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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 JUNE 25, 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 229,507 SHARES
(Class) (Outstanding at August 7, 1998)
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THE PANTRY, INC.
FORM 10-Q
JUNE 25, 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
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................23
PART II -- OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K...............................31
PART I -- FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 25, JUNE 25,
1997 1998
--------------- ------------
(AUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................. $ 3,347 $ 21,450
Receivables, net .......................... 2,101 7,738
Inventories ............................... 17,161 39,274
Prepaid expenses .......................... 1,204 1,869
Property held for sale .................... 3,323 4,265
Deferred income taxes ..................... 1,142 1,142
-------- --------
Total current assets .................... 28,278 75,738
-------- --------
Property and equipment, net ................ 77,986 248,658
-------- --------
Other assets:
Goodwill, net ............................. 20,318 73,529
Deferred lease cost, net .................. 314 280
Deferred financing cost, net .............. 4,578 13,587
Environmental receivables, net ............ 6,511 7,603
Deferred income taxes ..................... 156 --
Escrow for Lil' Champ acquisition ......... 4,049 --
Other noncurrent assets ................... 609 4,436
-------- --------
Total other assets ...................... 36,535 99,435
-------- --------
$142,799 $423,831
======== ========
See Notes to Consolidated Financial Statements.
2
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 25, JUNE 25,
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 41,137
Money orders ............................................ 3,022 3,637
Accrued interest .......................................... 4,592 4,959
Accrued compensation and related taxes .................... 3,323 7,296
Income taxes payable ...................................... 296 --
Other accrued taxes ....................................... 2,194 1,858
Accrued insurance ......................................... 3,887 4,943
Other accrued liabilities ................................. 2,856 12,477
--------- ---------
Total current liabilities ............................... 36,523 77,675
--------- ---------
Long-term debt ............................................. 100,305 277,272
--------- ---------
Other noncurrent liabilities:
Environmental reserve ..................................... 7,806 11,048
Deferred income taxes ..................................... -- 7,360
Capital lease obligations ................................. 679 11,488
Employment obligations .................................... 1,341 1,064
Accrued dividends on preferred stock ...................... 7,958 3,702
Other noncurrent liabilities .............................. 6,060 21,863
--------- ---------
Total other noncurrent liabilities ...................... 23,844 56,525
--------- ---------
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 June 25, 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 June 25, 1998 ......... 1 2
Additional paid in capital ................................ 5,396 43,116
Shareholder loan .......................................... -- (215)
Accumulated deficit ....................................... (23,270) (30,544)
--------- ---------
Total shareholders' equity (deficit) .................... (17,873) 12,359
--------- ---------
$ 142,799 $ 423,831
========= =========
See Notes to Consolidated Financial Statements.
3
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- --------------------------
JUNE 26, JUNE 25, JUNE 26, JUNE 25,
1997 1998 1997 1998
------------ ------------ ------------ -----------
(13 WEEKS) (13 WEEKS) (39 WEEKS) (39 WEEKS)
Revenues:
Merchandise sales ............................................... $ 52,562 $123,108 $144,679 $ 316,873
Gasoline sales .................................................. 57,132 127,780 158,970 343,498
Commissions ..................................................... 1,338 3,689 3,624 10,047
-------- -------- -------- ---------
Total revenues ................................................ 111,032 254,577 307,273 670,418
-------- -------- -------- ---------
Cost of sales:
Merchandise ..................................................... 34,552 80,400 95,384 207,265
Gasoline ........................................................ 51,166 113,812 143,084 304,136
-------- -------- -------- ---------
Total cost of sales ........................................... 85,718 194,212 238,468 511,401
-------- -------- -------- ---------
Gross profit ..................................................... 25,314 60,365 68,805 159,017
-------- -------- -------- ---------
Operating expenses:
Store expenses .................................................. 14,959 35,582 43,644 97,435
General and administrative expenses ............................. 4,237 7,874 12,715 23,406
Depreciation and amortization ................................... 2,310 6,750 6,808 18,525
-------- -------- -------- ---------
Total operating expenses ...................................... 21,506 50,206 63,167 139,366
-------- -------- -------- ---------
Income from operations ........................................... 3,808 10,159 5,638 19,651
-------- -------- -------- ---------
Other income (expense):
Interest ........................................................ (3,284) (7,502) (9,763) (20,353)
Miscellaneous ................................................... 517 479 1,236 1,253
-------- -------- -------- ---------
Total other expense ........................................... (2,767) (7,023) (8,527) (19,100)
-------- -------- -------- ---------
Income (loss) before income taxes and extraordinary item ......... 1,041 3,136 (2,889) 551
Income tax (expense) benefit ..................................... (208) (916) 578 --
-------- -------- -------- ---------
Income (loss) before extraordinary item .......................... 833 2,220 (2,311) 551
Extraordinary item, net of taxes ................................. -- 289 -- (6,511)
-------- -------- -------- ---------
Net income (loss) ................................................ $ 833 $ 2,509 $ (2,311) $ (5,960)
======== ======== ======== =========
See Notes to Consolidated Financial Statements.
4
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
----------------------------
JUNE 26, JUNE 25,
1997 1998
------------ -------------
(39 WEEKS) (39 WEEKS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................................... $ (2,311) $ (5,960)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary loss ............................................. -- 6,511
Depreciation and amortization .................................. 6,808 18,525
Change in deferred income taxes ................................ 164 (514)
(Gain) loss on sale of property and equipment .................. (467) 350
Reserves for environmental issues .............................. 262 92
Changes in operating assets and liabilities, net:
Receivables ...................................................... (38) (4,885)
Inventories ...................................................... (1,019) (2,866)
Prepaid expenses ................................................. (185) 737
Other noncurrent assets .......................................... 39 4,192
Accounts payable ................................................. 1,340 4,159
Other current liabilities and accrued expenses ................... (2,897) (681)
Employment obligations ........................................... (449) (277)
Other noncurrent liabilities ..................................... 678 7,727
--------- ----------
Net cash provided by operating activities ......................... 1,925 27,110
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale .............................. (6,737) (4,187)
Additions to property and equipment .............................. (9,003) (32,923)
Proceeds from sale of property held for sale ..................... 1,274 3,245
Proceeds from sale of property and equipment ..................... 1,406 1,521
Acquisitions of related businesses, net of cash acquired ......... (9,526) (165,799)
--------- ----------
Net cash used in investing activities ............................. (22,586) (198,143)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES: .............................
