) 7,833
Other current liabilities and accrued expenses..... 13,152 11,654 (4,840) (28,973) (9,255)
Other noncurrent liabilities....................... 4,149 2,453 (1) (200) 6,649
--------- --------- ------- -------- --------
Net cash provided by (used in) operating activities.. 13,133 23,630 (8,809) 3,990 31,944
--------- --------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale................ (655) -- -- -- (655)
Additions to property and equipment................ (9,434) (12,284) -- -- (21,718)
Proceeds from sale of property held for sale....... 4,093 -- -- -- 4,093
Proceeds from sale of property and equipment....... 310 838 -- -- 1,148
Intercompany notes receivable (payable)............ (3,564) 2,165 5,389 (3,990) --
Acquisitions of related businesses, net of cash
acquired.......................................... (63,527) (2,161) -- -- (65,688)
--------- --------- ------- -------- --------
Net cash provided by (used in) investing activities.. (72,777) (11,442) 5,389 (3,990) (82,820)
--------- --------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases.......... (90) (486) -- -- (576)
Principal repayments of long-term debt............. (52,633) (297) (10) -- (52,940)
Proceeds from issuance of long-term debt........... 148,000 -- -- -- 148,000
Net proceeds from other equity issues.............. (213) -- -- -- (213)
Other financing costs.............................. (1,985) -- -- -- (1,985)
--------- --------- ------- -------- --------
Net cash provided by (used in) financing activities.. 93,079 (783) (10) -- 92,286
--------- --------- ------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................................... 33,435 11,405 (3,430) -- 41,410
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....... 16,446 9,870 4,841 -- 31,157
--------- --------- ------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............. $ 49,881 $ 21,275 $ 1,411 $ -- $ 72,567
========= ========= ======= ======== ========
22
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, our Current Reports on Form 8-K and 8-K/A and our Quarterly
Reports on Form 10-Q and 10-Q/A for the period ended December 30, 1999.
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
fiscal quarter ended March 30, 2000 over the same fiscal quarter of the
previous fiscal year in total revenue of 62.3% and same store merchandise
sales growth of 9.0%. 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 retail information systems and continue to
remodel existing stores. Finally, we continue to seek acquisitions and believe
that there are a number of attractive acquisition opportunities in and
contiguous to our markets. Subsequent to March 30, 2000, we completed two
acquisitions of a total of six stores bringing our store count as of May 8,
2000 to 1,269 stores. These transactions were funded with cash on hand.
Acquisition History
Our acquisition strategy focuses on acquiring convenience stores within or
contiguous to our existing market areas. We believe acquiring locations with
demonstrated revenue volumes involves lower risk and is an economically
attractive alternative to traditional site selection and new store
development.
23
The table below provides information concerning the 2000 acquisitions (as of
March 30, 2000) and the 1999 acquisitions:
Number of
Date Acquired Trade Name Location Stores
------------- ------------ -------- ---------
Fiscal 2000
Acquisitions:
January 27, 2000........ On-The-Way North Carolina and Southern Virginia 12
November 11, 1999....... Kangaroo Georgia 49
November 4, 1999........ Cel Oil Charleston, South Carolina 7
October 7, 1999......... Wicker Mart North Carolina 7
Others (less than five
stores)................ Various Florida and South Carolina 4
---
Total.................................................................................... 79
---
Fiscal 1999
Acquisitions:
July 22, 1999........... Depot Food South Carolina and Northern Georgia 53
July 8, 1999............ Food Chief Eastern South Carolina 29
February 25, 1999....... ETNA North Carolina and Virginia 60
January 28, 1999........ Handy Way North Central Florida 121
November 5, 1998........ Express Stop Southeast North Carolina and Eastern South Carolina 22
October 22, 1998........ Dash-N East Central North Carolina 10
Others (less than five
stores)................ Various North Carolina and South Carolina 2
---
Total.................................................................................... 297
---
Impact of Acquisitions. The acquisitions highlighted above and related
transactions have had a significant impact on our financial condition and
results of operations since their respective transaction dates. All of these
acquisitions were accounted for under the purchase method and as a result, the
consolidated statements of operations herein include the results of operations
of acquired stores from the date of acquisition only. Moreover, the
consolidated balance sheet as of September 30, 1999 does not include the
assets and liabilities relating to those acquisitions consummated after
September 30, 1999. As a result, comparisons to prior operating results and
prior balance sheets are materially impacted. We intend to continue our
acquisition strategy and, accordingly, future results may not necessarily be
comparable to historic results.
