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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 26, 1998
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 186,029 shares
(Class) (Outstanding at May 11, 1998)
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THE PANTRY, INC.
FORM 10-Q
MARCH 26, 1998
TABLE OF CONTENTS
Part I -- Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets..........................................2
Consolidated Statements of Operations..........................4
Consolidated Statements of Cash Flows..........................5
Notes to Consolidated Financial Statements.....................6
Supplemental Guarantor Information............................10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results
of Operations.............................................................21
Part II -- Other Information
Item 6. Exhibits and Reports on Form 8-K...............................30
PART I - FINANCIAL INFORMATION.
Item 1. Financial Statements.
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 25, March 26,
1997 1998
--------------- ------------
(Audited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................. $ 3,347 $ 28,544
Receivables, net .......................... 2,101 5,987
Inventories ............................... 17,161 36,589
Prepaid expenses .......................... 1,204 1,727
Property held for sale .................... 3,323 3,946
Deferred income taxes ..................... 1,142 1,142
-------- --------
Total current assets .................... 28,278 77,935
-------- --------
Property and equipment, net ................ 77,986 224,389
-------- --------
Other assets:
Goodwill, net ............................. 20,318 70,173
Deferred lease cost, net .................. 314 292
Deferred financing cost, net .............. 4,578 13,989
Environmental receivables, net ............ 6,511 8,229
Deferred income taxes ..................... 156 --
Escrow for Lil' Champ acquisition ......... 4,049 --
Other non-current assets .................. 609 2,988
-------- --------
Total other assets ...................... 36,535 95,671
-------- --------
Total assets ............................... $142,799 $397,995
======== ========
See Notes to Consolidated Financial Statements.
2
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 25, March 26,
1997 1998
--------------- ------------
(Audited) (Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ........................ $ 33 $ 56
Current maturities of capital lease obligations ............. 285 1,312
Accounts payable:
Trade ..................................................... 16,035 38,410
Money orders .............................................. 3,022 3,603
Accrued interest ............................................ 4,592 10,873
Accrued compensation and related taxes ...................... 3,323 5,761
Income taxes payable ........................................ 296 --
Other accrued taxes ......................................... 2,194 1,433
Accrued insurance ........................................... 3,887 5,435
Other accrued liabilities ................................... 2,856 10,190
--------- ---------
Total current liabilities ................................. 36,523 77,073
--------- ---------
Long-term debt ............................................... 100,305 258,287
--------- ---------
Other non-current liabilities:
Environmental reserve ....................................... 7,806 11,013
Deferred income taxes ....................................... -- 6,749
Capital lease obligations ................................... 679 11,818
Employment obligations ...................................... 1,341 1,156
Accrued dividends on preferred stock ........................ 7,958 3,035
Other non-current liabilities ............................... 6,060 18,347
--------- ---------
Total other non-current liabilities ....................... 23,844 52,118
--------- ---------
Shareholders' equity (deficit):
Preferred stock, $.01 par value, 150,000 shares authorized;
43,499 issued and outstanding at September 25, 1997 and
17,500 issued and outstanding at March 26, 1998 ........... -- --
Common stock, $.01 par value, 300,000 shares authorized;
114,029 issued and outstanding at September 25, 1997 and
186,029 issued and outstanding at March 26, 1998 .......... 1 2
Additional paid in capital .................................. 5,396 43,116
Shareholder loan ............................................ -- (215)
Accumulated deficit ......................................... (23,270) (32,386)
--------- ---------
Total shareholders' equity (deficit) ...................... (17,873) 10,517
--------- ---------
Total liabilities and shareholders' equity (deficit) ......... $ 142,799 $ 397,995
========= =========
See Notes to Consolidated Financial Statements.
3
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
Three Months Ended Six Months Ended
--------------------------- --------------------------
March 27, March 26, March 27, March 26,
1997 1998 1997 1998
------------ ------------ ------------ -----------
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
Revenues:
Merchandise sales ...................................... $ 44,733 $104,405 $ 92,117 $ 193,765
Gasoline sales ......................................... 50,000 112,696 101,838 215,718
Commissions ............................................ 1,177 3,569 2,286 6,358
-------- -------- -------- ---------
Total revenues ....................................... 95,910 220,670 196,241 415,841
-------- -------- -------- ---------
Cost of sales:
Merchandise ............................................ 29,328 67,968 60,832 126,865
Gasoline ............................................... 45,291 99,415 91,918 190,324
-------- -------- -------- ---------
Total cost of sales .................................. 74,619 167,383 152,750 317,189
-------- -------- -------- ---------
Gross profit ............................................ 21,291 53,287 43,491 98,652
-------- -------- -------- ---------
Operating expenses:
Store expenses ......................................... 14,177 33,688 28,685 61,853
General and administrative expenses .................... 4,395 8,360 8,478 15,532
Depreciation and amortization .......................... 2,235 6,624 4,498 11,775
-------- -------- -------- ---------
Total operating expenses ............................. 20,807 48,672 41,661 89,160
-------- -------- -------- ---------
Income from operations .................................. 484 4,615 1,830 9,492
-------- -------- -------- ---------
Other income (expense):
Interest ............................................... (3,338) (7,034) (6,479) (12,851)
Miscellaneous .......................................... 652 335 719 774
-------- -------- -------- ---------
Total other expense .................................. (2,686) (6,699) (5,760) (12,077)
-------- -------- -------- ---------
Loss before income taxes and extraordinary item ......... (2,202) (2,084) (3,930) (2,585)
Income tax benefit ...................................... 441 504 786 916
-------- -------- -------- ---------
Loss before extraordinary item .......................... (1,761) (1,580) (3,144) (1,669)
Extraordinary item, net of taxes ........................ -- -- -- (6,800)
-------- -------- -------- ---------
Net loss ................................................ $ (1,761) $ (1,580) $ (3,144) $ (8,469)
======== ======== ======== =========
See Notes to Consolidated Financial Statements.
4
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
----------------------------
March 27, March 26,
1997 1998
------------ -------------
(26 weeks) (26 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................ $ (3,144) $ (8,469)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary loss .................................................... -- 6,800
Depreciation and amortization ......................................... 4,498 11,775
Change in deferred income taxes ....................................... (907) (1,415)
(Gain) loss on sale of property and equipment ......................... (432) 209
Reserves for environmental issues ..................................... 233 57
Changes in operating assets and liabilities, net:
Receivables ............................................................. 348 (3,758)
Inventories ............................................................. (2,255) (781)
Prepaid expenses ........................................................ 59 879
Other non-current assets ................................................ (33) 5,366
Accounts payable ........................................................ (703) 1,397
Other current liabilities and accrued expenses .......................... 803 1,559
Employment obligations .................................................. (336) (185)
Other non-current liabilities ........................................... 475 4,218
-------- ----------
Net cash provided by (used in) operating activities ...................... (1,394) 17,652
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ..................................... (665) (2,648)
Additions to property and equipment ..................................... (4,170) (17,814)
Proceeds from sale of property held for sale ............................ -- 2,025
Proceeds from sale of property and equipment ............................ 1,478 682
Acquisitions of related businesses, net of cash acquired of $10,487...... -- (145,398)
-------- ----------
Net cash used in investing activities .................................... (3,357) (163,153)
-------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital losses ............................... (151) (577)
Principal repayments of long-term debt .................................. (10) (57,009)
Proceeds from issuance of long-term debt ................................ 200 209,022
Net proceeds from equity issue .......................................... 15,947 31,936
Other financing costs ................................................... (85) (12,674)
-------- ----------
Net cash provided by financing activities ................................ 15,901 170,698
-------- ----------
NET INCREASE IN CASH ..................................................... 11,150 25,197
CASH & CASH EQUIVALENTS, BEGINNING OF YEAR ............................... 5,338 3,347
-------- ----------
CASH & CASH EQUIVALENTS, END OF QUARTER .................................. $ 16,488 $ 28,544
======== ==========
See Notes to Consolidated Financial Statements.
5
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND RECENT DEVELOPMENTS
Unaudited Consolidated Financial Statements
The accompanying consolidated financial statements include the accounts of
The Pantry, Inc. and its wholly-owned subsidiaries, Lil' Champ Food Stores,
Inc. ("Lil' Champ"), Sandhills, Inc., and PH Holding Corporation ("PH") and
PH's wholly-owned subsidiaries, TC Capital Management, Inc. and Pantry
Properties, Inc. All intercompany transactions and balances have been
eliminated in consolidation. See "Note 7 -- Supplemental Guarantor
Information."
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The
interim consolidated financial statements have been prepared from the
accounting records of The Pantry, Inc. and its subsidiaries and all amounts at
March 26, 1998 and for the three and six months ended March 26, 1998 and March
27, 1997 are unaudited. References herein to the "Company" shall include all
subsidiaries including Lil' Champ, whereas references to the "Pantry" shall not
include Lil' Champ. Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally accepted
accounting principles 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.
It is suggested that these interim financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
September 25, 1997 (the "Company's 10-K"), the Company's Quarterly Report on
Form 10-Q for the quarter ended December 25, 1997, the Company's Registration
Statement on Form S-4, as amended, effective January 8, 1998, and the Company's
Current Report on Form 8-K dated October 23, 1997.
The results of operations for the three and six months ended March 26,
1998 and March 27, 1997 are not necessarily indicative of results to be
expected for the full fiscal year. The convenience store industry in the
Company's marketing areas experiences higher levels of revenues and profit
margins during the summer months than during the winter months. Historically,
the Company has achieved higher revenues and earnings in its third and fourth
quarters.
On October 23, 1997, the Company acquired all the outstanding shares of
Lil' Champ (the "Lil' Champ Acquisition"). The Company accounted for the Lil'
Champ Acquisition under the purchase method of accounting; therefore the
Consolidated Financial Statements only include Lil' Champ's results of
operations since the date of acquisition.
The Company
The Company is a privately held company and operates approximately 883
convenience stores primarily under the names "The Pantry" in North Carolina,
South Carolina, Tennessee, Kentucky, and Indiana or "Lil' Champ" in Florida and
Georgia. The Company's stores offer a broad selection of merchandise and
services designed to appeal to the convenience needs of its customers,
including tobacco products, beer, soft drinks, self-service fast food and
beverages, publications, dairy products, groceries, health and beauty aids,
video games and money orders. In its Florida, Georgia, Kentucky and Indiana
stores, the Company also sells lottery products. In addition, self-service
gasoline is sold at 812 locations, 546 of which sells gasoline under brand
names including Amoco, British Petroleum ("BP"), Chevron, Exxon, Fina, Shell,
and Texaco. Since fiscal 1994, merchandise revenues (including commissions from
services) and gasoline revenues have each averaged approximately 50% of total
revenues.