Net proceeds from line of credit ................................. 5,645 --
Principal repayments under capital leases ........................ (227) (907)
Principal repayments of long-term debt ........................... (18) (57,044)
Proceeds from issuance of long-term debt ......................... 200 228,042
Net proceeds from equity issue ................................... 15,941 31,936
Other financing costs ............................................ (84) (12,891)
--------- ----------
Net cash provided by financing activities ......................... 21,457 189,136
--------- ----------
NET INCREASE IN CASH & CASH EQUIVALENTS ........................... 796 18,103
CASH & CASH EQUIVALENTS, BEGINNING OF YEAR ........................ 5,338 3,347
--------- ----------
CASH & CASH EQUIVALENTS, END OF QUARTER ........................... $ 6,134 $ 21,450
========= ==========
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
June 25, 1998 and for the three and nine months ended June 25, 1998 and June
26, 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. Pursuant to Regulation S-X, certain information and note
disclosures normally included in annual financial statements have been
condensed or omitted. The information furnished reflects all adjustments which
are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented, and which are of a normal, recurring
nature.
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 Reports on
Form 10-Q for the quarters ended December 25, 1997 and March 26, 1998, the
Company's Registration Statement on Form S-4, as amended, effective January 8,
1998, the Company's Current Report on Form 8-K dated October 23, 1997, and the
Company's Current Report on Form 8-K dated July 2, 1998, as amended.
The results of operations for the three and nine months ended June 25,
1998 and June 26, 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, as of June 25, 1998, operated
approximately 895 convenience stores primarily under the names "The Pantry" in
North Carolina, South Carolina, Tennessee, Kentucky, and Indiana or "Lil'
Champ" in Florida and Georgia (see "Note 8 -- Subsequent Events"). 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 822 locations, 542 of which sell 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 March 19, 1998, the Company acquired the operating assets of 23
convenience stores in Eastern North Carolina. In three separate transactions in
May, 1998, the Company acquired an additional twelve convenience stores in the
Gainesville, Florida area. Additionally, the Company acquired one convenience
store in Hilton Head, South Carolina, opened two in Myrtle Beach, South
Carolina, and opened one in Cary, North Carolina. These acquisitions and
openings have been funded primarily from cash on hand and borrowings under the
Company's Acquisition Facility (which is part of the New Credit Facility).
6
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- THE COMPANY AND RECENT DEVELOPMENTS -- Continued
Subsequent to June 25, 1998, the Company acquired 116 convenience stores
in two separate transactions (see "Note 8 -- Subsequent Events"). These stores
are located in North Carolina, South Carolina, and Virginia. Both acquisitions
have been primarily funded from cash on hand, borrowings under the Company's
Acquisition Facility (which is part of the New Credit Facility), and an
additional equity investment by existing stockholders. See "Note 6 --
Shareholders' Equity" and "Note 8 -- Subsequent Events."
NOTE 2 -- THE LIL' CHAMP ACQUISITION AND PRO FORMA INFORMATION
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 493 stores are located primarily in northern Florida and Georgia, with
approximately 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.
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 in the Indenture), (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."
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. For purposes of these interim financial statements and the notes
hereto, (i) the excess of the
7
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- THE LIL' CHAMP ACQUISITION AND PRO FORMA INFORMATION -- Continued
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.
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 nine months ended June 26, 1997 and June 25,
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):
NINE MONTHS ENDED
JUNE 26, JUNE 25,
1997 1998
------------ -----------
Revenues ........................................ $ 700,633 $710,137
Income (loss) before extraordinary item ......... (7,370) 199
Net loss ........................................ (13,881) (6,312)
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, JUNE 25,
1997 1998
--------------- ------------
Inventories at FIFO cost:
Merchandise .................... $ 16,877 $ 42,410
Gasoline ....................... 4,969 9,335
-------- ---------
21,846 51,745
Less adjustment to LIFO cost:
Merchandise .................... (4,203) (11,814)
Gasoline ....................... (482) (657)
-------- ---------
Inventories at LIFO cost ......... $ 17,161 $ 39,274
======== =========
Inventories at September 25, 1997 do not include the inventories of Lil'
Champ. See and "Note 2 -- The Lil' Champ Acquisition and Pro Forma
Information."
NOTE 4 -- ENVIRONMENTAL LIABILITIES AND CONTINGENCIES
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 six
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
9
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- ENVIRONMENTAL LIABILITIES AND CONTINGENCIES -- Continued
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.
Environmental reserves of $7.8 million and $11.0 million as of September
27, 1997 and June 25, 1998, respectively, 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. As of June 25, 1998, these anticipated
reimbursements of $7.6 million are recorded as long-term environmental
receivables.
Although the Company is not aware of releases or contamination at other
locations where it currently operates or has operated stores, any such releases
or contamination could require substantial remediation costs, some or all of
which may not be eligible for reimbursement from state trust funds.
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 June 25, 1998, long-term debt consisted of the
following (in thousands):
SEPTEMBER 25, JUNE 25,
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 ........................... -- 28,000
Other notes and mortgages payable; generally due in monthly
installments of principal plus interest at various rates and terms .. 343 333
-------- --------
100,338 277,328
Less -- current maturities ............................................ (33) (56)
-------- --------
$100,305 $277,272
======== ========
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 2 --
The Lil' Champ Acquisition and Pro Forma Information."