Results of Operations
Three Months Ended March 30, 2000 Compared to the Three Months Ended March
25, 1999
Total Revenue. Total revenue for the three months ended March 30, 2000 was
$584.1 million compared to $359.8 million for the three months ended March 25,
1999, an increase of $224.3 million or 62.3%. The increase in total revenue is
primarily attributable to the revenue from stores acquired or opened since
March 25, 1999 of $133.0 million, an increase in retail gasoline prices and
same store merchandise sales growth. In the three months ended March 20, 2000,
total revenue increases were inflated by a higher average retail gasoline
gallon price of $1.39 for the three months ended March 30, 2000 compared to
$0.96 for the three months ended March 25, 1999.
Merchandise Revenue. Merchandise revenue for the three months ended March
30, 2000 was $215.2 million compared to $164.6 million during the three months
ended March 25, 1999, an increase of $50.6 million or 30.7%. The increase in
merchandise revenue is primarily attributable to the revenue from stores
acquired or opened since March 25, 1999 of $39.6 million and same store
merchandise sales growth.
Same store merchandise revenue for the quarter increased 9% over the
comparable period in 1999. The increase in same store merchandise revenue is
primarily attributable to increased customer traffic, higher average
transaction size and general economic and market conditions. In addition, we
estimate that cigarette price inflation accounted for approximately 2.5% of
the same store gain (see "Inflation"). We believe the increases in store
traffic and average transaction size are primarily attributable to store
merchandising, enhanced store appearance and increased in-store promotional
activity.
24
Gasoline Revenue and Gallons. Gasoline revenue for the three months ended
March 30, 2000 was $361.7 million compared to $189.1 million during the three
months ended March 25, 1999, an increase of $172.5 million or 91.2%. The
increase in gasoline revenue is primarily attributable to the revenue from
stores acquired or opened since March 25, 1999 of $91.6 million and a $0.43 or
44.8% increase in average gasoline gallon retail prices compared to the three
months ended March 25, 1999.
In the three months ended March 30, 2000, gasoline gallons sold were 260.4
million compared to 196.3 million during the three months ended March 25,
1999, an increase of 64.1 million gallons or 32.6%. The increase is primarily
attributable to the gasoline sold by stores acquired or opened since March 25,
1999 of 69.4 million, partially offset by a same store gasoline gallon sales
decline of 3.2% during the period. The same store gallon decrease is primarily
attributable to the increased average retail price per gallon associated with
increasing wholesale fuel costs.
Commission Revenue. Commission revenue for the three months ended March 30,
2000 was $7.3 million compared to $6.1 million during the three months ended
March 25, 1999, an increase of $1.2 million or 19.4%. The increase is
primarily attributable to the revenue from stores acquired or opened since
March 25, 1999 of $1.8 million, same store commission revenue increases and
the introduction of new ancillary service programs partially offset by a
decrease in video poker income.
Total Gross Profit. Total gross profit for the second quarter of fiscal 2000
was $105.0 million compared to $83.6 million during the second quarter of
fiscal 1999, an increase of $21.4 million or 25.6%. The increase in gross
profit is primarily attributable to the profits from stores acquired or opened
since March 25, 1999 of $21.0 million and same store gross profit increases.
Merchandise Gross Profit and Margin. Merchandise gross profit was $71.5
million for the three months ended March 30, 2000 compared to $54.2 million
for the three months ended March 25, 1999, an increase of $17.3 million or
32.0%. This increase is primarily attributable to the profits from stores
acquired or opened since March 25, 1999 of $13.7 million and same store profit
increases. The increase in merchandise gross margin to 33.3% for the three
months ended March 30, 2000 from 32.9% for the three months ended March 25,
1999 is primarily attributable to the addition of higher margin food service
locations, lower product costs and increased vendor rebates.