Recent Developments
On October 23, 1997, the Company acquired all of the outstanding common
stock of Lil' Champ from Docks U.S.A., Inc. for $135.9 million (net of cash
acquired), including the repayment of $10.7 million in outstanding indebtedness
of Lil' Champ. Lil' Champ is a leading operator of convenience stores in
Florida and the largest convenience store operator in northern Florida. Lil
Champ's 486 stores are located primarily in northern Florida and Georgia, with
150 stores concentrated in the Jacksonville, Florida area. The purchase price,
the refinancing of existing Lil' Champ debt, and the fees and expenses of the
Lil' Champ Acquisition were financed with the proceeds from the offering of
$200.0 million, 10 1/4% Senior Subordinated Notes due 2007 (the "Senior
Subordinated Notes"), cash on hand, and the net proceeds from the sale of the
Company's $0.01 par value Common Stock to existing stockholders and management
of the Company.
6
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 1 -- THE COMPANY AND RECENT DEVELOPMENTS -- Continued
The Senior Subordinated Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, as to the payment of principal, premium,
if any, and interest, jointly and severally, by all current direct and indirect
restricted subsidiaries (Sandhills, Inc. and Lil Champ, wholly-owned
subsidiaries of the Company) and future direct and indirect restricted
subsidiaries (the "Guarantors"). The Senior Subordinated Notes contain
covenants that, among other things, restrict the ability of the Company and any
restricted subsidiary to: (i) incur additional indebtedness; (ii) pay dividends
or make distributions; (iii) issue stock of subsidiaries; (iv) make certain
investments; (v) repurchase stock; (vi) create liens; (vii) enter into
transactions with affiliates; (viii) enter into sale-leaseback transactions;
(ix) merge or consolidate the Company or any of its subsidiaries; and (x)
transfer and sell assets.
On October 23, 1997, the Company entered into a new bank credit facility
(the "New Credit Facility") consisting of a $45.0 million "Revolving Credit
Facility" and a $30.0 million "Acquisition Facility." The New Credit Facility
is available for (i) working capital financing and general corporate purposes
of the Company, (ii) issuing commercial and standby letters of credit and (iii)
acquisitions. The New Credit Facility is secured by substantially all of the
assets of the Company and the Guarantors and is guaranteed by the Guarantors.
The New Credit Facility contains covenants restricting the ability of the
Company and any its subsidiaries to, among other things: (i) incur additional
debt; (ii) declare dividends or redeem or repurchase capital stock; (iii)
prepay, redeem or purchase debt; (iv) incur liens; (v) make loans and
investments; (vi) make capital expenditures; (vii) engage in mergers,
acquisitions and asset sales; and (viii) engage in transactions with
affiliates. The Company is also required to comply with financial covenants
with respect to (a) a minimum coverage ratio, (b) a minimum pro forma EBITDA
(as defined herein), (c) a maximum pro forma leverage ratio, and (d) a maximum
capital expenditure allowance.
On October 23, 1997, the Company purchased $51.0 million in principal
amount of Senior Notes at a purchase price of 110% of the aggregate principal
amount of each tendered Senior Note plus accrued and unpaid interest up to, but
not including, the date of purchase (the "Tender Offer"). The Company obtained
consents (the "Consent Solicitation") from the holders of the Senior Notes to
amendments and waivers to certain of the covenants contained in the indenture
governing the Senior Notes (the "Senior Notes Indenture"). The Senior Notes
Indenture contains covenants including the restrictions on the Company's
ability to incur additional indebtedness and make acquisitions. The Company
obtained consents to permit it to, among other things, offer the Senior
Subordinated Notes, consummate the Lil' Champ Acquisition and enter into the
New Credit Facility. The consideration paid in respect of validly delivered
consents was 1 3/4% of the principal amount of the Senior Notes. See "Note 5 --
Long-Term Debt."
On March 19, 1998, the Company acquired the operating assets of 23
convenience stores in Eastern North Carolina. Additionally, the Company
acquired one store located in Hilton Head, South Carolina and opened another in
Myrtle Beach, South Carolina. Subsequent to March 26, 1998, the Company
acquired or opened 12 stores, 10 of which were acquired in one transaction and
are located in the Gainesville, Florida area. These acquisitions have been
funded primarily from cash on hand and borrowings under the Company's
Acquisition Facility; and are therefore governed by the terms of the New Credit
Facility.
NOTE 2 -- THE LIL' CHAMP ACQUISITION AND PRO FORMA INFORMATION
The Lil' Champ Acquisition has been accounted for under the purchase
method of accounting. Under the purchase method, the total purchase price
including direct costs has been allocated to the tangible and intangible assets
acquired and liabilities assumed by the Company based on their respective fair
values as of the acquisition date based upon valuations, appraisals, and other
studies not yet complete and available. For purposes of these interim financial
statements and the notes hereto, (i) the excess of the purchase price including
direct costs over the historical net assets of Lil' Champ, $50,428,000, has
been considered to be goodwill and other intangible assets, pending the
completion of appraisals and other purchase price allocation adjustments and
(ii) are amortized over a weighted-average period of approximately 30 years.
7
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 2 -- THE LIL' CHAMP ACQUISITION AND PRO FORMA INFORMATION -- Continued
The assets acquired and liabilities assumed related to the Lil' Champ
Acquisition are as follows (in thousands):
Assets Acquired:
Receivables ................................................................ $ 1,846
Inventories ................................................................ 17,601
Prepaid Expenses and other current assets .................................. 1,402
--------
Total current assets acquired .............................................. 20,849
Property and equipment ..................................................... 130,949
Other non-current assets ................................................... 3,696
--------
Total assets acquired ...................................................... 155,494
--------
Liabilities Assumed:
Short-term capital lease obligations ....................................... 1,027
Accounts payable and accrued expenses ...................................... 36,544
--------
Total current liabilities acquired ......................................... 37,571
Long-term capital lease obligations ........................................ 11,716
Other non-current liabilities .............................................. 20,737
--------
Total liabilities assumed .................................................. 70,024
--------
Net tangible assets acquired ................................................. 85,470
Direct costs and identifiable and unidentifiable intangibles ................. 50,428
--------
Total consideration paid including direct costs, net of cash acquired of
$10,487 ................................................................... $135,898
========
Pro forma information for the six months ended March 27, 1997 and March
26, 1998, assuming the Lil' Champ Acquisition, the refinancing of existing Lil'
Champ debt, the issuance of the Senior Subordinated Notes, the Tender Offer and
Consent Solicitation, and the Equity Investment (as defined herein) occurred at
the beginning of each of the periods presented is as follows (in thousands):
Six Months Ended
March 27, March 26,
1997 1998
----------- ------------
Revenues ................................ $ 456,284 $455,560
Loss before extraordinary items ......... (6,881) (2,199)
Net loss ................................ (13,681) (8,999)
8
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 3 -- INVENTORIES
Inventories are stated at the lower of last-in, first-out (LIFO) cost or
market. Inventories consisted of the following (in thousands):
September 25, March 26,
1997 1998
--------------- ----------
Inventories at FIFO cost:
Merchandise .................... $ 16,877 $ 35,001
Gasoline ....................... 4,969 10,235
-------- --------
21,846 45,236
Less adjustment to LIFO cost:
Merchandise .................... (4,203) (8,057)
Gasoline ....................... (482) (590)
-------- --------
Inventories at LIFO cost ......... $ 17,161 $ 36,589
======== ========
Inventories at September 25, 1997 do not include the inventories of Lil'
Champ. See "Note 1 -- The Company and Recent Developments" and "Note 2 -- The
Lil' Champ Acquisition and Pro forma Information."
NOTE 4 -- ENVIRONMENTAL LIABILITIES AND CONTINGENCIES
Environmental reserves of $7.8 million and $11.0 million as of September
27, 1997 and March 26, 1998 represent estimates for future expenditures for
remediation, tank removal and litigation associated with all known contaminated
sites as a result of releases (e.g., overfills, spills and underground storage
tank releases) and are based on current regulations, historical results and
certain other factors. The Company anticipates that it will be reimbursed for a
portion of these expenditures from state insurance funds and private insurance.
These anticipated reimbursements of $8.2 million are recorded as long-term
environmental receivables.
The State of North Carolina and the State of Tennessee have assessed
Sandhills, Inc., a subsidiary of the Company, with additional taxes plus
penalties and accrued interest totaling approximately $5.0 million, for the
periods February 1, 1992 to September 26, 1996, respectively. The Company is
contesting these tax assessments and believes that it has meritorious defenses
to the proposed adjustments. Based on this, the Company believes the outcome of
the audits will not have a material adverse effect on the Company's financial
condition or results of operations.
NOTE 5 -- LONG-TERM DEBT
At September 25, 1997 and March 26, 1998, long-term debt consisted of the
following (in thousands):
September 25, March 26,
1997 1998
--------------- ------------
Notes payable ("Senior Notes"); due November 15, 2000; interest
payable semi-annually at 12 1/2% .................................... $ 99,995 $ 48,995
Notes payable ("Senior Subordinated Notes"); due October 15, 2007;
interest payable semi-annually at 10 1/4% ........................... -- 200,000
Notes payable ("Acquisition Facility"); interest only payable quarterly
at LIBOR plus 2 1/2% through October 31, 1999 with quarterly
installments of principal plus interest quarterly beginning
January 30, 2000 through October 31, 2002 ........................... -- 9,000
Other notes and mortgages payable; generally due in monthly
installments of principal plus interest at various rates and terms .. 343 348
-------- --------
100,338 258,343
Less -- current maturities ........................................... (33) (56)
-------- --------
$100,305 $258,287
======== ========
9
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 5 -- LONG-TERM DEBT -- Continued
On October 23, 1997 in connection with the Lil' Champ Acquisition, the
Company completed the offering of Senior Subordinated Notes and, in related
transactions, completed the Tender Offer and Consent Solicitation with respect
to the Senior Notes and entered into the New Credit Facility. See "Note 1 --
The Company and Recent Developments."
The Senior Notes are unconditionally guaranteed, on an unsecured senior
subordinated basis, as to the payment of principal, premium, if any, and
interest, jointly and severally, by all Guarantors. The terms of the Senior
Notes contain certain covenants restricting the (i) use of proceeds from the
offering; (ii) liens on properties; (iii) certain "restricted payments" as
defined in the agreement; (iv) the incurrance of additional debt; (v) the sale
of assets; (vi) any merger, (vii) consolidation or change in control; (viii)
lines of business and (ix) transactions with affiliates.
The Senior Subordinated Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, as to the payment of principal, premium,
if any, and interest, jointly and severally, by all Guarantors. The Senior
Subordinated Notes contain covenants that, among other things, restrict the
ability of the Company and any restricted subsidiary to: (i) incur additional
indebtedness; (ii) pay dividends or make distributions; (iii) issue stock of
subsidiaries; (iv) make certain investments; (v) repurchase stock; (vi) create
liens; (vii) enter into transactions with affiliates; (viii) enter into
sale-leaseback transactions; (ix) merge or consolidate the Company or any of
its subsidiaries; and (x) transfer and sell assets.
