EXHIBIT 99.1
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties not presently known to
us, or that we currently deem immaterial, may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
Because gasoline sales comprise a substantial portion of our revenues,
interruptions in the supply of gasoline and increases in the cost of gasoline
could adversely affect our business, financial condition or results of
operations
Gasoline profit margins have a significant impact on our earnings because
gasoline revenue has increased as a percentage of our total revenue over the
past three fiscal years. Gasoline revenue has averaged 53.5% of our revenues
during that period. Several factors beyond our control affect the volume of
gasoline we sell and the gasoline profit margins we achieve:
. the supply and demand for gasoline
. any volatility in the wholesale gasoline market
. the pricing policies of competitors in local markets
In particular, a material increase in the price of gasoline could adversely
affect demand for our gasoline.
In addition, sudden increases in the cost of gasoline could adversely
affect our business, financial condition or results of operations if gasoline
sales volume is reduced. We face this particular risk because:
. we typically have no more than a seven-day supply of gasoline
. our gasoline contracts do not guarantee an uninterrupted, unlimited
supply of gasoline in the event of a shortage
Reductions in volume of gasoline sold or our gasoline profit margins could
have a material adverse effect on our results of operations. In addition,
because gasoline sales generate customer traffic to our stores, decreases in
gasoline sales could impact merchandise sales.
If we are unable to pass along price increases of tobacco products to our
customers, our business, financial condition or results of operations could be
adversely affected because tobacco sales comprise an important part of our
revenues
Sales of tobacco products have averaged approximately 13.9% of our total
revenue over the past three fiscal years. National and local campaigns to
discourage smoking in the United States, as well as increases in taxes on
cigarettes and other tobacco products, may have a material impact on our sales
of tobacco products. The consumer price index on tobacco products increased
approximately 33% in fiscal 1999 and an additional 6.1% during the six months
ending March 30, 2000. In November 1998, major cigarette manufacturers that
supply The Pantry increased prices by $0.45 per pack. In September 1999,
manufacturers raised cigarette prices an additional $0.10 per pack.
However, during fiscal 1999 as in years past, major cigarette manufacturers
offered monthly rebates to retailers and we passed along these rebates to our
customers. We cannot assure you that major cigarette manufacturers will continue
to offer these rebates or that any resulting increase in prices to our customers
will not have a material adverse effect on our cigarette sales and gross profit
dollars. A reduction in the amount of cigarettes sold by The Pantry could
adversely affect our business, financial condition and results of operations.
Our growth and operating results could suffer if we are unable to identify and
acquire suitable companies, obtain financing or integrate acquired stores or if
we discover previously undisclosed liabilities
An important part of The Pantry's growth strategy is to acquire other
convenience stores that complement our existing stores or broaden our geographic
presence. From April 1997 through March 2000, we acquired 1,052 convenience
stores in 17 major and numerous smaller transactions. We expect to continue to
acquire convenience stores as an element of our growth strategy. Acquisitions
involve risks that could cause our actual growth or operating results to differ
adversely compared to our expectations or the expectations of security analysts.
For example:
. We may not be able to identify suitable acquisition candidates or
acquire additional convenience stores on favorable terms. We compete
with others to acquire convenience stores. Competition may increase
and could result in decreased availability or increased price for
suitable acquisition candidates. It may be difficult to anticipate the
timing and availability of acquisition candidates.
. During the acquisition process we may fail or be unable to discover
some of the liabilities of companies or businesses which we acquire.
These liabilities may result from a prior owner's noncompliance with
applicable federal, state or local laws.
. We may not be able to obtain the necessary financing, on favorable
terms or at all, to finance any of our potential acquisitions.
. We may fail to successfully integrate or manage acquired convenience
stores.
. Acquired convenience stores may not perform as we expect or we may not
be able to obtain the cost savings and financial improvements we
anticipate.
Restrictive covenants in our debt agreements may restrict our ability to
implement our growth strategy, respond to changes in industry conditions, secure
additional financing and engage in acquisitions
Restrictive covenants contained in our existing bank credit facility and
indenture could limit our ability to finance future acquisitions, new locations
and other expansion of our operations. Credit facilities entered into in the
future likely will contain similar restrictive covenants. These covenants may
require us to achieve specific financial ratios and to obtain lender consent
prior to completing acquisitions. Any of these covenants could become more
restrictive in the future. Our ability to respond to changing business
conditions and to secure additional financing may be restricted by these
covenants. We also may be prevented from engaging in transactions including
acquisitions which are important to our growth strategy. Any breach of these
covenants could cause a default under our debt obligations and result in our
debt becoming immediately due and payable which would adversely affect our
business, financial condition and results of operations.