Gasoline Gross Profit and Per Gallon Margin. Gasoline gross profit was $26.2
million for the three months ended March 30, 2000 compared to $23.3 million
for the three months ended March 25, 1999, an increase of $2.9 million or
12.4%. This increase is primarily attributable to the profits from stores
acquired or opened since March 25, 1999 of $7.0 million, partially offset by
the lower gasoline margin associated with increasing wholesale fuel costs.
Gasoline gross profit per gallon was $0.101 in the three months ended
March 30, 2000 compared to $0.119 for the three months ended March 25, 1999.
Store Operating and General and Administrative Expenses. Store operating
expenses for the first quarter of fiscal 2000 totaled $66.5 million compared
to store operating expenses of $51.5 million for the first quarter of fiscal
1999, an increase of $15.0 million or 29.1%. The increase in store operating
expenses is primarily attributable to the operating and lease expenses
associated with the stores acquired or opened since March 25, 1999 of $14.9
million. As a percentage of total revenue, store operating expenses decreased
to 11.4% in the three months ended March 30, 2000 from 14.3% in the three
months ended March 25, 1999. As a percentage of merchandise revenue, store
operating expenses decreased to 30.9% from 31.3%.
General and administrative expenses for the three months ended March 30,
2000 was $15.8 million compared to $12.4 million during the three months ended
March 25, 1999, an increase of $3.4 million or 27.2%. The increase in general
and administrative expenses is primarily attributable to increased
administrative expenses associated with the stores acquired or opened since
March 25, 1999 of $1.7 million. As a percentage of total revenue, general and
administrative expenses decreased to 2.7% in the three months ended March 30,
2000 from
25
3.4% in the three months ended March 25, 1999. As a percentage of merchandise
revenue, general and administrative expenses decreased to 7.3% from 7.5%.
Income from Operations. Income from operations totaled $8.9 million for the
three months ended March 30, 2000 compared to $10.0 million during the three
months ended March 25, 1999, a decrease of $1.2 million or 11.5%. The decrease
is attributable to the factors discussed above and is further reduced by a
$4.2 million increase in depreciation and amortization.
EBITDA. EBITDA represents income (loss) before interest expense, income tax
benefit, depreciation and amortization, impairment of long-lived assets, and
extraordinary loss. EBITDA for the three months ended March 30, 2000 totaled
$22.7 million compared to EBITDA of $19.7 million during the three months
ended March 25, 1999, an increase of $3.0 million or 15.4%. 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 March 30, 2000 totaled $13.4 million
compared to $10.0 million for the three months ended March 25, 1999, an
increase of $3.4 million or 34.4%. The increase in interest expense is
primarily attributable to the increased borrowings under our bank credit
facility associated with acquisition activity and a general rise in interest
rates.
Income Tax Expense. We recorded an income tax benefit totaling $2.0 million
for the three months ended March 30, 2000 compared to income tax expense of
$0.4 million for the three months ended March 25, 1999. The change in income
tax expense was primarily attributable to the decrease in income before income
taxes. Income tax expense is recorded net of changes in valuation allowance to
reduce federal and state deferred tax assets to a net amount which we believe
more likely than not will be realized, based on estimates of future earnings
and the expected timing of temporary difference reversals.
Net Loss. The net loss for the three months ended March 30, 2000 was $2.5
million compared to a net loss of $3.5 million for the three months ended
March 25, 1999. The net loss for the second quarter of fiscal 1999 included an
extraordinary loss of $3.6 million related to the write-off of a call premium
and deferred financing fees as a result of the redemption of our senior notes.
Six Months Ended March 30, 2000 Compared to the Six Months Ended March 25,
1999
Total Revenue. Total revenue for the six months ended March 30, 2000 was
$1,124.5 million compared to $675.4 million for the six months ended March 25,
1999, an increase of $449.1 million or 66.5%. The increase in total revenue is
primarily attributable to the revenue from stores acquired or opened since
March 25, 1999 of $298.5 million and same store merchandise sales growth. In
the six months ended March 30, 2000, total revenue increases were inflated by
a higher average retail gasoline gallon price of $1.32 for the six months
ended March 30, 2000 compared to $0.99 for the six months ended March 25,
1999.