Under the terms of the New Credit Facility, the Acquisition Facility is
available to finance acquisitions of related businesses with certain
restrictions (see "Note 1 -- The Company and Recent Developments"). The New
Credit Facility contains covenants restricting the ability of the Company and
any its of subsidiaries to, among other things: (i) incur additional debt; (ii)
declare dividends or redeem or repurchase capital stock; (iii) prepay, redeem
or purchase debt; (iv) incur liens; (v) make loans and investments; (vi) make
capital expenditures; (vii) engage in mergers, acquisitions and asset sales;
and (viii) engage in transactions with affiliates. The Company is also required
to comply with financial covenants with respect to (a) a minimum coverage
ratio, (b) a minimum pro forma EBITDA, (c) a maximum pro forma leverage ratio,
and (d) a maximum capital expenditure allowance.
NOTE 6 -- SHAREHOLDERS' EQUITY
As described in Note 1 above, on October 23, 1997 in connection with the
Lil' Champ Acquisition and related transactions, the Company issued 72,000
shares of Common Stock, par value $0.01, to certain existing shareholders and a
member of management for $32.0 million. Prior to the purchase of Common Stock,
holders of the Company's Series A Preferred Stock, par value $0.01 per share,
contributed all outstanding shares of Series A Preferred Stock and related
accrued and unpaid dividends to the capital of the Company (together with the
issuance of Common Stock, "the Equity Investment"). As a result, preferred
stock and accrued dividends were each reduced by $260 and $5,570,000,
respectively, and additional paid in capital was increased by $5,570,260.
On January 1, 1998, the Company adopted an incentive and non-qualified
Stock Option Plan (the "Plan"). Pursuant to the provisions of the Plan, options
may be granted to officers, key employees and consultants of the Company or any
of its subsidiaries and certain members of the Board of Directors ("BOD") to
purchase shares of the Company's Common Stock. Under the Plan, incentive stock
options may only be granted to employees. The Plan is administered by the BOD,
or a committee of the BOD. Options are granted at prices determined by the BOD
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. As of
March 26, 1998, no grants have been made under the Plan.
NOTE 7 -- SUPPLEMENTAL GUARANTOR INFORMATION
In connection with the Lil' Champ Acquisition, the Guarantors jointly and
severally, unconditionally guaranteed, on an unsecured senior subordinated
basis, the full and prompt performance of The Pantry's obligations under its
Senior Subordinated Notes and its Senior Notes Indenture.
Management has determined that separate financial statements of the
Guarantors (Lil' Champ and Sandhills, Inc. as of September 25, 1997 and March
26, 1998, and for each of the three and six months ended March 27, 1997 and
March 26, 1998) would not be significant to investors and in lieu of such
separate financial statements, the Company has presented
10
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE 7 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
supplemental combining information. This supplemental combining information
includes the consolidated financial statements of the Company's unrestricted
subsidiary, PH and PH's wholly-owned subsidiaries, TC Capital Management, Inc.
and Pantry Properties, Inc. (together, the "Non-Guarantors"). Accordingly, the
following supplemental combining information presents information regarding The
Pantry, the Guarantors, the Non-Guarantors, and related consolidating entries.
The Company accounts for its wholly-owned subsidiaries on the equity
basis. Certain reclassifications have been made to conform all of the financial
information to the financial presentation on a consolidated basis. The
principal consolidating entries eliminate investments in subsidiaries and
intercompany balances.
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
September 25, 1997
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiary Subsidiary Eliminations Total
------------ ------------ -------------- -------------- -----------
(dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents ............. $ 2,247 $ 279 $ 821 $ -- $ 3,347
Receivables, net ...................... 4,056 4,562 30 (6,547) 2,101
Inventories ........................... 17,161 -- -- -- 17,161
Prepaid expenses ...................... 1,195 6 3 -- 1,204
Property held for sale ................ 3,323 -- -- -- 3,323
Deferred income taxes ................. 1,142 -- -- -- 1,142
-------- ------- ------ --------- --------
Total current assets ................ 29,124 4,847 854 (6,547) 28,278
-------- ------- ------ --------- --------
Investment in subsidiaries ............. 47,225 -- -- (47,225) --
-------- ------- ------ --------- --------
Property and equipment, net ............ 77,641 -- 345 -- 77,986
-------- ------- ------ --------- --------
Other assets:
Goodwill, net ......................... 20,318 -- -- -- 20,318
Deferred lease cost, net .............. 314 -- -- -- 314
Deferred financing cost, net .......... 4,578 -- -- -- 4,578
Environmental receivables, net ........ 6,511 -- -- -- 6,511
Deferred income taxes ................. 156 -- -- -- 156
Escrow for Lil' Champ acquisition ..... -- -- 4,049 -- 4,049
Intercompany notes receivable ......... -- 39,434 -- (39,434) --
Other non-current assets .............. 534 74 1 -- 609
-------- ------- ------ --------- --------
Total other assets .................. 32,411 39,508 4,050 (39,434) 36,535
-------- ------- ------ --------- --------
Total assets ........................... $186,401 $44,355 $5,249 $ (93,206) $142,799
======== ======= ====== ========= ========
11
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
September 25, 1997
Guarantor Non-Guarantor
The Pantry Subsidiary Subsidiary Eliminations Total
------------ ------------ -------------- -------------- ------------
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Current maturities of long-term debt .................... $ 17 $ -- $ 16 $ -- $ 33
Current maturities of capital lease obligations ......... 285 -- -- -- 285
Accounts payable: .......................................
Trade ................................................. 16,032 3 -- -- 16,035
Money orders .......................................... 3,022 -- -- -- 3,022
Accrued interest ........................................ 5,564 -- 1 (973) 4,592
Accrued compensation and related taxes .................. 3,322 -- 1 -- 3,323
Income taxes payable .................................... 313 1,560 235 (1,812) 296
Other accrued taxes ..................................... 2,194 -- -- -- 2,194
Accrued insurance ....................................... 3,887 -- -- -- 3,887
Other accrued liabilities ............................... 6,382 113 122 (3,761) 2,856
--------- ------- ------ --------- ---------
Total current liabilities ............................. 41,018 1,676 375 (6,546) 36,523
--------- ------- ------ --------- ---------
Long-term debt ........................................... 100,168 -- 137 -- 100,305
--------- ------- ------ --------- ---------
Other non-current liabilities:
Environmental reserve ................................... 7,806 -- -- -- 7,806
Deferred income taxes ................................... -- -- -- -- --
Capital lease obligations ............................... 679 -- -- -- 679
Employment obligations .................................. 1,341 -- -- -- 1,341
Accrued dividends on preferred stock .................... 7,958 -- -- -- 7,958
Intercompany note payable ............................... 39,434 -- -- (39,434) --
Other non-current liabilities ........................... 5,870 150 40 -- 6,060
--------- ------- ------ --------- ---------
Total other non-current liabilities ................... 63,088 150 40 (39,434) 23,844
--------- ------- ------ --------- ---------
Shareholders' equity (deficit):
Preferred stock ......................................... -- -- -- -- --
Common stock ............................................ 1 -- -- -- 1
Additional paid-in capital .............................. 5,396 25 5,001 (5,026) 5,396
Accumulated earnings (deficit) .......................... (23,270) 42,504 (304) (42,200) (23,270)
--------- ------- ------ --------- ---------
Total shareholders' equity (deficit) .................. (17,873) 42,529 4,697 (47,226) (17,873)
--------- ------- ------ --------- ---------
Total liabilities and shareholders' equity (deficit) ..... $ 186,401 $44,355 $5,249 $ (93,206) $ 142,799
========= ======= ====== ========= =========
12
THE PANTRY, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINING BALANCE SHEETS
March 26, 1998
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
------------ -------------- -------------- -------------- ----------
(dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents .......... $ 15,195 $ 12,441 $ 908 $ -- $ 28,544
Receivables, net ................... 7,125 13,299 4 (14,441) 5,987
Inventories ........................ 16,706 19,883 -- -- 36,589
Prepaid expenses ................... 772 946 9 -- 1,727
Property held for sale ............. 3,946 -- -- -- 3,946
Deferred income taxes .............. 1,142 -- -- -- 1,142
-------- -------- ------ ---------- --------
Total current assets ............. 44,886 46,569 921 (14,441) 77,935
-------- -------- ------ ---------- --------
Investment in subsidiaries .......... 52,409 -- -- (52,409) --
-------- -------- ------ ---------- --------
Property and equipment, net ......... 91,983 132,063 343 -- 224,389
-------- -------- ------ ---------- --------
Other assets:
Goodwill, net ...................... 20,424 49,749 -- -- 70,173
Deferred lease cost, net ........... 292 -- -- -- 292
Deferred financing cost, net ....... 13,989 -- -- -- 13,989
Environmental receivables, net ..... 6,511 1,718 -- -- 8,229
Deferred income taxes .............. 2,752 -- 17 (2,769) --
Intercompany notes receivable ...... -- 39,434 4,075 (43,509) --
Other non-current assets ........... 549 2,438 1 -- 2,988
-------- -------- ------ ---------- --------
Total other assets ............... 44,517 93,339 4,093 (46,278) 95,671
-------- -------- ------ ---------- --------
Total assets ........................ $233,795 $271,971 $5,357 $ (113,128) $397,995
======== ======== ====== ========== ========
13
THE PANTRY, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINING BALANCE SHEETS
March 26, 1998
Guarantor
The Pantry Subsidiaries
------------ --------------
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
Current liabilities:
Current maturities of long-term debt ........................ $ 17 $ 21
Current maturities of capital lease obligations ............. 285 1,027
Accounts payable: ...........................................
Trade ..................................................... 15,649 22,761
Money orders .............................................. 2,746 857
Accrued interest ............................................ 8,170 3,734
Accrued compensation and related taxes ...................... 2,917 2,844
Income taxes payable ........................................ -- 3,102
Other accrued taxes ......................................... 1,433 --
Accrued insurance ........................................... 3,215 2,220
Other accrued liabilities ................................... 11,810 8,220
--------- --------
Total current liabilities ................................. 46,242 44,786
--------- --------
Long-term debt ............................................... 112,427 145,734
--------- --------
Other non-current liabilities: ...............................
Environmental reserve ....................................... 7,863 3,150
Deferred income taxes ....................................... -- 9,518
Capital lease obligations ................................... 528 11,290
Employment obligations ...................................... 1,156 --
Accrued dividends on preferred stock ........................ 3,035 --
Intercompany note payable ................................... 43,482 --
Other non-current liabilities ............................... 8,545 9,762
--------- --------
Total other non-current liabilities ....................... 64,609 33,720
--------- --------
Shareholders' equity (deficit):
Preferred stock ............................................. -- --
Common stock ................................................ 2 --
Additional paid-in capital .................................. 43,116 25
Shareholder loan ............................................ (215) --
Accumulated earnings (deficit) .............................. (32,386) 47,706
--------- --------
Total shareholders' equity (deficit) ...................... 10,517 47,731
--------- --------
Total liaibilities and shareholders' equity (deficit) ........ $ 233,795 $271,971
========= ========
Non-Guarantor
Subsidiary Eliminations Total
-------------- -------------- ------------
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
Current liabilities:
Current maturities of long-term debt ........................ $ 18 $ -- $ 56
Current maturities of capital lease obligations ............. -- -- 1,312
Accounts payable: ...........................................