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: (i) the use of proceeds from the
offering; (ii) liens on properties; (iii) certain "restricted payments" as
10
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- LONG-TERM DEBT -- Continued
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 2 -- The Lil' Champ Acquisition and Pro Forma
Information"). The New Credit Facility contains covenants restricting the
ability of the Company and any its of subsidiaries to, among other things: (i)
incur additional indebtedness; (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. See "Note 8 -- Subsequent Events."
NOTE 6 -- SHAREHOLDERS' EQUITY
As described in Note 2 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 stockholders 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
June 25, 1998, grants representing 8,701 shares have been made under the Plan.
On July 2, 1998 and in connection with two acquisitions completed
subsequent to June 25, 1998, the Company issued 43,478 shares of Common Stock,
par value $0.01 per share, to certain existing stockholders for $25.0 million.
See "Note 8 -- Subsequent Events."
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 June
25, 1998, and for each of the three and nine months ended June 26, 1997 and
June 25, 1998) would not be significant to investors and in lieu of such
separate financial statements, the Company has presented supplemental combining
information. This supplemental combining information includes the consolidated
financial statements of the Company's unrestricted subsidiary, PH and PH's
wholly-owned subsidiaries, TC Capital Management, Inc. and Pantry
11
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
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 noncurrent assets ............... 534 74 1 -- 609
-------- ------- ------ --------- --------
Total other assets ................... 32,411 39,508 4,050 (39,434) 36,535
-------- ------- ------ --------- --------
$186,401 $44,355 $5,249 $ (93,206) $142,799
======== ======= ====== ========= ========
12
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 noncurrent liabilities:
Environmental reserve ............................... 7,806 -- -- -- 7,806
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 noncurrent liabilities ........................ 5,870 150 40 -- 6,060
--------- ------- ------ --------- ---------
Total other noncurrent 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)
--------- ------- ------ --------- ---------
$ 186,401 $44,355 $5,249 $ (93,206) $ 142,799
========= ======= ====== ========= =========
13
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
JUNE 25, 1998
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents .......... $ 10,624 $ 9,860 $ 966 $ -- $ 21,450
Receivables, net ................... 9,817 19,409 3 (21,491) 7,738
Inventories ........................ 16,624 22,650 -- -- 39,274
Prepaid expenses ................... 735 1,128 6 -- 1,869
Property held for sale ............. 4,265 -- -- -- 4,265
Deferred income taxes .............. 1,142 -- -- -- 1,142
-------- -------- ------ ---------- --------
Total current assets ............. 43,207 53,047 975 (21,491) 75,738
-------- -------- ------ ---------- --------
Investment in subsidiaries .......... 57,433 -- -- (57,433) --
-------- -------- ------ ---------- --------
Property and equipment, net ......... 96,548 151,769 341 -- 248,658
-------- -------- ------ ---------- --------
Other assets:
Goodwill, net ...................... 20,223 53,306 -- -- 73,529
Deferred lease cost, net ........... 280 -- -- -- 280
Deferred financing cost, net ....... 13,587 -- -- -- 13,587
Environmental receivables, net ..... 6,510 1,093 -- -- 7,603
Deferred income taxes .............. 2,142 -- 16 (2,158) --
Intercompany note receivable ....... 20,338 39,433 4,075 (63,846) --
Other noncurrent assets ............ 921 3,515 -- 4,436
-------- -------- ---------- --------
Total other assets ............... 64,001 97,347 4,091 (66,004) 99,435
-------- -------- ------ ---------- --------
$261,189 $302,163 $5,407 $ (144,928) $423,831
======== ======== ====== ========== ========
14
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
JUNE 25, 1998
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Current maturities of long-term debt ................ $ 17 $ 21 $ 18 $ -- $ 56
Current maturities of capital lease obligations ..... 285 1,027 -- -- 1,312
Accounts payable:
Trade ............................................. 18,817 22,320 -- -- 41,137
Money orders ...................................... 2,791 846 -- -- 3,637
Accrued interest .................................... 3,864 3,159 1 (2,065) 4,959
Accrued compensation and related taxes .............. 3,693 3,603 -- -- 7,296
Income taxes payable ................................ -- 5,306 431 (5,737) --
Other accrued taxes ................................. 1,858 -- -- -- 1,858
Accrued insurance ................................... 2,723 2,220 -- -- 4,943
Other accrued liabilities ........................... 15,016 10,992 121 (13,652) 12,477
--------- -------- ------ ---------- ---------
Total current liabilities ......................... 49,064 49,494 571 (21,454) 77,675
--------- -------- ------ ---------- ---------
Long-term debt ....................................... 131,422 145,728 122 -- 277,272
--------- -------- ------ ---------- ---------
Other noncurrent liabilities:
Environmental reserve ............................... 7,898 3,150 -- -- 11,048
Deferred income taxes ............................... -- 9,518 -- (2,158) 7,360
Capital lease obligations ........................... 452 11,036 -- -- 11,488
Employment obligations .............................. 1,064 -- -- -- 1,064
Accrued dividends on preferred stock ................ 3,702 -- -- -- 3,702
Intercompany note payable ........................... 43,483 20,400 -- (63,883) --
Other noncurrent liabilities ........................ 11,745 10,080 38 -- 21,863
--------- -------- ------ ---------- ---------
Total other noncurrent liabilities ................ 68,344 54,184 38 (66,041) 56,525
--------- -------- ------ ---------- ---------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock ..................................... -- -- -- -- --
Common stock ........................................ 2 -- -- -- 2
Additional paid in capital .......................... 43,116 25 5,000 (5,025) 43,116
Shareholder loan .................................... (215) -- (215)
Accumulated earnings (deficit) ...................... (30,544) 52,732 (324) (52,408) (30,544)
--------- -------- ------ ---------- ---------
Total shareholders' equity (deficit) .............. 12,359 52,757 4,676 (57,433) 12,359
--------- -------- ------ ---------- ---------
$ 261,189 $302,163 $5,407 $ (144,928) $ 423,831