Merchandise Revenue. Merchandise revenue for the six months ended March 30,
2000 was $424.7 million compared to $304.0 million during the six months ended
March 25, 1999, an increase of $120.7 million or 39.7%. The increase in
merchandise revenue is primarily attributable to the revenue from stores
acquired or opened since March 25, 1999 of $94.0 million and same store
merchandise sales growth.
26
Same store merchandise revenue for the six months ended March 30, 2000
increased 10.6% over the six months ended March 25, 1999. The increase in same
store merchandise revenue is primarily attributable to increased customer
traffic, higher average transaction size and general economic and market
conditions. In addition, we estimate the cigarette price increase accounted
for approximately 2.75-3.5% of the same store gain (see "Inflation"). We
believe the increases in store traffic and average transaction size are
primarily attributable to store merchandising, more competitive gasoline
pricing, enhanced store appearance and increased in-store promotional
activity.
Gasoline Revenue and Gallons. Gasoline revenue for the six months ended
March 30, 2000 was $685.8 million compared to $360.9 million during the six
months ended March 25, 1999, an increase of $324.9 million or 90.0%. The
increase in gasoline revenue is primarily attributable to the revenue from
stores acquired or opened since March 25, 1999 of $201.0 million and a $0.33
or 33.3% increase in average gasoline gallon retail prices compared to the six
months ended March 25, 1999.
In the six months ended March 30, 2000, gasoline gallons sold were 518.2
million compared to 365.3 million during the six months ended March 25, 1999,
an increase of 152.9 million gallons or 41.8%. The increase is primarily
attributable to the gasoline sold by stores acquired or opened since March 25,
1999 of 157.9 million and was partially offset by a same store gasoline gallon
sales decline for the six month period of 1.9%. The same store gallon decrease
is primarily attributable to the increase in wholesale fuel costs and its
impact on average retail price and consumer demand.
Commission Revenue. Commission revenue for the six months ended March 30,
2000 was $14.0 million compared to $10.5 million during the six months ended
March 25, 1999, an increase of $3.5 million or 33.3%. The increase is
primarily attributable to the revenue from stores acquired or opened since
March 25, 1999 of $3.5 million.
Total Gross Profit. Total gross profit for the six months ended March 30,
2000 was $213.9 million compared to $155.9 million during the six months ended
March 25, 1999, an increase of $57.9 million or 37.1%. The increase in gross
profit is primarily attributable to the profits from stores acquired or opened
since March 25, 1999 of $51.9 million and same store merchandise gross profit
increases.
Merchandise Gross Profit and Margin. Merchandise gross profit was $141.9
million for the six months ended March 30, 2000 compared to $99.1 million for
the six months ended March 25, 1999, an increase of $42.8 million or 43.2%.
This increase is primarily attributable to the profits from stores acquired or
opened since March 25, 1999 of $32.9 million and same store merchandise gross
profit increases. The increase in merchandise gross margin to 33.4% for the
six months ended March 30, 2000 from 32.6% for the six months ended March 25,
1999 is primarily attributable to the addition of higher margin food service
locations, lower product costs and increased vendor rebates.
Gasoline Gross Profit and Per Gallon Margin. Gasoline gross profit was $57.9
million for the six months ended March 30, 2000 compared to $46.3 million for
the six months ended March 25, 1999, an increase of $11.6 million or 25.1%.
This increase is primarily attributable to the profits from stores acquired or
opened since March 25, 1999 of $16.9 million, offset by the lower gasoline
margin associated with rising wholesale fuel costs. The gasoline gross profit
per gallon was $0.112 in the six months ended March 30, 2000 compared to
$0.127 for the six months ended March 25, 1999.
Store Operating and General and Administrative Expenses. Store operating
expenses for the six months ended March 30, 2000 totaled $130.8 million
compared to store operating expenses of $95.2 million for the six months ended
March 25, 1999, an increase of $35.6 million or 37.4%. The increase in store
expenses is primarily attributable to the operating and lease expenses
associated with the stores acquired or opened since March 25, 1999 of $34.2
million. As a percentage of total revenue, store operating expenses decreased
to 11.6% in the six months ended March 30, 2000 from 14.1% in the six months
ended March 25, 1999. As a percentage of merchandise revenue, store operating
expenses decreased to 30.8% from 31.3%.