Trade ..................................................... -- -- 38,410
Money orders .............................................. -- -- 3,603
Accrued interest ............................................ 1 (1,032) 10,873
Accrued compensation and related taxes ...................... -- -- 5,761
Income taxes payable ........................................ 372 (3,474) --
Other accrued taxes ......................................... -- -- 1,433
Accrued insurance ........................................... -- -- 5,435
Other accrued liabilities ................................... 122 (9,962) 10,190
------ ---------- ---------
Total current liabilities ................................. 513 (14,468) 77,073
------ ---------- ---------
Long-term debt ............................................... 126 -- 258,287
------ ---------- ---------
Other non-current liabilities: ...............................
Environmental reserve ....................................... -- -- 11,013
Deferred income taxes ....................................... -- (2,769) 6,749
Capital lease obligations ................................... -- -- 11,818
Employment obligations ...................................... -- -- 1,156
Accrued dividends on preferred stock ........................ -- -- 3,035
Intercompany note payable ................................... -- (43,482) --
Other non-current liabilities ............................... 40 -- 18,347
------ ---------- ---------
Total other non-current liabilities ....................... 40 (46,251) 52,118
------ ---------- ---------
Shareholders' equity (deficit):
Preferred stock ............................................. -- -- --
Common stock ................................................ -- -- 2
Additional paid-in capital .................................. 5,001 (5,026) 43,116
Shareholder loan ............................................ -- -- (215)
Accumulated earnings (deficit) .............................. (323) (47,383) (32,386)
------ ---------- ---------
Total shareholders' equity (deficit) ...................... 4,678 (52,409) 10,517
------ ---------- ---------
Total liaibilities and shareholders' equity (deficit) ........ $5,357 $ (113,128) $ 397,995
====== ========== =========
14
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
Three Months Ended March 27, 1997
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiary Subsidiary Eliminations Total
------------ ------------ -------------- -------------- ------------
(dollars in thousands)
Revenues:
Merchandise sales .................................. $ 44,733 $ -- $ -- $ -- $ 44,733
Gasoline sales ..................................... 50,000 -- -- -- 50,000
Commissions ........................................ 1,177 -- -- -- 1,177
-------- -------- ---- -------- --------
Total revenues ................................... 95,910 -- -- -- 95,910
-------- -------- ---- -------- --------
Cost of sales:
Merchandise ........................................ 29,328 -- -- -- 29,328
Gasoline ........................................... 45,291 -- -- -- 45,291
-------- -------- ---- -------- --------
Total cost of sales .............................. 74,619 -- -- -- 74,619
-------- -------- ---- -------- --------
Gross profit ........................................ 21,291 -- -- -- 21,291
-------- -------- ---- -------- --------
Operating expenses:
Store expenses ..................................... 17,117 -- (82) (2,858) 14,177
General and administrative expenses ................ 4,371 17 7 -- 4,395
Depreciation and amortization ...................... 2,230 4 1 -- 2,235
-------- -------- ---- -------- --------
Total operating expenses ......................... 23,718 21 (74) (2,858) 20,807
-------- -------- ---- -------- --------
Income (loss) from operations ....................... (2,427) (21) 74 2,858 484
-------- -------- ---- -------- --------
Equity in earnings of subsidiaries .................. 3,629 -- -- (3,629) --
-------- -------- ---- -------- --------
Other income (expense):
Interest expense ................................... (3,839) -- (3) 504 (3,338)
Miscellaneous ...................................... 435 3,535 45 (3,363) 652
-------- -------- ------ -------- --------
Total other expense .............................. (3,404) 3,535 42 (2,859) (2,686)
-------- -------- ------ -------- --------
Income (loss) before income taxes and
extraordinary item ................................. (2,202) 3,514 116 (3,630) (2,202)
Income tax benefit (expense) ........................ 441 (1,195) (34) 1,229 441
-------- -------- ------ -------- --------
Net income (loss) before extraordinary item ......... (1,761) 2,319 82 (2,401) (1,761)
Extraordinary item, net of taxes .................... -- -- -- -- --
-------- -------- ------ -------- --------
Net income (loss) ................................... $ (1,761) $ 2,319 $ 82 $ (2,401) $ (1,761)
======== ======== ====== ======== ========
15
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
Three Months Ended March 26, 1998
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
------------ -------------- -------------- -------------- -----------
(dollars in thousands)
Revenues:
Merchandise sales .................................. $ 48,733 $ 55,672 $ -- $ -- $104,405
Gasoline sales ..................................... 48,636 64,060 -- -- 112,696
Commissions ........................................ 1,483 2,086 -- -- 3,569
-------- -------- ---- -------- --------
Total revenues ................................... 98,852 121,818 -- -- 220,670
-------- -------- ---- -------- --------
Cost of sales:
Merchandise ........................................ 31,272 36,696 -- -- 67,968
Gasoline ........................................... 43,541 55,874 -- -- 99,415
-------- -------- ---- -------- --------
Total cost of sales .............................. 74,813 92,570 -- -- 167,383
-------- -------- ---- -------- --------
Gross profit ........................................ 24,039 29,248 -- -- 53,287
-------- -------- ---- -------- --------
Operating expenses:
Store expenses ..................................... 18,960 17,723 (59) (2,936) 33,688
General and administrative expenses ................ 4,146 4,207 7 -- 8,360
Depreciation and amortization ...................... 3,317 3,306 1 -- 6,624
-------- -------- ---- -------- --------
Total operating expenses ......................... 26,423 25,236 (51) (2,936) 48,672
-------- -------- ---- -------- --------
Income (loss) from operations ....................... (2,384) 4,012 51 2,936 4,615
-------- -------- ---- -------- --------
Equity in earnings of subsidiaries .................. 4,098 -- -- (4,098) --
-------- -------- ---- -------- --------
Other income (expense):
Interest expense ................................... (3,977) (4,038) (3) 984 (7,034)
Miscellaneous ...................................... 179 4,097 9 (3,950) 335
-------- -------- ------ -------- --------
Total other expense .............................. (3,798) 59 6 (2,966) (6,699)
-------- -------- ------ -------- --------
Income (loss) before income taxes and
extraordinary item ................................. (2,084) 4,071 57 (4,128) (2,084)
Income tax benefit (expense) ........................ 504 (1,368) (57) 1,425 504
-------- -------- ------ -------- --------
Net income (loss) before extraordinary item ......... (1,580) 2,703 -- (2,703) (1,580)
Extraordinary item, net of taxes .................... -- -- -- -- --
-------- -------- ------ -------- --------
Net income (loss) ................................... $ (1,580) $ 2,703 $ -- $ (2,703) $ (1,580)
======== ======== ====== ======== ========
16
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
Six Months Ended March 27, 1997
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiary Subsidiary Eliminations Total
------------ ------------ -------------- -------------- ------------
(dollars in thousands)
Revenues:
Merchandise sales .................................. $ 92,117 -- $ -- $ -- $ 92,117
Gasoline sales ..................................... 101,838 -- -- -- 101,838
Commissions ........................................ 2,286 -- -- -- 2,286
-------- -- ----- -------- --------
Total revenues ................................... 196,241 -- -- -- 196,241
-------- -- ----- -------- --------
Cost of sales:
Merchandise ........................................ 60,832 -- -- -- 60,832
Gasoline ........................................... 91,918 -- -- -- 91,918
-------- -- ----- -------- --------
Total cost of sales .............................. 152,750 -- -- -- 152,750
-------- -- ----- -------- --------
Gross profit ........................................ 43,491 -- -- -- 43,491
-------- -- ----- -------- --------
Operating expenses:
Store expenses ..................................... 34,697 -- (163) (5,849) 28,685
General and administrative expenses ................ 8,431 35 12 -- 8,478
Depreciation and amortization ...................... 4,488 7 3 -- 4,498
-------- -- ----- -------- --------
Total operating expenses ......................... 47,616 42 (148) (5,849) 41,661
-------- -- ----- -------- --------
Income (loss) from operations ....................... (4,125) (42) 148 5,849 1,830
-------- --- ----- -------- --------
Equity in earnings of subsidiaries .................. 7,555 -- -- (7,555) --
-------- --- ----- -------- --------
Other income (expense):
Interest expense ................................... (7,771) -- (7) 1,299 (6,479)
Miscellaneous ...................................... 411 7,366 90 (7,148) 719
-------- ----- ------- -------- --------
Total other expense .............................. (7,360) 7,366 83 (5,849) (5,760)
-------- ----- ------- -------- --------
Income (loss) before income taxes and
extraordinary item ................................. (3,930) 7,324 231 (7,555) (3,930)
Income tax benefit (expense) ........................ 786 (2,490) (69) 2,559 786
-------- ------ ------- -------- --------
Net income (loss) before extraordinary item ......... (3,144) 4,834 162 (4,996) (3,144)
Extraordinary item, net of taxes .................... -- -- -- -- --
-------- ------ ------- -------- --------
Net income (loss) ................................... $ (3,144) $ 4,834 $ 162 $ (4,996) $ (3,144)
======== ======== ======= ======== ========
17
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
Six Months Ended March 26, 1998
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
------------ -------------- -------------- -------------- -----------
(dollars in thousands)
Revenues:
Merchandise sales .................................. $ 99,613 $ 94,152 $ -- $ -- $ 193,765
Gasoline sales ..................................... 105,466 110,252 -- -- 215,718
Commissions ........................................ 2,915 3,443 -- -- 6,358
-------- -------- ----- -------- ---------
Total revenues ................................... 207,994 207,847 -- -- 415,841
-------- -------- ----- -------- ---------
Cost of sales: ......................................