========= ======== ====== ========== =========
15
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 26, 1997
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
------------ ------------ -------------- -------------- ----------
(DOLLARS IN THOUSANDS)
Revenues:
Merchandise sales ....................... $ 52,562 $ -- $ -- $ -- $ 52,562
Gasoline sales .......................... 57,132 -- -- -- 57,132
Commissions ............................. 1,338 -- -- -- 1,338
-------- -------- ---- -------- --------
Total revenues ......................... 111,032 -- -- -- 111,032
-------- -------- ---- -------- --------
Cost of sales:
Merchandise ............................. 34,552 -- -- -- 34,552
Gasoline ................................ 51,166 -- -- -- 51,166
-------- -------- ---- -------- --------
Total cost of sales .................... 85,718 -- -- -- 85,718
-------- -------- ---- -------- --------
Gross profit .............................. 25,314 -- -- -- 25,314
-------- -------- ---- -------- --------
Operating expenses:
Store expenses .......................... 18,315 -- (68) (3,288) 14,959
General and administrative expenses ..... 4,240 (8) 5 -- 4,237
Depreciation and amortization ........... 2,305 3 2 -- 2,310
-------- --------- ---- -------- --------
Total operating expenses ............... 24,860 (5) (61) (3,288) 21,506
-------- ---------- ---- -------- --------
Income from operations .................... 454 5 61 3,288 3,808
-------- --------- ---- -------- --------
Equity in earnings of subsidiaries ........ 4,366 -- -- (4,366) --
-------- --------- ---- -------- --------
Other income (expense):
Interest ................................ (4,078) -- (3) 797 (3,284)
Miscellaneous ........................... 299 4,255 68 (4,105) 517
-------- --------- ------ -------- --------
Total other expense .................... (3,779) 4,255 65 (3,308) (2,767)
-------- --------- ------ -------- --------
Income before income taxes................. 1,041 4,260 126 (4,386) 1,041
Income tax benefit (expense) .............. (208) (1,442) (36) 1,478 (208)
-------- --------- ------ -------- --------
Net income ................................ $ 833 $ 2,818 $ 90 $ (2,908) $ 833
======== ========= ====== ======== ========
16
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 25, 1998
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- -----------
(DOLLARS IN THOUSANDS)
Revenues:
Merchandise sales .................................... $ 60,595 $ 62,513 $ -- $ -- $123,108
Gasoline sales ....................................... 61,408 66,372 -- -- 127,780
Commissions .......................................... 1,698 1,991 -- -- 3,689
-------- -------- ---- -------- --------
Total revenues ..................................... 123,701 130,876 -- -- 254,577
-------- -------- ---- -------- --------
Cost of sales:
Merchandise .......................................... 39,752 40,648 -- -- 80,400
Gasoline ............................................. 55,001 58,811 -- -- 113,812
-------- -------- ---- -------- --------
Total cost of sales ................................ 94,753 99,459 -- -- 194,212
-------- -------- ---- -------- --------
Gross profit .......................................... 28,948 31,417 -- -- 60,365
-------- -------- ---- -------- --------
Operating expenses:
Store expenses ....................................... 21,197 18,137 (61) (3,691) 35,582
General and administrative expenses .................. 4,185 3,685 4 -- 7,874
Depreciation and amortization ........................ 3,456 3,292 2 -- 6,750
-------- -------- ---- -------- --------
Total operating expenses ........................... 28,838 25,114 (55) (3,691) 50,206
-------- -------- ---- -------- --------
Income from operations ................................ 110 6,303 55 3,691 10,159
-------- -------- ---- -------- --------
Equity in earnings of subsidiaries .................... 7,171 -- -- (7,171) --
-------- -------- ---- -------- --------
Other income (expense):
Interest ............................................. (4,248) (4,283) (3) 1,032 (7,502)
Miscellaneous ........................................ 103 5,093 7 (4,724) 479
-------- -------- ------ -------- --------
Total other expense ................................ (4,145) 810 4 (3,692) (7,023)
-------- -------- ------ -------- --------
Income before income taxes and extraordinary item ..... 3,136 7,113 59 (7,172) 3,136
Income tax benefit (expense) .......................... (916) (2,087) (60) 2,147 (916)
-------- -------- ------ -------- --------
Net income (loss) before extraordinary item ........... 2,220 5,026 (1) (5,025) 2,220
Extraordinary item, net of taxes ...................... 289 -- -- -- 289
-------- -------- ------ -------- --------
Net income (loss) ..................................... $ 2,509 $ 5,026 $ (1) $ (5,025) $ 2,509
======== ======== ====== ======== ========
17
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 26, 1997
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
------------ ------------ -------------- -------------- -----------
(DOLLARS IN THOUSANDS)
Revenues:
Merchandise sales ....................... $ 144,679 -- $ -- $ -- $144,679
Gasoline sales .......................... 158,970 -- -- -- 158,970
Commissions ............................. 3,624 -- -- -- 3,624
--------- -- ------ --------- --------
Total revenues ......................... 307,273 -- -- -- 307,273
--------- -- ------ --------- --------
Cost of sales:
Merchandise ............................. 95,384 -- -- -- 95,384
Gasoline ................................ 143,084 -- -- -- 143,084
--------- -- ------ --------- --------
Total cost of sales .................... 238,468 -- -- -- 238,468
--------- -- ------ --------- --------
Gross profit .............................. 68,805 -- -- -- 68,805
--------- -- ------ --------- --------
Operating expenses:
Store expenses .......................... 53,012 -- (231) (9,137) 43,644
General and administrative expenses ..... 12,671 27 17 -- 12,715
Depreciation and amortization ........... 6,793 10 5 -- 6,808
--------- -- ------ --------- --------
Total operating expenses ............... 72,476 37 (209) (9,137) 63,167
--------- -- ------ --------- --------
Income (loss) from operations ............. (3,671) (37) 148 9,137 5,638
--------- --- ------ --------- --------
Equity in earnings of subsidiaries ........ 11,921 -- -- (11,921) --
--------- --- ------ --------- --------
Other income (expense):
Interest ................................ (11,849) -- (10) 2,096 (9,763)
Miscellaneous ........................... 710 11,621 158 (11,253) 1,236
--------- ------ ------ --------- --------
Total other expense .................... (11,139) 11,621 148 (9,157) (8,527)