27
General and administrative expenses for the first six months of fiscal 2000
were $31.4 million compared to $22.4 million during the comparable period of
fiscal 1999, an increase of $9.0 million or 40.4%. The increase in general and
administrative expenses is primarily attributable to additional administrative
expenses associated with the stores acquired or opened since March 25, 1999 of
$4.8 million. As a percentage of total revenue, general and administrative
expenses decreased to 2.8% in the six months ended March 30, 2000 from 3.3% in
the six months ended March 25, 1999. As a percentage of merchandise revenue,
general and administrative expenses were relatively flat.
Income from Operations. Income from operations totaled $24.4 million for the
six months ended March 30, 2000 compared to $20.5 million during the six
months ended March 25, 1999, an increase of $3.9 million or 18.8%. The
increase is attributable to the factors discussed above and is partially
reduced by the $9.5 million increase in depreciation and amortization.
EBITDA. EBITDA for the six months ended March 30, 2000 totaled $51.7 million
compared to EBITDA of $38.4 million during the six months ended March 25,
1999, an increase of $13.3 million or 34.7%. The increase is attributable to
the items discussed above.
Interest Expense. Interest expense is primarily interest on our senior
subordinated notes and borrowings under our bank credit facilities. Interest
expense for the six months ended March 30, 2000 totaled $25.1 million compared
to $18.9 million for the six months ended March 25, 1999, an increase of $6.2
million or 33.0%. The increase in interest expense is attributable to
additional borrowings under our bank credit facility associated with
acquisition activity and a general rise in interest rates.
Income Tax Expense. We recorded an income tax benefit totaling $0.2 million
for the six months ended March 30, 2000 compared to income tax expense of $0.7
million for the six months ended March 25, 1999. The change in income tax
expense was primarily attributable to the decrease in income before income
taxes. Income tax expense is recorded net of changes in valuation allowance to
reduce federal and state deferred tax assets to a net amount which we believe
more likely than not will be realized, based on estimates of future earnings
and the expected timing of temporary difference reversals.
Net Loss. The net loss for the six months ended March 30, 2000 was $0.3
million compared to a net loss of $2.5 million for the six months ended March
25, 1999. The net loss for fiscal 1999 included an extraordinary loss of $3.6
million related to the write-off of a call premium and deferred financing fees
as a result of the redemption of our senior notes.
Liquidity and Capital Resources
Cash Flows from Operations. Due to the nature of our business, substantially
all sales are for cash, and cash provided by operations is our primary source
of liquidity. Capital expenditures, acquisitions and interest expense
represent our primary uses of funds. We rely primarily upon cash provided by
operating activities, sale-leaseback transactions, asset dispositions and
equity investments to finance our operations, pay interest, and fund capital
expenditures. We rely on excess cash, supplemented as necessary from time to
time by borrowings under our bank facilities, to finance acquisitions. Cash
provided by operating activities increased to $31.9 million for the six months
ended March 30, 2000 from $13.4 million for the six months ended March 25,
1999. We had $72.6 million of cash and cash equivalents on hand at March 30,
2000 with $25.0 million invested in a blocked account to fund future
acquisitions.
Fiscal 2000 Acquisitions. For the six months ended March 30, 2000, we have
acquired a total of 79 convenience stores in six transactions for
approximately $62.4 million, net of cash acquired. These acquisitions were
funded with borrowings under our bank credit facility and cash on hand.
Subsequent to March 30, 2000,
28
we acquired six additional convenience stores in two transactions for
approximately $4.0 million, which were funded with borrowings under our bank
credit facility and cash on hand.
Capital Expenditures. Capital expenditures (excluding all acquisitions) were
approximately $22.4 million in the six months ended March 30, 2000 and
approximately $23.3 million in the six months ended March 25, 1999. Capital
expenditures are primarily expenditures for existing store improvements, store
equipment, new store development, information systems and expenditures to
comply with regulatory statutes, including those related to environmental
matters.