Merchandise ........................................ 64,374 62,491 -- -- 126,865
Gasoline ........................................... 93,984 96,340 -- -- 190,324
-------- -------- ----- -------- ---------
Total cost of sales .............................. 158,358 158,831 -- -- 317,189
-------- -------- ----- -------- ---------
Gross profit ........................................ 49,636 49,016 -- -- 98,652
-------- -------- ----- -------- ---------
Operating expenses:
Store expenses ..................................... 37,962 30,212 (119) (6,202) 61,853
General and administrative expenses ................ 8,481 7,039 12 -- 15,532
Depreciation and amortization ...................... 6,187 5,585 3 -- 11,775
-------- -------- ----- -------- ---------
Total operating expenses ......................... 52,630 42,836 (104) (6,202) 89,160
-------- -------- ----- -------- ---------
Income (loss) from operations ....................... (2,994) 6,180 104 6,202 9,492
-------- -------- ----- -------- ---------
Equity in earnings of subsidiaries .................. 8,071 -- -- (8,071) --
-------- -------- ----- -------- ---------
Other income (expense):
Interest expense ................................... (8,125) (6,785) (6) 2,065 (12,851)
Miscellaneous ...................................... 463 8,562 15 (8,266) 774
-------- -------- ------- -------- ---------
Total other expense .............................. (7,662) 1,777 9 (6,201) (12,077)
-------- -------- ------- -------- ---------
Income (loss) before income taxes and
extraordinary item ................................. (2,585) 7,957 113 (8,070) (2,585)
Income tax benefit (expense) ........................ 916 (2,755) (132) 2,887 916
-------- -------- ------- -------- ---------
Net income (loss) before extraordinary item ......... (1,669) 5,202 (19) (5,183) (1,669)
Extraordinary item, net of taxes .................... (6,800) -- -- -- (6,800)
-------- -------- ------- -------- ---------
Net income (loss) ................................... $ (8,469) $ 5,202 $ (19) $ (5,183) $ (8,469)
======== ======== ======= ======== =========
18
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
Six Months Ended March 27, 1997
The Pantry Guarantor
(Issuer) Subsidiary
-------------- ------------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................ $(3,144) $ 4,834
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: .................
Depreciation and amortization ............................... 4,488 7
Change in deferred income taxes ............................. (907) --
(Gain) loss on sale of property and equipment ............... (432) --
Reserves for environmental issues ........................... 233 --
Equity earnings of affiliates ............................... (4,997) --
Changes in operating assets and liabilities, net:
Receivables ................................................. 424 535
Inventories ................................................. (2,255) --
Prepaid expenses ............................................ 64 1
Other non-current assets .................................... (33) --
Accounts payable ............................................ (703) --
Other current liabilities and accrued expenses .............. 325 (193)
Employment obligations ...................................... (336) --
Other non-current liabilities ............................... 476 --
------- -------
Net cash provided by (used in) operating activities .......... (6,797) 5,184
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ......................... (660) --
Additions to property and equipment ......................... (4,170) --
Proceeds from sale of property and equipment ................ 1,478 --
Intercompany notes receivable (payable) ..................... (5,851) 5,851
------- -------
Net cash used provided by (used in) investing activities ..... (9,203) 5,851
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases ................... (151) --
Principal repayments of long-term debt ...................... (2) --
Proceeds from issuance of long-term debt .................... 200 --
Net proceeds from equity issue .............................. 15,947 --
Other financing costs ....................................... (85) --
--------- -------
Net cash provided by (used in) financing activities .......... 15,909 --
--------- -------
NET INCREASE (DECREASE) IN CASH .............................. (91) 11,035
CASH & CASH EQUIVALENTS, BEGINNING OF YEAR ................... 1,513 135
--------- -------
CASH & CASH EQUIVALENTS, END OF QUARTER ...................... $ 1,422 $11,170
========= =======
Non-Guarantor
Subsidiary Eliminations Total
-------------- -------------- ------------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................ $ 162 $ (4,996) $ (3,144)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: .................
Depreciation and amortization ............................... 3 -- 4,498
Change in deferred income taxes ............................. -- -- (907)
(Gain) loss on sale of property and equipment ............... -- -- (432)
Reserves for environmental issues ........................... -- -- 233
Equity earnings of affiliates ............................... 1 4,996 --
Changes in operating assets and liabilities, net:
Receivables ................................................. (9) (602) 348
Inventories ................................................. -- -- (2,255)
Prepaid expenses ............................................ (6) -- 59
Other non-current assets .................................... -- -- (33)
Accounts payable ............................................ -- -- (703)
Other current liabilities and accrued expenses .............. 69 602 803
Employment obligations ...................................... -- -- (336)
Other non-current liabilities ............................... (1) -- 475
-------- -------- --------
Net cash provided by (used in) operating activities .......... 219 -- (1,394)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ......................... (5) -- (665)
Additions to property and equipment ......................... -- -- (4,170)
Proceeds from sale of property and equipment ................ -- -- 1,478
Intercompany notes receivable (payable) ..................... -- -- --
------- -------- --------
Net cash used provided by (used in) investing activities ..... (5) -- (3,357)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases ................... -- -- (151)
Principal repayments of long-term debt ...................... (8) -- (10)
Proceeds from issuance of long-term debt .................... -- -- 200
Net proceeds from equity issue .............................. -- -- 15,947
Other financing costs ....................................... -- -- (85)
------- -------- --------
Net cash provided by (used in) financing activities .......... (8) -- 15,901
-------- -------- --------
NET INCREASE (DECREASE) IN CASH .............................. 206 -- 11,150
CASH & CASH EQUIVALENTS, BEGINNING OF YEAR ................... 3,690 -- 5,338
------- -------- --------
CASH & CASH EQUIVALENTS, END OF QUARTER ...................... $3,896 $ -- $ 16,488
======= ======== ========
19
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
Six Months Ended March 26, 1998
The Pantry Guarantor Non-Guarantor
(Issuer) Subsidiaries Subsidiary Eliminations Total
------------ -------------- -------------- -------------- ------------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ........................................ $ (8,469) $ 5,202 $(19) $ (5,183) $ (8,469)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary loss ...................................... 6,800 -- -- -- 6,800
Depreciation and amortization ........................... 6,193 5,580 2 -- 11,775
Change in deferred income taxes ......................... (1,398) -- (17) -- (1,415)
(Gain) loss on sale of property and equipment ........... 100 109 -- -- 209
Reserves for environmental issues ....................... 57 -- -- -- 57
Equity earnings of affiliates ........................... (5,183) -- -- 5,183 --
Changes in operating assets and liabilities, net:
Receivables ............................................. (3,068) (6,891) 26 6,175 (3,758)
Inventories ............................................. 1,501 (2,282) -- -- (781)
Prepaid expenses ........................................ 423 462 (6) -- 879
Other noncurrent assets ................................. (15) (386) -- 5,767 5,366
Accounts payable ........................................ (661) 2,056 -- 2 1,397
Other current liabilities and accrued expenses .......... 5,883 3,462 136 (7,922) 1,559
Employment obligations .................................. (185) -- -- -- (185)
Other noncurrent liabilities ............................ 2,675 1,543 -- -- 4,218
--------- ---------- ------ -------- ----------
Net cash provided by (used in) operating activities ...... 4,653 8,855 122 4,022 17,652
--------- ---------- ------ -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ..................... (2,648) -- -- -- (2,648)
Additions to property and equipment ..................... (11,324) (6,490) -- -- (17,814)
Proceeds from sale of property held for sale ............ 2,025 -- -- -- 2,025
Proceeds from sale of property and equipment ............ 316 366 -- -- 682
Intercompany notes receivable (payable) ................. 4,048 -- (26) (4,022) --
Acquisitions of related businesses, net of cash
acquired of $10,487.................................... (9,500) (135,898) -- -- (145,398)
--------- ---------- ------ -------- ----------
Net cash used in investing activities .................... (17,083) (142,022) (26) (4,022) (163,153)
--------- ---------- ------ -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases ............... (151) (426) -- -- (577)
Principal repayments of long-term debt .................. (57,000) -- (9) -- (57,009)
Proceeds from issuance of long-term debt ................ 63,267 145,755 -- -- 209,022
Net proceeds from equity issue .......................... 31,936 -- -- -- 31,936
Other financing costs ................................... (12,674) -- -- -- (12,674)
--------- ---------- ------ -------- ----------
Net cash provided by (used in) financing activities ...... 25,378 145,329 (9) -- 170,698
--------- ---------- ------- -------- ----------
NET INCREASE IN CASH ..................................... 12,948 12,162 87 -- 25,197
CASH & CASH EQUIVALENTS, BEGINNING OF YEAR ............... 2,247 279 821 -- 3,347
--------- ---------- ------ -------- ----------
CASH & CASH EQUIVALENTS, END OF QUARTER .................. $ 15,195 $ 12,441 $908 $ -- $ 28,544
========= ========== ====== ======== ==========
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Actual
results could differ materially from those projected in such forward-looking
statements and are subject to risks including, but not limited to, those
identified in the Company's Registration Statements on Form S-4, as amended,
effective January 8, 1998.
Management's discussion and analysis should be read in conjunction with
the financial statements and notes thereto. Further information is contained in
the Company's 10-K, the Company's Quarterly Report on Form 10-Q for the quarter
ended December 25, 1997, the Company's Registration Statement on Form S-4, as
amended, effective January 8, 1998, and the Company's Current Report on Form
8-K dated October 23, 1997.
Recent Developments
On October 23, 1997, the Company acquired all of the outstanding common
stock of Lil' Champ from Docks U.S.A., Inc. for $135.9 million (net of cash
acquired), including the repayment of $10.7 million in outstanding indebtedness
of Lil' Champ, and consummated certain other related transactions. The
acquisition was funded by a combination of Senior Subordinated Notes, cash on
hand, and an additional equity investment certain existing shareholders and a
member of management (see "PART I. -- Financial Information -- Item 1.
Financial Statements -- Notes to Consolidated Financial Statements -- Note 2 --
The Lil' Champ Acquisition and Pro Forma Information"). Lil' Champ is a leading
operator of convenience stores in Florida and the largest convenience store
operator in northern Florida.
On March 19, 1998, the Company acquired the operating assets of 23
convenience stores in Eastern North Carolina. During the quarter ended March
26, 1998, the Company acquired one convenience store located in Hilton Head,
South Carolina and opened another in Myrtle Beach, South Carolina. Subsequent
to March 26, 1998, the Company acquired or opened 12 stores, 10 of which were
acquired in one transaction and are located in the Gainesville, Florida area.
These acquisitions were primarily funded from cash on hand and borrowings under
the Company's Acquisition Facility. The combination of The Pantry, Lil' Champ,
and selected "tuck in" acquisitions has created one of the largest independent
convenience store chains in the United States (based on number of stores) with
883 stores located primarily in the Southeast.
The Lil' Champ Acquisition and subsequent "tuck in" acquisitions are
consistent with management's strategic goal to continue to capitalize on and
enhance the Company's position as a leading convenience store retailer in the
Southeast. Management believes acquiring Lil' Champ and selected stores in
existing markets provides the Company with a significant competitive advantage
in generating operating efficiencies and pursuing other "tuck in" acquisitions.
The Company's senior management team continues to increase and strengthen
management depth to facilitate the Company's Southeastern growth plans.
Despite the attention given to the Lil' Champ Acquisition, the above
activities, and the relatively weak gasoline margins in the Pantry's operating
markets, the Company is able to report increases in income from operations and
EBITDA (as defined herein) for both Pantry and Lil' Champ operations for the
six and five month periods ended March 26, 1998, respectively, when compared to
the same periods in the prior year (see "Results of Operations" for a detailed
discussion).