We are growing rapidly and our failure to effectively manage our growth may
adversely affect our business, financial condition and results of operations
The Pantry is growing rapidly. We have grown from total revenue of $384.8
million in fiscal 1996 to $1.7 billion in fiscal 1999. Our ability to manage the
growth of our operations will require us to continue to improve our operational,
financial and human resource management information systems and our other
internal systems and controls. Failure to make these improvements may affect our
business, financial condition and results of operations.
The Pantry is in the process of upgrading its management information
systems. The new systems will fully automate our inventory and management
reporting processes. We expect that this upgrade will cost approximately $5.0
million to complete during fiscal year 2000. We expect that the upgrade will be
completed prior to the end of fiscal 2000. Any failure to complete our
transition to these new systems may inhibit our growth plans.
In addition, our growth will increase our need to attract, develop,
motivate and retain both our management and professional employees. The
inability of our management to manage our growth effectively, or the inability
of our employees to achieve anticipated performance or utilization levels, could
have a material adverse effect on our business, financial condition and results
of operations.
We depend on one principal wholesaler for the majority of our merchandise and
loss of this supplier could have an adverse impact on our cost of goods and
business, financial condition and results of operations
The Pantry purchases over 50% of its general merchandise, including most
tobacco products and grocery items, from a single wholesale grocer, McLane
Company, Inc., a wholly-owned subsidiary of Wal-Mart. In addition, McLane
supplies health and beauty aids, toys and seasonal items to all of our stores.
We have a contract with McLane until 2003, and we may not be able to renew the
contract upon expiration. We believe that our arrangements with vendors,
including McLane, have enabled us to decrease the operating expenses of acquired
companies after we complete an acquisition. Therefore, a change of suppliers
could have a material adverse affect on our cost of goods and business,
financial condition and results of operations.
Changes in traffic patterns and the type, number and location of competing
stores could result in the loss of customers and a corresponding decrease in
revenues for affected stores
The convenience store and retail gasoline industries are highly competitive
and we may not be able to compete successfully. Changes in traffic patterns and
the type, number and location of competing stores could result in the loss of
customers and a corresponding decrease in revenues for affected stores. Major
competitive factors include, among others, location, ease of access, gasoline
brands, pricing, product and service selections, customer service, store
appearance, cleanliness and safety. In addition, inflation, increased labor and
benefit costs and the lack of availability of experienced management and hourly
employees may adversely affect the profitability of the convenience store
industry. Any or all of these factors could create heavy competitive pressures
and have an adverse effect on our business, financial condition and results of
operations.
The Pantry competes with numerous other convenience stores and
supermarkets. In addition, our stores offering self-service gasoline compete
with gasoline service stations and, more recently, supermarkets. Our stores also
compete to some extent with supermarket chains, drug stores, fast food
operations and other similar retail outlets. In some of our markets our
competitors have been in existence longer and have greater financial, marketing
and other resources than us. As a result, our competitors may be able to respond
better to changes in the economy and new opportunities in our industry.
Because substantially all of our stores are located in the southeastern United
States, our revenues could suffer if the economy of that region deteriorates
Substantially all of our stores are located in the Southeast region of the
United States. As a result, our results of operations are subject to general
economic conditions in that region. In the event of an economic downturn in the
Southeast, our business, financial condition and results of operations could be
adversely impacted.
Unfavorable weather conditions in the spring and summer months could adversely
affect our business, financial condition and results of operations
Weather conditions in our operating area impact our business, financial
condition and results of operations. During the spring and summer vacation
season, customers are more likely to purchase higher profit margin items at our
stores, such as fast foods, fountain drinks and other beverages, and more
gasoline at our gasoline locations. As a result, we typically generate higher
revenues and gross margins during warmer weather months in the Southeast, which
fall within our third and fourth quarters. If weather conditions are not
favorable during these periods, our operating results and cash flow from
operations could be adversely affected.
In addition, approximately 37% of our stores are concentrated in coastal
areas in the southeastern United States, and are therefore exposed to damages
associated with hurricanes, tropical storms and other weather conditions in
these areas.
If our history of losses continues, we may be unable to complete our growth
strategy and financing plans
We have experienced losses during two out of our most recent three fiscal
years. Our net losses were $1.0 million in fiscal 1997 and $3.3 million in
fiscal 1998. In fiscal 1999, we had net income of $10.4 million. We incurred
interest expense of $13.0 million in fiscal 1997, $28.9 million in fiscal 1998
and $41.3 million in fiscal 1999. We also incurred an extraordinary loss of $8.0
million in fiscal 1998 and $3.6 million (net of taxes) in fiscal 1999, in each
case related to the early extinguishment of debt.