We finance our capital expenditures and new store development through cash
flow from operations, a sale-leaseback program or similar lease activity,
vendor reimbursements and asset dispositions. Our sale-leaseback program
includes the packaging of our owned convenience store real estate, both land
and buildings, for sale to investors in return for their agreement to
leaseback the property to 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. Under our sale-leaseback program, we received $4.1 million during the
six months ended March 30, 2000.
In the six months ended March 30, 2000, we received approximately $7.6
million from sale-leaseback proceeds, asset dispositions and vendor
reimbursements for capital improvements. Net capital expenditures, excluding
all acquisitions, for the six months ended March 30, 2000 were $14.8 million.
We anticipate capital expenditures for fiscal 2000 will be approximately $45.0
million, of which $22.4 million has been expended to date.
Long-Term Debt. Our long-term debt consisted primarily of $200.0 million of
senior subordinated notes and $334.8 million outstanding under our bank
credit. We are currently in compliance with our debt covenants.
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
borrowing of $10.0 million; (ii) term loan facilities with outstanding
borrowings of $334.8 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 May 8, 2000, we had $17.1 million available for
borrowing or additional letters of credit under the credit facility, $50.0
million available for borrowing under the acquisition term facility and $21.0
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 we pay 3.5% per year
in addition to the Eurodollar base rate and for the Tranche C we pay 3.75% per
year in addition to the Eurodollar base rate. If we opt for the base rate, we
pay 1.5% per year in addition to the base rate for our revolving credit
facility, the acquisition term facility, and the Tranche A term loan facility.
For our Tranche B term loan facility we pay 2.0% per year in addition to the
base rate and for the Tranche C term loan facility we pay 2.25% per year in
addition to the base rate.
In order to reduce our exposure to interest rate fluctuations we have
entered into 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
29
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 matures in January
2004, and the Tranche B and Tranche C term loan facilities mature in January
2006. All term loan facilities require quarterly payments of principal with
annual payments of principal totaling approximately $8.3 million in fiscal
2000, $18.6 million in fiscal 2001, $21.6 million in fiscal 2002, $24.9
million in fiscal 2003, $43.4 million in fiscal 2004, $88.6 million in fiscal
2005, and $119.4 million in fiscal 2006. The acquisition term facility
requires quarterly payments of principal beginning in April 2001 in an amount
equal to 8.33%, or 8.37% with respect to the installment payable in January
2004, of the aggregate acquisition term loans outstanding at January 31, 2001.
Cash Flows from Financing Activities. During the six months ended March 30,
2000, we used proceeds from our bank credit facility and cash on hand to
finance the 2000 acquisitions, principal repayments and related fees and
expenses.
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 nine to 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 March 30, 2000, our shareholders' equity totaled
$103.8 million. The $0.4 million decrease from September 30, 1999 is primarily
attributable to the net loss for the period.
Environmental Considerations
We are required by federal and state regulations to maintain evidence of
financial responsibility for taking corrective action and compensating third
parties in the event of a release from our underground storage tank systems.
In order to comply with this requirement, as of May 8, 2000, we maintain
surety bonds in the aggregate amount of approximately $900,000 in favor of
state environmental enforcement agencies in the states of North Carolina,
South Carolina, Georgia and Virginia and a letter of credit in the amount of
approximately $1.1 million issued by a commercial bank in favor of state
environmental enforcement agencies in the states of Florida, Tennessee,
Indiana and Kentucky. We also rely on reimbursements from applicable state
trust funds. In Florida, we also meet such financial responsibility
requirements through a combination of private commercial liability insurance
and a letter of credit. In Georgia, we meet our financial responsibility
requirements by a combination of state trust fund coverage, private commercial
liability insurance and a surety bond.
All states in which we operate or have operated underground storage tank
systems have established trust funds for the sharing, recovering, and
reimbursing of cleanup costs and liabilities incurred as a result of releases
from underground storage tank systems. These trust funds, which essentially
provide insurance coverage for the cleanup of environmental damages caused by
the operation of underground storage tank systems, are funded by an
underground storage tank registration fee and a tax on the wholesale purchase
of motor fuels within each state. We have paid underground storage tank
registration fees and gasoline taxes to each state where we operate to
participate in these programs and have filed claims and received reimbursement
in North Carolina, South Carolina, Kentucky, Indiana, Georgia, Florida and
Tennessee. The coverage afforded by each state fund varies but generally
provides from $150,000 to $1.0 million per site or occurrence for the cleanup
of environmental contamination, and most provide coverage for third party
liabilities.