For a more detailed discussion of Lil' Champ's operations and its impact
on the Pantry, refer to the Company's Registration Statement on Form S-4, as
amended, effective January 8, 1998 and the Company's Current Report on Form 8-K
dated October 23, 1997.
Results of Operations
Impact of Lil' Champ Acquisition. The Lil' Champ Acquisition and related
transactions have had a material impact on the Company's financial condition
and results of operations since the date of acquisition. The Consolidated
Statements of Operations for the six and three months ended March 26, 1998
discussed herein includes Lil' Champ operations for the five and three month
periods ended March 26, 1998, respectively. Due to the method of accounting for
the Lil' Champ Acquisition, the Consolidated Balance Sheets as of September 25,
1997 and the Consolidated Statements of Operations for the six and three months
ended March 27, 1997 do not include the assets, liabilities, and results of
operations of Lil' Champ.
For the above reasons and in an effort to provide information, set forth
below are selected unaudited financial and operating data of the Company
(including Lil' Champ fiscal year 1998 results since the date of acquisition),
the Company excluding Lil' Champ results (as previously defined, the "Pantry"),
and Lil' Champ. This information is provided on an interim basis for the
current fiscal year and is intended to aid in the discussion of the Company's
results of operations. Amounts are in millions, except store operating data and
ratios.
21
The selected operating results in the first two columns of each table
include the consolidated accounts of The Pantry, Inc. and its wholly-owned
subsidiaries, Lil' Champ, Sandhills, Inc., and PH and PH's wholly-owned
subsidiaries, TC Capital Management, Inc. and Pantry Properties, Inc. Due to
the method of accounting for the Lil' Champ Acquisition, the consolidated
operating results for the six and three months ended March 27, 1997, do not
include Lil' Champ results and include only the five and three months of Lil'
Champ operating results for the periods ended March 26, 1998. For purpose of
review and comparison, these tables show consolidated results, Pantry results,
and Lil' Champ results separately and presents Lil' Champ results for only the
five months or twenty-two weeks ended March 26, 1998 in the "Six Month" table.
Selected Operating Results for the Six Months Ended
Consolidated The Pantry Lil' Champ
------------------------- ------------------------- ------------------------
March 27, March 26, March 27, March 26, March 27, March 26,
1997 1998 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------ -----------
(26 weeks) (26 weeks) (26 weeks) (26 weeks) (22 weeks) (22 weeks)
Income Statement Data:
Revenues:
Merchandise Sales .......................... $ 92.1 $ 193.8 $ 92.1 $ 99.6 $ 94.1 $ 94.2
Gasoline sales ............................. 101.8 215.7 101.8 105.5 123.0 110.2
Commissions ................................ 2.3 6.4 2.3 3.0 3.6 3.4
------ ------- ------ ------ ------ ------
Total Revenues ............................... 196.2 415.9 196.2 208.1 220.7 207.8
Cost of Sales:
Merchandise ................................ 60.8 126.9 60.8 64.4 62.2 62.5
Gasoline ................................... 91.9 190.3 91.9 94.0 112.0 96.3
------ ------- ------ ------ ------ ------
Gross Profit ................................. 43.5 98.7 43.5 49.7 46.5 49.0
Income from operations ....................... 1.8 9.5 1.8 3.3 3.6 6.2
Interest expense ............................. 6.5 12.9 n/a n/a n/a n/a
Other Financial Data:
EBITDA (a) ................................... $ 7.0 $ 22.1 $ 7.0 $ 10.1 $ 8.8 $ 12.0
EBITDA/interest expense ...................... 1.1 x 1.7 x n/a n/a n/a n/a
Store Operating Data:
Number of stores (end of period) ............. 375 883 375 404 491 479
Same store sales growth (b):
Merchandise ................................ 11.1 % 2.6 % 11.1 % 4.2 % n/a 1.2 %
Gasoline gallons ........................... 3.8 % 2.0 % 3.8 % 5.6 % n/a 0.1 %
Merchandise gross margin ..................... 34.0 % 34.5 % 34.0 % 35.3 % 33.9 % 33.7 %
Gasoline gallons sold (in millions) .......... 81.3 189.3 81.3 94.7 95.2 94.6
Average retail gasoline price per gallon ..... $ 1.25 $ 1.14 $ 1.25 $ 1.11 $ 1.29 $ 1.16
Average gasoline gross profit
per gallon (in cents) ...................... 12.18c 13.42c 12.18c 12.14c 11.55c 14.69c
22
Selected Operating Results for the Quarter Ended
Consolidated The Pantry Lil' Champ
------------------------- ------------------------- ------------------------
March 27, March 26, March 27, March 26, March 27, March 26,
1997 1998 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------ -----------
(13 weeks) (13 weeks) (13 weeks) (13 weeks) (13 weeks) (13 weeks)
Income Statement Data:
Revenues:
Merchandise Sales ........................... $ 44.7 $ 104.4 $ 44.7 $ 48.7 $ 56.4 $ 55.7
Gasoline sales .............................. 50.0 112.7 50.0 48.7 72.8 64.0
Commissions ................................. 1.2 3.6 1.2 1.6 2.1 2.0
------- -------- ------- ------- ------- -------
Total Revenues ............................... 95.9 220.7 95.9 99.0 131.3 121.7
Cost of Sales:
Merchandise ................................. 29.3 68.0 29.3 31.3 37.3 36.7
Gasoline .................................... 45.3 99.4 45.3 43.6 66.0 55.8
------- -------- ------- ------- ------- -------
Gross Profit ................................. 21.3 53.3 21.3 24.1 28.0 29.2
Income from operations ....................... 0.5 4.6 0.5 0.6 2.1 4.0
Interest expense ............................. 3.4 7.1 n/a n/a n/a n/a
Other Financial Data:
EBITDA (a) .................................. $ 3.3 $ 11.6 $ 3.3 $ 4.1 $ 5.3 $ 7.5
EBITDA/interest expense ..................... 1.0 x 1.6 x n/a n/a n/a n/a
Store Operating Data:
Same store sales growth (b):
Merchandise ............................... 10.9 % 2.1 % 10.9 % 4.9 % n/a 0.0 %
Gasoline gallons .......................... 9.2 % 2.0 % 9.2 % 3.2 % n/a 1.2 %
Merchandise gross margin ..................... 34.5 % 34.9 % 34.5 % 35.7 % 33.9 % 34.1 %
Gasoline gallons sold (in millions) .......... 40.0 101.8 40.0 45.7 56.2 56.1
Average retail gasoline price per gallon ..... $ 1.25 $ 1.11 $ 1.25 $ 1.07 $ 1.30 $ 1.14
Average gasoline gross profit
per gallon (in cents) ....................... 11.75c 13.06c 11.75c 11.16c 12.10c 14.62c
- ---------
(a) "EBITDA" represents income before interest expense, income tax benefit,
depreciation and amortization, and extraordinary loss.
(b) The stores included in calculating "same store sales growth" are Pantry and
Lil' Champ stores that were in operation for both the six and three months
ended and the five and three months ended March 27, 1997 and March 26,
1998, respectively. For consolidated "same store sales growth", Lil' Champ
"same store sales growth" volume data was added to Pantry volume data.
Six Months Ended March 26, 1998 Compared to the Six Months Ended March 27,
1997
Gross Revenue. Total revenue for the six month period ended March 26, 1998
(the "first fiscal six months 1998") increased $219.6 million over the
comparable period ended March 27, 1997 (the "first fiscal six months 1997").
The increase in total revenue is primarily attributable to Lil' Champ revenue
of $207.8 million for the five month period ended March 26, 1998, the revenue
from stores acquired or opened since March 27, 1997, and same store sales
growth.
Merchandise Revenue. Total merchandise revenue for the first fiscal six
months 1998 increased $101.6 million over the first fiscal six months 1997. The
increase in merchandise revenue is primarily attributable to Lil' Champ
merchandise revenue of $94.2 million for the five month period ended March 26,
1998, the revenue from stores acquired or opened since March 27, 1997, and same
store sales growth. The Pantry locations and Lil' Champ locations same store
merchandise revenue for the six and five month periods ended March 26, 1998
increased 4.2% and 1.2% over the comparable periods in 1997, respectively.
Overall same store merchandise sales growth was 2.6% (see footnote [b] to the
table above). Same store sales increases at the Pantry locations are primarily
attributable to increased customer counts and average transaction size
resulting from more competitive gasoline pricing, enhanced store appearance and
store merchandising, and increased in-store promotional activity. Same store
sales increases at Lil' Champ locations are primarily attributable to store
merchandising, increases in food service sales, and promotional activity.
23
Gasoline Revenue and Gallons. Total gasoline revenue for the first fiscal
six months 1998 increased $113.9 million over the first fiscal six months 1997.
The increase in gasoline revenue is primarily attributable to Lil' Champ
gasoline revenue of $110.2 million for the five month period ended March 26,
1998, the revenue from stores acquired or opened since March 27, 1997, and same
store gallon sales growth. Overall gasoline revenue growth was partially offset
by lower average gasoline retail prices in the first fiscal six months 1998
versus the first fiscal six months 1997. In the first fiscal six months 1998,
the Company's average retail price of gasoline was $0.11 lower than in the
first fiscal six months 1997.
In the first fiscal six months 1998, total gasoline gallons increased
108.0 million gallons over the first fiscal six months 1997, 94.6 million of
which is attributable to Lil' Champ volume. Pantry locations and Lil' Champ
locations same store gasoline gallon sales for the six and five month periods
ended March 26, 1998 increased 5.6% and 0.1% over the comparable periods in
1997, respectively. Overall same store gallon sales growth was 2.0% (see
footnote [b] to the table above). Same store gallon increases at Pantry
locations are primarily attributable to more competitive gasoline pricing,
rebranding and promotional activity, and enhanced store appearance. Same store
gallon results at Lil' Champ locations are primarily attributable to general
gasoline conditions and relatively inclement weather in Florida and coastal
Georgia during the five month period ended March 26, 1998.
Commission Revenue. Total commission revenue for the first fiscal six
months 1998 increased $4.1 million over the first fiscal six months 1997. The
increase in commission revenue is primarily attributable to Lil' Champ revenue
of $3.4 million for the five month period ended March 26, 1998 and the revenue
from stores acquired or opened since March 27, 1997. Lil' Champ's commission
revenue is principally lottery revenue in locations throughout Florida and
Georgia.
Total Gross Profit. Total gross profit for the first fiscal six months
1998 increased $55.2 million over the first fiscal six months 1997. The
increase in gross profit is primarily attributable to Lil' Champ gross profit
of $49.0 million for the five month period ended March 26, 1998 and an increase
of $6.2 million in gross profit for Pantry operations. The increase in Pantry
location gross profits is primarily attributable to the gross profit from
stores acquired or opened since March 27, 1997, same store volume growth, and a
higher merchandise gross margin.