--------- ------ ------ --------- --------
Income (loss) before income taxes ......... (2,889) 11,584 357 (11,941) (2,889)
Income tax benefit (expense) .............. 578 (3,932) (105) 4,037 578
--------- ------ ------ --------- --------
Net income (loss) ......................... $ (2,311) $ 7,652 $ 252 $ (7,904) $ (2,311)
========= ======== ====== ========= ========
18
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 25, 1998
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- -----------
(DOLLARS IN THOUSANDS)
Revenues:
Merchandise sales ................................... $ 160,208 $ 156,665 $ -- $ -- $ 316,873
Gasoline sales ...................................... 166,874 176,624 -- -- 343,498
Commissions ......................................... 4,613 5,434 -- -- 10,047
--------- --------- ----- --------- ---------
Total revenues ..................................... 331,695 338,723 -- -- 670,418
--------- --------- ----- --------- ---------
Cost of sales:
Merchandise ......................................... 104,126 103,139 -- -- 207,265
Gasoline ............................................ 148,985 155,151 -- -- 304,136
--------- --------- ----- --------- ---------
Total cost of sales ................................ 253,111 258,290 -- -- 511,401
--------- --------- ----- --------- ---------
Gross profit .......................................... 78,584 80,433 -- -- 159,017
--------- --------- ----- --------- ---------
Operating expenses:
Store expenses ...................................... 59,159 48,349 (180) (9,893) 97,435
General and administrative expenses ................. 12,666 10,724 16 -- 23,406
Depreciation and amortization ....................... 9,643 8,877 5 -- 18,525
--------- --------- ----- --------- ---------
Total operating expenses ........................... 81,468 67,950 (159) (9,893) 139,366
--------- --------- ----- --------- ---------
Income (loss) from operations ......................... (2,884) 12,483 159 9,893 19,651
--------- --------- ----- --------- ---------
Equity in earnings of subsidiaries .................... 15,242 -- -- (15,242) --
--------- --------- ----- --------- ---------
Other income (expense):
Interest ............................................ (12,373) (11,068) (9) 3,097 (20,353)
Miscellaneous ....................................... 566 13,655 22 (12,990) 1,253
--------- --------- ------- --------- ---------
Total other expense ................................ (11,807) 2,587 13 (9,893) (19,100)
--------- --------- ------- --------- ---------
Income (loss) before income taxes and extraordinary
item ................................................ 551 15,070 172 (15,242) 551
Income tax benefit (expense) .......................... -- (4,842) (192) 5,034 --
--------- --------- ------- --------- ---------
Net income (loss) before extraordinary item ........... 551 10,228 (20) (10,208) 551
Extraordinary item, net of taxes ...................... (6,511) -- (6,511)
--------- --------- ---------
Net income (loss) ..................................... $ (5,960) $ 10,228 $ (20) $ (10,208) $ (5,960)
========= ========= ======= ========= =========
19
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 26, 1997
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
-------------- ------------ -------------- -------------- ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................ $ (2,311) $ 7,652 $ 252 $ (7,904) $ (2,311)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ........................... 6,793 10 5 6,808
Change in deferred income taxes ......................... 164 164
Gain on sale of property and equipment .................. (467) (467)
Reserves for environmental issues ....................... 262 262
Equity earnings of affiliates ........................... (7,904) 7,904 --
Changes in operating assets and liabilities, net:
Receivables ............................................. (244) (208) (9) 423 (38)
Inventories ............................................. (1,019) (1,019)
Prepaid expenses ........................................ (184) 2 (3) (185)
Other noncurrent assets ................................. 39 39
Accounts payable ........................................ 1,340 1,340
Other current liabilities and accrued expenses .......... (2,604) 25 105 (423) (2,897)
Employment obligations .................................. (449) (449)
Other noncurrent liabilities ............................ 680 (2) 678
-------- -------- ---------
Net cash provided by (used in) operating activities ...... (5,904) 7,481 348 -- 1,925
-------- -------- ------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ..................... (6,782) -- (5) 50 (6,737)
Additions to property and equipment ..................... (9,003) -- -- -- (9,003)
Proceeds from sale of property held for sale ............ 571 -- 753 (50) 1,274
Proceeds from sale of property and equipment ............ 1,406 -- -- -- 1,406
Intercompany notes receivable (payable) ................. 7,317 (7,317) -- -- --
Acquisitions of related businesses, net of cash
acquired .............................................. (9,526) -- -- -- (9,526)
-------- -------- ------- -------- ---------
Net cash provided by (used in) investing activities ...... (16,017) (7,317) 748 -- (22,586)
-------- -------- ------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit ........................ 5,645 -- -- -- 5,645
Principal repayments under capital leases ............... (227) -- -- -- (227)
Principal repayments of long-term debt .................. (6) -- (12) -- (18)
Proceeds from issuance of long-term debt ................ 200 -- -- -- 200
Net proceeds from equity issue .......................... 15,941 -- -- -- 15,941
Other financing costs ................................... (84) -- -- -- (84)
---------- -------- ------- -------- ---------
Net cash provided by (used in) financing activities ...... 21,469 -- (12) -- 21,457
---------- -------- ------- -------- ---------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS ....... (452) 164 1,084 -- 796
CASH & CASH EQUIVALENTS, BEGINNING OF YEAR ............... 1,513 135 3,690 -- 5,338
---------- -------- ------- -------- ---------
CASH & CASH EQUIVALENTS, END OF QUARTER .................. $ 1,061 $ 299 $4,774 $ -- $ 6,134
========== ======== ======= ======== =========
20
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 25, 1998
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ...................................... $ (5,960) $ 10,228 $(20) $ (10,208) $ (5,960)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Extraordinary loss ................................... 6,511 -- -- -- 6,511
Depreciation and amortization ........................ 9,652 8,869 4 -- 18,525
Change in deferred income taxes ...................... (498) -- (16) -- (514)