If we incur net losses in future periods, we may not be able to implement
our growth strategy in accordance with our present plans. Continuation of our
net losses may also require us to secure additional financing sooner than
anticipated. Such financing may not be available in sufficient amounts, or on
terms acceptable to us, and may dilute existing shareholders. If we do achieve
profitability, we may not sustain or increase profitability in the future. This
may, in turn, cause our stock price to decline.
We are subject to extensive environmental regulation, and increased regulation
or our failure to comply with existing regulations could require substantial
capital expenditures or affect our business, financial condition and results of
operations
Our business is subject to extensive environmental requirements,
particularly environmental laws regulating underground storage tanks. Compliance
with these regulations may require significant capital expenditures.
Federal, state and local regulations governing underground storage tanks
were phased in over a period ending in December 1998. These regulations required
us to make expenditures for compliance with corrosion protection and leak
detection requirements and required spill/overfill equipment by December 1998.
We are in material compliance with the December 1998 upgrade requirements.
Failure to comply with any environmental regulations or an increase in
regulations could affect our business, financial condition and results of
operations.
We may incur substantial liabilities for remediation of environmental
contamination at our locations
Under various federal, state and local laws, ordinances and regulations, we
may, as the owner or operator of our locations, be liable for the costs of
removal or remediation of contamination at these or our former locations,
whether or not we knew of, or were responsible for, the presence of such
contamination. The failure to properly remediate such contamination may subject
us to liability to third parties and may adversely affect our ability to sell or
rent such property or to borrow money using such property as collateral.
Additionally, persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the costs of removal or remediation of
such substances at sites where they are located, whether or not such site is
owned or operated by such person. Although we do not typically arrange for the
treatment or disposal of hazardous substances, we may be deemed to have arranged
for the disposal or treatment of hazardous or toxic substances and, therefore,
may be liable for removal or remediation costs, as well as other related costs,
including governmental fines, and injuries to persons, property and natural
resources.
We estimate that our future expenditures for remediation of current
locations net of reimbursements will be approximately $900,000 for which
reserves have been established on our financial statements. In addition, The
Pantry estimates that up to $13.6 million may be expended for remediation on our
behalf by state trust funds established in our operating areas or other
responsible third parties including insurers. To the extent third parties do not
pay for remediation as we anticipate, we will be obligated to make these
payments, which could materially adversely affect our financial condition and
results of operations.
Reimbursements from state trust funds will be dependent on the continued
viability of these funds. The State of Florida trust fund ceased accepting new
claims for reimbursement for releases discovered after December 31, 1998.
However, the State of Florida trust fund will continue to reimburse claims for
remedial work performed on sites that were accepted into its program before
December 31, 1998. We have obtained private coverage for remediation and third
party claims arising out of releases reported after December 31, 1998. We meet
federal and Florida financial responsibility requirements with respect to
underground storage tanks in Florida through a combination of private insurance
and a letter of credit.
We may incur additional substantial expenditures for remediation of
contamination that has not been discovered at existing locations or locations
which we may acquire in the future. We cannot assure you that we have identified
all environmental liabilities at all of our current and former locations; that
material environmental conditions not known to us do not exist; that future
laws, ordinances or regulations will not impose material environmental liability
on us; or that a material environmental condition does not otherwise exist as to
any one or more of our locations.
The large amount of our total outstanding debt and our obligation to service
that debt could divert necessary funds from operations, limit our ability to
obtain financing for future needs and expose us to interest rate risks
We are highly leveraged, which means that the amount of our outstanding
debt is large compared to the net book value of our assets, and have substantial
repayment obligations under our outstanding debt. As of March 30, 2000 we
had:
. Total consolidated debt including capital lease obligations of
approximately $550.1 million
. Shareholders' equity of approximately $103.8 million
As of March 30, 2000, our borrowing availability under our bank credit
facility was approximately $67.1 million.
Our bank credit facility contains numerous financial and operating
covenants that limit our ability, and the ability of most of our subsidiaries,
to engage in activities such as acquiring or disposing of assets, engaging in
mergers or reorganizations, making investments or capital expenditures and
paying dividends. These covenants require that we meet interest coverage, net
worth and leverage tests. The indenture governing our senior subordinated notes
and our bank credit facility permit us and our subsidiaries to incur or
guarantee additional debt, subject to limitations.