Merchandise Gross Margin. The merchandise gross margin increase from 34.0%
in the first fiscal six months 1997 to 34.5% in the first fiscal six months
1998 is primarily attributable to changes in merchandise mix at Pantry
locations and the addition of several higher average margin Pantry locations
acquired in the coastal Carolinas. The margin increase was partially offset by
the slightly lower merchandise gross margin at Lil' Champ locations.
Gasoline Gross Profit Per Gallon. The gasoline gross profit per gallon
increase from $0.122 in the first fiscal six months 1997 to $0.134 in first
fiscal six months 1998 is the result of general gasoline market conditions in
Lil' Champ's markets. The increase was partially offset by the lower gasoline
margins realized in Pantry operations.
Store Operating and General and Administrative Expenses. Store operating
expenses for the first fiscal six months 1998 increased $33.2 million over the
first fiscal six months 1997. The increase in store expenses is primarily
attributable to Lil' Champ expenses of $30.1 million for the five month period
ended March 26, 1998 and the personnel and lease expenses associated with the
stores acquired or opened since March 27, 1997.
General and administrative expenses for the first fiscal six months 1998
increased $7.1 million over the first fiscal six months 1997. The increase in
general and administrative expenses is primarily attributable to Lil' Champ
expenses of $7.0 million for the five month period ended March 26, 1998.
General and administrative expenses decreased as a percentage of merchandise
sales.
Income from Operations. Income from operations for the first fiscal six
months 1998 increased $7.7 million over the first fiscal six months 1997. The
increase is primarily attributable to Lil' Champ income from operations of $6.2
million and to an increase of $1.5 million in income from Pantry operations.
The increase in income from Pantry operations is primarily attributable to the
earnings from stores acquired or opened since March 27, 1997, same store volume
increases, and the margin impact as discussed above.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA").
EBITDA represents income before interest expense, income tax benefit,
depreciation and amortization, and extraordinary loss. EBITDA for the first
fiscal six months 1998 increased $15.1 million over the first fiscal six months
in 1997. The increase is attributable to Lil' Champ EBITDA of $12.0 million for
the five month period ended March 26, 1998 and an increase of $3.1 million in
EBITDA for Pantry operations. The Pantry increase is attributable to the items
discussed above, as well as gains on the sale of assets and other miscellaneous
income.
24
EBITDA is not a measure of performance under generally accepted accounting
principles, and should not be 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. The Company has included information concerning
EBITDA as one measure of an issuer's historical ability to service debt. EBITDA
should not be considered as an alternative to, or more meaningful than, income
from operations or cash flow as an indication of the Company's operating
performance.
Interest Expense (see "Liquidity and Capital Resources; Long-Term Debt").
Interest expense is primarily interest on the Company's Senior Notes and Senior
Subordinated Notes. Interest expense increased $6.4 million for the first
fiscal six months in 1998 over the first fiscal six months 1997 and is
attributable to interest on the Senior Subordinated Notes, which was partially
offset by the interest savings related to the repurchase of $51.0 million in
principal amount of Senior Notes.
Extraordinary Loss. The Company recognized an extraordinary loss, net of
taxes, of approximately $6.8 million in connection with the Tender Offer and
Consent Solicitation. The loss is the sum, net of taxes, of the premium paid
for the early redemption of $51.0 million in principal amount of the Senior
Notes, the respective portion of the consent fees paid, and the write-off of a
respective portion of the deferred financing cost associated with the Senior
Notes.
Second Quarter Ended March 26, 1998 Compared to the Second Quarter Ended
March 27, 1997
Gross Revenue. Total revenue for the three month period ended March 26,
1998 (the "second fiscal quarter 1998") increased $124.8 million over the
comparable period ended March 27, 1997 (the "second fiscal quarter 1997"). The
increase in total revenue is primarily attributable to Lil' Champ revenue of
$121.7 million for the second fiscal quarter 1998, the revenue from stores
acquired or opened since March 27, 1997, and same store sales growth. Company
gross revenue increases were partially offset by lower gasoline revenue
resulting from lower average retail gasoline prices.
Merchandise Revenue. Total merchandise revenue for the second fiscal
quarter 1998 increased $59.7 million over the second fiscal quarter 1997. The
increase in merchandise revenue is primarily attributable to Lil' Champ
merchandise revenue of $55.7 million for the second fiscal quarter, 1998 the
revenue from stores acquired or opened since March 27, 1997, and same store
sales growth. The Pantry locations and Lil' Champ locations same store
merchandise revenue for the second fiscal quarter 1998 increased 4.9% and 0.0%
over the second fiscal quarter 1997, respectively. Overall same store
merchandise sales growth was 2.1% (see footnote [b] to the table above). Same
store sales increases at the Pantry locations are primarily attributable to
more competitive gasoline pricing, enhanced store appearance and store
merchandising, and increased in-store promotional activity. Same store sales
increases at Lil' Champ locations are primarily attributable to store
merchandising, increases in food service sales, and promotional activity.
Gasoline Revenue and Gallons. Total gasoline revenue for the second fiscal
quarter 1998 increased $62.7 million over the second fiscal quarter 1997. The
increase in gasoline revenue is primarily attributable to Lil' Champ gasoline
revenue of $64.0 million for the second fiscal quarter 1998, the revenue from
stores acquired or opened since March 27, 1997, and same store gallon sales
growth. Overall gasoline revenue growth was partially offset by lower average
gasoline retail prices in the second fiscal quarter 1998 versus the second
fiscal quarter 1997.
In the second fiscal quarter 1998, total gasoline gallons increased 61.8
million gallons over the second fiscal quarter 1997, 56.1 million of which is
attributable to Lil' Champ volume and to an increase of 5.7 million gallons
from Pantry operations. Pantry locations and Lil' Champ locations same store
gasoline gallon sales for the second fiscal quarter 1998 increased 3.2% and
increased 1.2% over the comparable periods in 1997, respectively. Overall same
store gallon sales growth was 2.0% (see footnote [b] to the table above). Same
store gallon increases at Pantry locations are primarily attributable to more
competitive gasoline pricing, rebranding and promotional activity, and enhanced
store appearance. The lower same store gallon increase at Lil' Champ is
primarily attributable to general gasoline conditions and relatively inclement
weather in Florida and coastal Georgia during the second fiscal quarter 1998.
Commission Revenue. Total commission revenue for the second fiscal quarter
1998 increased $2.4 million over the second fiscal quarter 1997. The increase
in commission revenue is attributable to Lil' Champ revenue of $2.0 million for
the second fiscal quarter 1998 and the revenue from stores acquired or opened
since March 27, 1997. Lil' Champ's commission revenue is principally lottery
revenue in locations throughout Florida and Georgia.
25
Total Gross Profit. Total gross profit for the second fiscal quarter 1998
increased $32.0 million over the second fiscal quarter 1997. The increase in
gross profit is primarily attributable to Lil' Champ gross profit of $29.2
million for the second fiscal quarter 1998 and an increase of $2.8 million in
gross profit for Pantry operations. The increase in Pantry location gross
profits is primarily attributable to the gross profit from stores acquired or
opened since March 27, 1997, same store volume growth, and higher merchandise
gross margin.
Merchandise Gross Margin. The merchandise gross margin increase from 34.5%
for the second fiscal quarter 1997 to 34.9% for the second fiscal quarter 1998
is attributable to changes in merchandise mix at Pantry locations and the
addition of several higher average margin Pantry locations acquired in the
coastal Carolinas. The margin increase was offset by the relatively lower
merchandise gross margin at Lil' Champ locations.
Gasoline Gross Profit Per Gallon. The gasoline gross profit per gallon
increase from $0.118 for the second fiscal quarter 1997 to $0.131 in second
fiscal quarter 1998 is the result of relatively higher gasoline margins in Lil'
Champ's marketing areas and general gasoline market conditions including lower
wholesale gasoline costs for the Company.
Store Operating and General and Administrative Expenses. Store operating
expenses for the second fiscal quarter 1998 increased $19.5 million over the
second fiscal quarter 1997. The increase in store expenses is primarily
attributable to Lil' Champ expenses of $17.4 million for the second fiscal
quarter 1998 and the personnel and lease expenses associated with the stores
acquired or opened since March 27, 1997.
General and administrative expenses for the second fiscal quarter 1998
increased $4.0 million over the second fiscal quarter 1997. The increase in
general and administrative expenses is primarily attributable to Lil' Champ
expenses of $4.4 million for the second fiscal quarter 1998. General and
administrative expenses decreased as a percentage of merchandise sales.
Income from Operations. Income from operations for the second fiscal
quarter 1998 increased $4.1 million over the second fiscal quarter 1997. The
increase is primarily attributable to Lil' Champ income from operations of $4.0
million.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA
represents income before interest expense, income tax benefit, depreciation and
amortization, and extraordinary loss. EBITDA for the second fiscal quarter 1998
increased $8.3 million over the second fiscal quarter in 1997. The increase is
attributable to Lil' Champ EBITDA of $7.5 million for the second fiscal quarter
1998 and an increase of $0.8 million in EBITDA for Pantry operations. The
Pantry increase is attributable to the items discussed above, as well as gains
on the sale of assets and other miscellaneous income. In the second fiscal
quarter 1997, the Pantry recognized a gain of approximately $0.5 million
related to the sale of ten stores in South Carolina.
Interest Expense (see "Liquidity and Capital Resources; Long-Term Debt").
Interest expense is primarily interest on the Company's Senior Notes and Senior
Subordinated Notes. Interest expense increased $3.6 million for the second
fiscal quarter 1998 over the second fiscal quarter 1997 and is attributable to
interest on Senior Subordinated Notes, which was partially offset by the
interest savings related to the repurchase of $51.0 million in principal amount
of Senior Notes.
Liquidity and Capital Resources
Cash Flows from Operations. Due to the nature of the Company's business,
substantially all sales are for cash, and cash provided by operations is the
Company's primary source of liquidity. Capital expenditures, acquisitions and
interest expense represent the primary uses of funds. The Company relies
primarily upon cash provided by operating activities, supplemented as necessary
from time to time by borrowings under its New Credit Facility, sale-leaseback
transactions, asset dispositions and equity investments, to finance its
operations, pay interest, and fund capital expenditures and acquisitions. Cash
provided by (used in) operating activities for the first fiscal six months 1997
and the first fiscal six months 1998 totaled ($1.4) million and $17.7 million,
respectively. The Company had $28.5 million of cash and cash equivalents on
hand at March 26, 1998.