30
Costs for which we do not receive reimbursement include but are not limited
to (i) the per-site deductible; (ii) costs incurred in connection with
releases occurring or reported to trust funds prior to their inception; (iii)
removal and disposal of underground storage tank systems; (iv) 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 $150,000 per occurrence depending on the upgrade status of our
underground storage tank system, the date the release is discovered/reported
and the type of cost for which reimbursement is sought. The Florida trust fund
will not cover releases first reported after December 31, 1998. We meet
Florida financial responsibility requirements for remediation and third party
claims arising out of releases reported after December 31, 1998 through a
combination of private insurance and a letter of credit. In Georgia, we meet
our financial responsibility requirements by a combination of state trust fund
coverage, private commercial liability insurance and a surety bond.
Environmental reserves of $14.5 million as of March 30, 2000 represent
estimates for future expenditures for remediation, tank removal and litigation
associated with 436 known contaminated sites as a result of releases and are
based on current regulations, historical results and other factors. Although
we can make no assurances, we anticipate that we will be reimbursed for a
portion of these expenditures from state insurance funds and private
insurance. As of March 30, 2000, amounts which are probable of reimbursement
(based on our experience) from those sources total $13.1 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 do have locations where the applicable trust fund does not
cover a deductible or has a co-pay which may be less than the cost of such
remediation. To the extent such third parties do not pay for remediation as we
anticipate, we will be obligated to make such payments, which could materially
adversely affect our financial condition and results of operations.
Reimbursement from state trust funds will be dependent upon the maintenance
and continued solvency of the various funds. Although we are not aware of
releases or contamination at other locations where we currently operate or
have operated stores, any such releases or contamination could require
substantial remediation expenditures, some or all of which may not be eligible
for reimbursement from state trust funds.
We have reserved $500,000 to cover third party claims for environmental
conditions at adjacent real properties that are not covered by state trust
funds or by private insurance. This reserve is based on management's best
estimate of losses that may be incurred over the next several years based on,
among other things, the average remediation cost for contaminated sites and
our historical claims experience.
Several of our locations identified as contaminated are being cleaned up by
third parties who have assumed responsibility for such clean up matters.
Additionally, we are awaiting closure notices on several other locations which
will release us from responsibility related to known contamination at those
sites. These sites continue to be included in our environmental reserve until
a final closure notice is received.
Year 2000 Initiative
As a result of our year 2000 initiative, 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. 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 nor
do we anticipate any material effect on our results of operations or financial
condition resulting from the Year 2000 issue.
31
Recently Issued Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. In June 1999, SFAS No. 133 was
amended to defer the effective date to the first fiscal quarter of fiscal
2001. As of March 30, 2000, we have not determined the effect of SFAS No. 133
on our consolidated financial statements, however, we do not believe adoption
of this accounting standard will have a material impact on our financial
condition.
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 6.1% during the six months ended March 30, 2000. The
largest increase occurred on November 23, 1998, when major cigarette
manufacturers increased prices by $0.45 per pack. In January 2000,
manufacturers raised cigarette prices an additional $0.13 per pack. In
general, we have passed price increases on to our customers. However, during
the period as in previous periods, major cigarette manufacturers offered
rebates to retailers, and we passed along those rebates to our customers. For
the six months ended March 30, 2000, we estimate that cigarette inflation
accounted for approximately 2.75%-3.5% of the 10.3% increase in comparable
store merchandise sales.
During the six months ended March 30, 2000, wholesale gasoline fuel costs
continued to increase. Average wholesale gasoline costs as quoted on the New
York Mercantile Exchange for the six month period were $0.75 compared to $0.39
per gallon for the comparable period in fiscal 1999. New York Mercantile
Exchange cost quotes do not include freight or federal, state and local taxes,
however changes in NYMEX gas closely approximate changes in our direct
wholesale gasoline costs. Generally we pass along wholesale gasoline cost
changes to our customers through retail price changes. Gasoline price
inflation has had an impact on total revenue, gross profit dollars, gross
margin percentage and gasoline gallons comparable store growth.