Our level of debt and the limitations imposed on us by our debt agreements
could have other important consequences to our shareholders, including the
following:
. We will have to use a portion of our cash flow from operations for
debt service, rather than for our operations or to implement our
growth strategy
. We may not be able to obtain additional debt financing for future
working capital, capital expenditures, acquisitions or other corporate
purposes
. We are vulnerable to increases in interest rates because the debt
under our bank credit facility is at a variable interest rate
Violations of or changes to government regulations could adversely impact wage
rates and other aspects of our business
Convenience stores, including stores that sell tobacco and alcohol
products, are subject to federal and state laws governing such matters as wage
rates, overtime, working conditions, citizenship requirements and alcohol and
tobacco sales. At the federal level, there are proposals under consideration
from time to time to increase minimum wage rates and to introduce a system of
mandated health insurance. A violation or change of these laws, or adoption of
any of these proposals, could have a material adverse effect on our business,
financial condition and results of operations.
In 1999, the South Carolina legislature passed a law which makes it illegal
to own or operate video poker machines effective July 1, 2000 unless approved by
a statewide referendum. On October 14, 1999, the South Carolina Supreme Court
ruled that the referendum called for was unconstitutional. After invalidating
the referendum, the South Carolina Supreme Court upheld the remainder of the
law. Accordingly, effective July 1, 2000, video poker will be banned in South
Carolina, which could adversely impact our results of operations.
The interests of Freeman Spogli & Co., our controlling stockholder, may conflict
with our interests and the interests of our other stockholders
As a result of its stock ownership and board representation, Freeman Spogli
will be in a position to affect our corporate actions such as mergers or
takeover attempts in a manner that could conflict with the interests of our
other stockholders. Freeman Spogli owns 10,269,524 shares of common stock and
warrants to purchase 2,346,000 shares of common stock as of May 8, 2000. Based
on its ownership of common stock and warrants, Freeman Spogli beneficially owns
61.7% of our common stock. In addition, four of the seven members of our board
of directors are representatives of Freeman Spogli.
Because we depend on our senior management's experience and knowledge of our
industry, we would be materially affected if senior management left The Pantry
We are dependent on the continued efforts of our senior management team,
including our President and Chief Executive Officer, Peter Sodini. Mr. Sodini's
employment contract terminates in September 2001. If, for any reason, our senior
executives do not continue to be active in management, our operations could be
materially adversely affected. We cannot assure you that we will be able to
attract and retain additional qualified senior personnel as needed in the
future. We do not maintain key personnel life insurance on our senior executives
and other key employees.
Future sales of additional shares into the market may depress the market price
of the common stock
If our existing stockholders sell shares of common stock in the public
market, including shares issued upon the exercise of outstanding options and
warrants, or if the market perceives such sales could occur, the market price of
our common stock could fall. These sales also might make it more difficult for
us to sell equity or equity-related securities in the future at a time and price
that we deem appropriate or to use equity as consideration for future
acquisitions.
We have 18,111,474 outstanding shares of common stock. Of these shares,
6,250,000 shares are freely tradable. Of the remaining shares, 12,567,962 shares
are held by affiliated investment funds of Freeman Spogli and affiliates of
Chase Manhattan Capital Corporation, who may be deemed to be affiliates of The
Pantry. Pursuant to Rule 144 under the Securities Act of 1993, as amended,
affiliates of The Pantry can resell up to 1% of the aggregate outstanding common
stock during any three month period. In addition, Freeman Spogli and Chase
Capital have registration rights allowing them to require The Pantry to register
the resale of their shares. If Freeman Spogli and Chase Capital exercise their
registration rights and sell shares of common stock in the public market, the
market price of our common stock could fall.
Our charter includes provisions which may have the effect of preventing or
hindering a change in control and adversely affecting the market price of our
common stock
Our certificate of incorporation gives our board of directors the authority
to issue up to five million shares of preferred stock and to determine the
rights and preferences of the preferred stock without obtaining shareholder
approval. The existence of this preferred stock could make more difficult or
discourage an attempt to obtain control of The Pantry by means of a tender
offer, merger, proxy contest or otherwise. Furthermore, this preferred stock
could be issued with other rights, including economic rights, senior to our
common stock, and, therefore, issuance of the preferred stock could have an
adverse effect on the market price of our common stock. We have no present plans
to issue any shares of our preferred stock.
Other provisions of our certificate of incorporation and bylaws and of
Delaware law could make it more difficult for a third party to acquire us or
hinder a change in management even if doing so would be beneficial to our
shareholders. These governance provisions could hurt the market price of our
common stock.
We may, in the future, adopt other measures that may have the effect of
delaying, deferring or preventing an unsolicited takeover, even if such a change
in control were at a premium price or favored by a majority of unaffiliated
shareholders. These measures may be adopted without any further vote or action
by our shareholders.