Loss on sale of property and equipment ............... 144 206 -- -- 350
Reserves for environmental issues .................... 92 -- -- -- 92
Equity earnings of affiliates ........................ (10,208) -- -- 10,208 --
Changes in operating assets and liabilities, net:
Receivables ............................................ (5,761) (14,094) 26 14,944 (4,885)
Inventories ............................................ 1,583 (4,449) -- -- (2,866)
Prepaid expenses ....................................... 460 280 (3) -- 737
Other noncurrent assets ................................ (387) 530 -- 4,049 4,192
Accounts payable ....................................... 2,555 1,604 -- -- 4,159
Other current liabilities and accrued expenses ......... 5,491 8,541 194 (14,907) (681)
Employment obligations ................................. (277) -- -- -- (277)
Other noncurrent liabilities ........................... 5,867 1,861 (1) -- 7,727
--------- --------- ------- --------- ----------
Net cash provided by operating activities ............... 9,264 13,576 184 4,086 27,110
--------- --------- ------ --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale .................... (4,187) -- -- (4,187)
Additions to property and equipment .................... (18,956) (13,967) -- -- (32,923)
Proceeds from sale of property held for sale ........... 3,245 -- -- -- 3,245
Proceeds from sale of property and equipment ........... 720 801 -- -- 1,521
Intercompany notes receivable (payable) ................ (16,289) 20,401 (26) (4,086) --
Acquisitions of related businesses, net of cash
acquired ............................................. (9,500) (156,299) -- -- (165,799)
--------- --------- ------ --------- ----------
Net cash used in investing activities ................... (44,967) (149,064) (26) (4,086) (198,143)
--------- --------- ------ --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases .............. (227) (680) -- -- (907)
Principal repayments of long-term debt ................. (57,025) (6) (13) -- (57,044)
Proceeds from issuance of long-term debt ............... 82,287 145,755 -- -- 228,042
Net proceeds from equity issue ......................... 31,936 -- -- -- 31,936
Other financing costs .................................. (12,891) -- -- -- (12,891)
--------- ----------- ------ --------- ----------
Net cash provided by (used in) financing activities ..... 44,080 145,069 (13) -- 189,136
--------- ----------- ------ --------- ----------
NET INCREASE IN CASH & CASH EQUIVALENTS ................. 8,377 9,581 145 -- 18,103
CASH & CASH EQUIVALENTS, BEGINNING OF YEAR .............. 2,247 279 821 -- 3,347
--------- ----------- ------ --------- ----------
CASH & CASH EQUIVALENTS, END OF QUARTER ................. $ 10,624 $ 9,860 $966 $ -- $ 21,450
========= =========== ====== ========= ==========
21
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUBSEQUENT EVENTS
Subsequent to June 25, 1998, the Company acquired certain assets of Quick
Stop Food Mart, Inc. (the "Quick Stop Acquisition") including, but not limited
to, seventy-five (75) convenience stores located throughout North Carolina and
South Carolina. In addition, subsequent to June 25, 1998, the Company acquired
certain assets of Stallings Oil Company (the "Stallings Acquisition")
including, but not limited to, forty-one (41) convenience stores located
throughout North Carolina and eastern Virginia. The aggregate purchase price
for both acquisitions was approximately $75 million plus the cost of
inventories.
The source of funds for each of the Quick Stop Acquisition and the
Stallings Acquisition was (i) the Company's Acquisition Facility (which is part
of the New Credit Facility), (ii) an additional aggregate equity investment in
the Company of $25 million by existing stockholders of the Company, and (iii)
cash on hand.
In connection with Quick Stop Acquisition and the Stallings Acquisition,
the New Credit Facility was amended to increase the amount available to the
Company for acquisitions from $30 million to $85 million. In addition,
amendments were made to certain of the Company's financial covenants under the
New Credit Facility, including (a) the minimum coverage ratio, (b) the minimum
pro forma EBITDA, (c) the maximum pro forma leverage ratio, and (d) the maximum
capital expenditure allowance.
22
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 Reports on Form 10-Q for the
quarters ended December 25, 1997 and March 26, 1998, the Company's Registration
Statement on Form S-4, as amended, effective January 8, 1998, the Company's
Current Report on Form 8-K dated October 23, 1997 and the Company's Current
Report on Form 8-K date July 2, 1998, as amended.
LIL' CHAMP AND 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 stockholders 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.
Within the nine months ended June 25, 1998, the Company has acquired or
opened an additional 38 convenience stores in its existing markets. These
openings and 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 as of June 25, 1998) with 895 stores located primarily in the
Southeast.
Subsequent to June 25, 1998, the Company acquired 116 convenience stores
in two separate transactions (see "Part I -- Financial Information -- Item 1.
Financial Statements -- Notes to Consolidated Financial Statements -- Note 8 --
Subsequent Events"). Both transactions were funded primarily from cash on hand,
borrowings under the Company's Acquisition Facility, and an equity investment
by existing shareholders. These convenience stores are located in North
Carolina, South Carolina, and Virginia. These acquisitions, coupled with
several openings since June 25, 1998, have increased the Company's store count
to over 1,000 stores with operations in eight Southeastern states.
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 reported increases in income from operations and EBITDA
(as defined herein) for both Pantry and Lil' Champ operations for the nine and
eight month periods ended June 25, 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 nine and three months ended June 25, 1998
discussed herein include Lil' Champ operations for the eight and three month
periods ended June 25, 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 nine and three
months ended June 26, 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.
23
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 nine and three months ended June 26, 1997, do not
include Lil' Champ results and include only the eight and three months of Lil'
Champ operating results for the periods ended June 25, 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
eight months or thirty-five weeks ended June 25, 1998 in the "Nine Month"
table.