General CPI, excluding energy, increased 1.55% during the six months ended
March 30, 2000 and food at home, which is most indicative of our merchandise
inventory, increased 1.36%. While we have generally been able to pass along
these price increases to our customers, we can make no assurances that
continued inflation will not have a material adverse effect on our sales and
gross profit dollars.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative Disclosures. We are exposed to market risks inherent in our
financial instruments. These instruments arise from transactions entered into
in the normal course of business and, in some cases, relate to our
acquisitions of related businesses. We are subject to interest rate risk on
our existing long-term debt and any future financing requirements. Our fixed
rate debt consists primarily of outstanding balances on our senior
subordinated notes and our variable rate debt relates to borrowings under our
bank credit facility.
In order to reduce our exposure to interest rate fluctuations, we have
entered into two interest rate swap arrangements, in which we agree to
exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated by reference to an agreed upon notional amount.
The interest rate differential is reflected as an adjustment to interest
expense over the life of the swaps. On March 2, 1999, we entered into an
interest rate swap arrangement with a notional amount of $45.0 million that
fixes our Eurodollar rate at 5.62% through January 2001. On November 30, 1999,
we entered into a swap arrangement with a notional amount of $50 million that
fixes our Eurodollar rate at 6.28% through November 2001.
32
The following table presents the future principal cash flows and weighted-
average interest rates expected on our existing long-term debt instruments.
Fair values have been determined based on quoted market prices as of May 8,
2000.
Expected Maturity Date
as of March 30, 2000
(Dollars in Thousands)
Fiscal Fiscal Fiscal Fiscal Fiscal Fair
2000 2001 2002 2003 2004 Thereafter Total Value
------- ------- ------- ------- ------- ---------- -------- --------
Long-term debt.......... $18,343 $18,984 $21,987 $25,241 $43,404 $408,008 $535,967 $523,815
Weighted average
Interest rate.......... 9.83% 9.88% 9.92% 9.95% 9.99% 10.14% 9.98%
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.
33
PART II--OTHER INFORMATION.
ITEM 4. Submission of Matters to a Vote of Security Holders.
On March 23, 2000 we held our Annual Meeting of Stockholders during which
our stockholders:
(1) Elected seven nominees to serve as directors each for a term of one
year or until his successor is duly elected and qualified. The votes
were cast as follows:
Name Votes For Votes Withheld
---- ---------- --------------
Peter J. Sodini 17,645,839 5,900
Todd W. Halloran 17,645,839 5,900
Jon D. Ralph 17,645,839 5,900
Charles P. Rullman 17,645,839 5,900
Edfred F. Shannon, Jr. 17,645,839 5,900
Peter M. Starrett 17,645,839 5,900
Hubert E. Yarborough, III 17,645,839 5,900
(2) Ratified the appointment of Deloitte & Touche LLP as independent public
accountants for the Company and its subsidiaries for the fiscal year
ending September 28, 2000. The votes were cast as follows:
Votes For Votes Against Votes Witheld
---------- ------------- -------------
Ratification of Deloitte &
Touche, LLP 17,583,415 200 600
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 January 3, 2000, The Pantry filed a Current Report on Form 8-K/A
(Amendment No. 2) amending and restating Item 7 to its Current Report on
Form 8-K/A, filed with the Securities and Exchange Commission on October 5,
1999, to revise footnote (k) to the Notes to the Unaudited Pro Forma
Statement of Operations Data to reflect an accounting adjustment to third
quarter financial results for The Pantry.
(2) 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 common stock of Kangaroo, Inc.
("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)Independent Auditor's Report
(2)Balance Sheets
(3)Statements of Income and Retained Earnings
(4)Statements of Cash Flows
(5)Notes to Financial Statements
Unaudited pro forma consolidated 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
34
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: May 15, 2000
/s/ WILLIAM T. FLYG
By: _________________________________
William T. Flyg
Senior Vice President Finance and
Secretary
(Authorized Officer and Principal
Financial Officer)
35
EXHIBIT INDEX
Exhibit No. Description of Document
----------- -----------------------
27.1 Financial Data Schedule.
99.1 Risk Factors.
36