Line and Letter of Credit Facility. On October 23, 1997, to supplement
cash on hand and cash provided by operating activities, the Company entered
into the New Credit Facility. The New Credit Facility consists of a $45.0
million Revolving Credit Facility and a $30.0 million Acquisition Facility (see
"PART I. -- Financial Information -- Item 1. Financial Statements -- Notes to
Consolidated Financial Statements -- Note 1 -- The Company and Recent
Developments -- Recent Developments"). The Revolving Credit Facility is
available to fund working capital and for the issuance of standby letters of
credit. The Acquisition Facility is available to fund future acquisitions of
related businesses. As of March 26, 1998,
26
there were no borrowings outstanding under the working capital line of credit
and $9.0 million outstanding under the Acquisition Facility (see "Tuck In
Acquisitions" and "Long-Term Debt"). As of March 26, 1998, approximately $12.3
million of letters of credit were issued under the standby letter of credit
facility.
The Lil' Champ Acquisition. On October 23, 1997, the Company acquired all
of the outstanding common stock of Lil' Champ from Docks U.S.A., Inc. for
$135.9 million (net of cash acquired), plus the repayment of $10.7 million in
outstanding indebtedness of Lil' Champ. The purchase price, the refinancing of
existing Lil' Champ debt, and the fees and expenses of the Lil' Champ
Acquisition were financed with the proceeds from the offering of the Senior
Subordinated Notes, cash on hand, and the net proceeds from the sale of the
Company's Common Stock, par value $0.01 per share to existing stockholders and
management of the Company.
On October 23, 1997 and in connection with the Lil' Champ Acquisition, the
Company purchased $51.0 million in principal amount of the Senior Notes at a
purchase price of 110% of the aggregate principal amount of each tendered
Senior Note plus accrued and unpaid interest up to, but not including, the date
of purchase. The Company obtained consents from the holders of the Senior Notes
to amendments and waivers to certain of the covenants contained in Senior Notes
Indenture. The consideration paid in respect of validly delivered consents was
1 3/4% of the principal amount of the Senior Notes. The Company recognized an
extraordinary loss, net of taxes, of approximately $6.8 million in connection
with the Tender Offer and Consent Solicitation. See "Results of Operations."
"Tuck In" Acquisitions. During the quarter ended March 26, 1998, the
Company acquired a total of 24 convenience stores in two separate transactions
for approximately $9.5 million. Twenty-three stores are located in or around
Eastern North Carolina and one store is located in Hilton Head, South Carolina.
The Company funded these transactions with cash on hand and $9.0 million in
proceeds from the Acquisition Facility.
Capital Expenditures. Capital expenditures, for the first fiscal six
months 1997 and the first fiscal six months 1998 were approximately $4.2
million and $17.8 million, respectively. Capital expenditures are primarily
expenditures for existing store improvements, store equipment, acquisitions,
new store development and expenditures to comply with regulatory statutes,
including those related to environmental matters. The Company finances
substantially all capital expenditures and new store development through cash
flow from operations, a sale-leaseback program or similar lease activity, and
asset dispositions. In the first fiscal six months 1998, the Company has
received approximately $4.9 million in sale-leaseback and other reimbursements
for capital improvements; therefore net capital expenditures, excluding all
acquisitions, for the first fiscal six months 1998 were $12.9 million.
Long-Term Debt. At March 26, 1998, the Company's long-term debt consisted
primarily of $49.0 million of the Senior Notes and $200 million of the Senior
Subordinated Notes (together with the Senior Notes, the "Notes"). The interest
payments on the Senior Notes are due May 15 and November 15. The interest
payments on the Senior Subordinated Notes are due October 15 and June 15.
The Notes are unconditionally guaranteed, on an unsecured basis, as to the
payment of principal, premium, if any, and interest, jointly and severally, by
the Guarantors. The Notes contain covenants that, among other things, restrict
the ability of the Company and any restricted subsidiary to: (i) incur
additional indebtedness; (ii) pay dividends or make distributions; (iii) issue
stock of subsidiaries; (iv) make certain investments; (v) repurchase stock;
(vi) create liens; (vii) enter into transactions with affiliates; (viii) enter
into sale-leaseback transactions; (ix) merge or consolidate the Company or any
of its subsidiaries; and (x) transfer and sell assets. See "PART I. --
Financial Information -- Item 1. Financial Statements -- Notes to Consolidated
Financial Statements -- Note 1 -- The Company and Recent Developments" and
"Note 5 -- Long-term Debt."
During the quarter ended March 26, 1998 and relating to the "tuck in"
acquisitions discussed above, the Company borrowed $9.0 million under its
Acquisition Facility. Under the terms of the New Credit Facility, the
Acquisition Facility is available to finance acquisitions of related businesses
with certain restrictions (see "PART I. -- Financial Information -- Item 1.
Financial Statements -- Notes to Consolidated Financial Statements -- Note 1 --
The Company and Recent Developments"). The New Credit Facility contains
covenants restricting the ability of the Company and any its of subsidiaries
to, among other things: (i) incur additional debt; (ii) declare dividends or
redeem or repurchase capital stock; (iii) prepay, redeem or purchase debt; (iv)
incur liens; (v) make loans and investments; (vi) make capital expenditures;
(vii) engage in mergers, acquisitions and asset sales; and (viii) engage in
transactions with affiliates. The Company is also required to comply with
financial covenants with respect to (a) a minimum coverage ratio, (b) a minimum
pro forma EBITDA, (c) a maximum pro forma leverage ratio, and (d) a maximum
capital expenditure allowance.
27
Cash Flows from Financing Activities. The Lil' Champ Acquisition price,
the refinancing of existing Lil' Champ debt, the Tender Offer, and all related
fees and expenses were financed with the proceeds from the offering of $200.0
million Senior Subordinated Notes, cash on hand, and the net proceeds of
approximately $32.0 million from the sale to existing stockholders and
management of the Company of an additional 72,000 shares of the Company's
Common Stock, par value $0.01 per share. See "PART I. -- Financial Information
- -- Item 1. Financial Statements -- Notes to Consolidated Financial Statements
- -- Note 1 -- The Company and Recent Developments."
Shareholders' Equity. As of March 26, 1998, the Company's shareholders'
equity totaled $10.5 million. The increase in shareholders' equity of $28.4
million is attributed to the proceeds from the sale of additional Common Stock
and the contribution of all outstanding shares of Series A Preferred Stock and
related accrued dividends (see "PART I. -- Financial Information -- Item 1.
Financial Statements -- Notes to Consolidated Financial Statements -- Note 1
- -- The Company and Recent Developments" and "Note 6 -- Shareholders'
Equity"), which was partially offset by the Company's net loss of $8.5 million
for the six months ended March 26, 1998.
The value of additional paid in capital is impacted by the accounting
treatment applied to a 1987 leveraged buyout of the outstanding Common Stock of
the Company's predecessor which resulted in a debit to Common Stock of $17.1
million. This debit had the effect, among others, of offsetting $7.0 million of
equity capital invested in the Company by its shareholders. Additionally, the
accumulated deficit includes the cumulative effect of (i) the accrued dividends
on previously outstanding preferred stock of $5.0 million, (ii) the accrued
dividends on current outstanding Series B Preferred Stock of $2.4 million,
(iii) the net cost of equity transactions and (iv) the cumulative results of
operations, which include extraordinary losses and cumulative effect of
accounting changes, interest expense of $17.2 million on previously outstanding
subordinated debentures and preferred stock obligations. This interest and the
related subordinated debt and these dividends and the related preferred stock
were paid or redeemed in full with a portion of the proceeds from the fiscal
1994 sale of the Senior Notes.
Environmental Considerations. The Company is subject to various federal,
state and local environmental laws. Federal, state, and local regulatory
agencies have adopted regulations governing underground petroleum storage tanks
("USTs") that require the Company to make certain expenditures for compliance.
Regulations enacted by the EPA in 1988 established requirements for (i)
installing UST systems; (ii) upgrading UST systems; (iii) taking corrective
action in response to releases; (iv) closing UST systems; (v) keeping
appropriate records; and (vi) maintaining evidence of financial responsibility
for taking corrective action and compensating third parties for bodily injury
and property damage resulting from releases. UST systems upgrading consists of
installing and employing leak detection equipment and systems, upgrading UST
systems for corrosion protection and installing overfill/spill prevention
devices.
In addition to the technical standards, the Company is required by federal
and state regulations to maintain evidence of financial responsibility for
taking corrective action and compensating third parties in the event of a
release from its UST systems. In order to comply with the applicable
requirements, the Company maintains a letter of credit in the aggregate amount
of $2.1 million issued by a commercial bank in favor of state environmental
agencies in the states of North Carolina, South Carolina, Tennessee, Kentucky
and Indiana and relies upon the reimbursement provisions of applicable state
trust funds.
The Company believes it is in full or substantial compliance with the leak
detection requirements applicable to its USTs. The Company anticipates that it
will meet the 1998 deadline for installing corrosion protection and
spill/overfill equipment for all of its USTs and has budgeted approximately
$4.5 million of capital expenditures for these purposes over the next nine
months. Additional regulations or amendments to the existing UST regulations
could result in future revisions to the estimated upgrade compliance and
remediation costs outlined above.
All states in which the Company operates or has operated UST systems have
established trust funds for the sharing, recovering and reimbursing of certain
cleanup costs and liabilities incurred as a result of releases from UST
systems. These trust funds, which essentially provide coverage for taking
corrective action and compensating third parties in the event of a release from
its UST systems, are funded by a UST registration fee and a tax on the
wholesale purchase of motor fuels within each state. The Company has paid UST
registration fees and gasoline taxes to each state where it operates to
participate in these trust programs and the Company has filed claims and
received reimbursement in North Carolina, South Carolina, Florida, Georgia,
Tennessee and Kentucky. The coverage afforded by each state fund varies but
generally provides for up to $1 million per site for the cleanup of
environmental contamination, and most provide coverage for third party
liability subject to applicable deductibles. Costs for which the Company does
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
UST systems; and (iv) costs incurred in connection with sites otherwise
28
ineligible for reimbursement from the trust funds. The trust funds require the
Company to pay deductibles ranging from $10,000 to $100,000 per occurrence
depending generally on the upgrade status of its UST system, the date the
release is discovered/reported and the type of cost for which reimbursement is
sought. Reimbursements from state trust funds will be dependent upon the
continued maintenance and solvency of the various funds.
Cash Requirements. The Company believes that cash on hand, together with
cash flow anticipated to be generated from operations, new equity issued and
sold on October 23, 1997 in connection with the Lil' Champ Acquisition and
related transactions, short-term borrowing for seasonal working capital,
permitted borrowings under the Company's Acquisition Facility and permitted
borrowings by its Unrestricted Subsidiary will be sufficient to enable the
Company to satisfy anticipated cash requirements for operating, investing and
financing activities, including debt service for the next twelve months.
29
PART II -- OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
30
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 11, 1998
By: /s/ WILLIAM T. FLYG
-------------------------------------
William T. Flyg
Senior Vice President Finance and Secretary
(Authorized Officer and Principal Financial Officer)
31
EXHIBIT INDEX
Exhibit No. Description of Document
- ------------- -------------------------
27.1 Financial Data Schedule.