SELECTED OPERATING RESULTS FOR THE NINE MONTHS ENDED
CONSOLIDATED THE PANTRY LIL' CHAMP
------------------------- ------------------------- ---------------------------
JUNE 26, JUNE 25, JUNE 26, JUNE 25, JUNE 26, JUNE 25,
1997 1998 1997 1998 1997 1998
------------ ------------ ------------ ------------ --------------- -----------
(39 WEEKS) (39 WEEKS) (39 WEEKS) (39 WEEKS) (35 WEEKS) (35 WEEKS)
INCOME STATEMENT DATA:
Revenues:
Merchandise Sales ......................... $ 144.7 $ 316.9 $ 144.7 $ 160.2 $ 154.3 $ 156.7
Gasoline sales ............................ 159.0 343.5 159.0 166.9 194.0 176.6
Commissions ............................... 3.6 10.0 3.6 4.6 5.7 5.4
Total Revenues ............................. 307.3 670.4 307.3 331.7 354.0 338.7
Cost of Sales:
Merchandise ............................... 95.4 207.3 95.4 104.2 101.7 103.1
Gasoline .................................. 143.1 304.1 143.1 148.9 175.9 155.2
Gross Profit ............................... 68.8 159.0 68.8 78.6 76.4 80.4
Income from operations ..................... 5.6 19.7 5.6 7.1 5.1 12.6
Interest expense ........................... 9.8 20.4 n/a n/a n/a n/a
OTHER FINANCIAL DATA:
EBITDA (a) ................................. $ 13.7 $ 39.4 $ 13.7 $ 17.4 $ 16.3 (c) $ 22.0
EBITDA/interest expense .................... 1.4 x 1.9 x n/a n/a n/a n/a
STORE OPERATING DATA:
Number of stores (end of period) ........... 393 895 393 402 488 493
Same store sales growth (b):
Merchandise ............................... 9.0 % 3.6 % 9.0 % 5.1 % n/a 2.3 %
Gasoline gallons .......................... 7.0 % 2.5 % 7.0 % 4.4 % n/a 1.0 %
Merchandise gross margin ................... 34.1 % 34.6 % 34.1 % 35.0 % 34.1 % 34.2 %
Gasoline gallons sold (in millions) ........ 128.9 307.2 128.9 153.1 152.0 154.1
Average retail gasoline price per gallon ..... $ 1.23 $ 1.12 $ 1.23 $ 1.09 $ 1.28 $ 1.15
Average gasoline gross profit
per gallon (in cents) ...................... 12.34c 12.83c 12.34c 11.76c 11.91c 13.89c
24
SELECTED OPERATING RESULTS FOR THE QUARTER ENDED
CONSOLIDATED THE PANTRY LIL' CHAMP
------------------------- ------------------------- ---------------------------
JUNE 26, JUNE 25, JUNE 26, JUNE 25, JUNE 26, JUNE 25,
1997 1998 1997 1998 1997 1998
------------ ------------ ------------ ------------ --------------- -----------
(13 WEEKS) (13 WEEKS) (13 WEEKS) (13 WEEKS) (13 WEEKS) (13 WEEKS)
INCOME STATEMENT DATA:
Revenues:
Merchandise Sales ........................... $ 52.6 $ 123.1 $ 52.6 $ 60.6 $ 56.4 $ 62.5
Gasoline sales .............................. 57.1 127.8 57.1 61.4 72.8 66.4
Commissions ................................. 1.3 3.7 1.3 1.7 2.1 2.0
Total Revenues ............................... 111.0 254.6 111.0 123.7 131.3 130.9
Cost of Sales:
Merchandise ................................. 34.6 80.4 34.6 39.7 37.3 40.6
Gasoline .................................... 51.2 113.8 51.2 55.0 66.0 58.9
Gross Profit ................................. 25.3 60.4 25.3 29.0 28.0 31.4
Income (loss) from operations ................ 3.8 10.2 3.8 3.8 ( 1.0) 6.4
Interest expense ............................. 3.3 7.5 n/a n/a n/a n/a
OTHER FINANCIAL DATA:
EBITDA (a) .................................. $ 6.7 $ 17.4 $ 6.7 $ 7.4 $ 5.3 (c) $ 10.0
EBITDA/interest expense ..................... 2.0 x 2.3 x n/a n/a n/a n/a
STORE OPERATING DATA:
Same store sales growth (b):
Merchandise ............................... 6.0 % 5.0 % 6.0 % 6.3 % n/a 3.9 %
Gasoline gallons .......................... 13.0 % 2.3 % 13.0 % 2.0 % n/a 2.6 %
Merchandise gross margin ..................... 34.2 % 34.7 % 34.2 % 34.3 % 33.9 % 35.0 %
Gasoline gallons sold (in millions) .......... 47.6 117.9 47.6 58.4 56.8 59.5
Average retail gasoline price per gallon ..... $ 1.20 $ 1.08 $ 1.20 $ 1.05 $ 1.28 $ 1.12
Average gasoline gross profit per gallon
(in cents) .................................. 12.39c 11.87c 12.39c 11.13c 11.97c 12.61c
- ---------
(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 nine and three
months ended and the eight and three months ended June 26, 1997 and June
25, 1998, respectively. For consolidated "same store sales growth", Lil'
Champ "same store sales growth" volume data was added to Pantry volume
data.
(c) Lil' Champs' EBITDA (as defined in "Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA")") for the eight months and quarter
ended June 26, 1997 have been increased by $3.1 million for a non-recurring
enviromental charge. This adjustment is made for comparative purposes only.
NINE MONTHS ENDED JUNE 25, 1998 COMPARED TO THE NINE MONTHS ENDED JUNE 26, 1997
GROSS REVENUE. Total revenue for the nine month period ended June 25, 1998
(the "first fiscal nine months 1998") increased $363.1 million over the
comparable period ended June 26, 1997 (the "first fiscal nine months 1997").
The increase in total revenue is primarily attributable to Lil' Champ revenue
of $338.7 million for the eight month period ended June 25, 1998, the revenue
from stores acquired or opened since June 26, 1997, and same store sales
growth.
MERCHANDISE REVENUE. Total merchandise revenue for the first fiscal nine
months 1998 increased $172.2 million over the first fiscal nine months 1997.
The increase in merchandise revenue is primarily attributable to Lil' Champ
merchandise revenue of $156.7 million for the eight month period ended June 25,
1998, the revenue from stores acquired or opened since June 26, 1997, and same
store sales growth. The Pantry locations and Lil' Champ locations same store
merchandise revenue for the nine and eight month periods ended June 25, 1998
increased 5.1% and 2.3% over the comparable periods in 1997, respectively.
Overall same store merchandise sales growth was 3.6% (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 general
economic and market conditions, enhanced store merchandising, increases in food
service sales, and promotional activity.
25
GASOLINE REVENUE AND GALLONS. Total gasoline revenue for the first fiscal
nine months 1998 increased $184.5 million over the first fiscal nine months
1997. The increase in gasoline revenue is primarily attributable to Lil' Champ
gasoline revenue of $176.6 million for the eight month period ended June 25,
1998, the revenue from stores acquired or opened since June 26, 1997, and same
store gallon sales growth. Overall gasoline revenue growth was partially offset
by lower average gasoline retail prices in the first fiscal nine months 1998
versus the first fiscal nine months 1997. In the first fiscal nine months 1998,
the Company's average retail price of gasoline was $0.11 lower than in the
first fiscal nine months 1997.
In the first fiscal nine months 1998, total gasoline gallons increased
178.3 million gallons over the first fiscal nine months 1997. The increase is
attributable to Lil' Champ volume of 154.1 million. Pantry locations and Lil'
Champ locations same store gasoline gallon sales for the nine and eight month
periods ended June 25, 1998 increased 4.4% and 1.0% over the comparable periods
in 1997, respectively. Overall same store gallon sales growth was 2.5% (see
footnote [b] to the table above). Same store gallon increases at Pantry
locations are primarily attributable to general economic and market conditions,
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 market conditions and relatively
inclement weather in Florida and coastal Georgia during the eight month period
ended June 25, 1998.
COMMISSION REVENUE. Total commission revenue for the first fiscal nine
months 1998 increased $6.4 million over the first fiscal nine months 1997. The
increase in commission revenue is primarily attributable to Lil' Champ revenue
of $5.4 million for the eight month period ended June 25, 1998 and the revenue
from stores acquired or opened since June 26, 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 nine months
1998 increased $90.2 million over the first fiscal nine months 1997. The
increase in gross profit is primarily attributable to Lil' Champ gross profit
of $80.4 million for the eight month period ended June 25, 1998 and an increase
of $9.8 million in gross profit for Pantry operations. The increase in Pantry
gross profit is primarily attributable to the gross profit from stores acquired
or opened since June 26, 1997, same store volume growth, and a higher
merchandise gross margin.
MERCHANDISE GROSS MARGIN. The merchandise gross margin increase from 34.1%
in the first fiscal nine months 1997 to 34.6% in the first fiscal nine 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 $0.123 in the first fiscal nine months 1997 to $0.128 in first
fiscal nine 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 nine months 1998 increased $53.8 million over the
first fiscal nine months 1997. The increase in store expenses is primarily
attributable to Lil' Champ expenses of $48.3 million for the eight month period
ended June 25, 1998 and the personnel and lease expenses associated with the
stores acquired or opened since June 26, 1997.
General and administrative expenses for the first fiscal nine months 1998
increased $10.7 million over the first fiscal nine months 1997. The increase in
general and administrative expenses is attributable to Lil' Champ expenses of
$10.7 million for the eight month period ended June 25, 1998. General and
administrative expenses decreased as a percentage of total revenues.
INCOME FROM OPERATIONS. Income from operations for the first fiscal nine
months 1998 increased $14.1 million over the first fiscal nine months 1997. The
increase is primarily attributable to Lil' Champ income from operations of
$12.6 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 June 26,
1997, same store volume increases, and the margin impact as discussed above and
is partially offset by the personnel and lease expenses associated with the
stores acquired or opened since June 26, 1997.
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 nine months 1998 increased $25.7 million over the first fiscal nine
months in 1997. The increase is attributable to Lil' Champ EBITDA of $22.0
million for the eight month period ended June 25, 1998 and an increase of $3.7
million in EBITDA for Pantry operations. The Pantry increase is attributable to
the items discussed above, and is partially offset by lower gains on the sale
of assets and other miscellaneous income in the first fiscal nine months 1998
when compared to the first fiscal nine months 1997.
26
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, Senior
Subordinated Notes, and borrowing under the Acquisition Facility. Interest
expense increased $10.6 million for the first fiscal nine months 1998 over the
first fiscal nine months 1997 and is attributable to interest on the Senior
Subordinated Notes and borrowing under the Acquisition Facility, which was
partially offset by the interest savings related to the repurchase of $51.0
million in principal amount of Senior Notes.
EXTRAORDINARY ITEM. The Company recognized an extraordinary loss, net of
taxes, of approximately $6.5 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.
THIRD QUARTER ENDED JUNE 25, 1998 COMPARED TO THE THIRD QUARTER ENDED JUNE 26,
1997
GROSS REVENUE. Total revenue for the three month period ended June 25, 1998
(the "third fiscal quarter 1998") increased $143.6 million over the comparable
period ended June 26, 1997 (the "third fiscal quarter 1997"). The increase in
total revenue is primarily attributable to Lil' Champ revenue of $130.9 million
for the third fiscal quarter 1998, the revenue from stores acquired or opened
since June 26, 1997, and same store sales growth. In the third fiscal quarter
1998, Company gross revenue increases were partially offset by lower average
retail gasoline prices when compared to the third fiscal quarter 1997.
MERCHANDISE REVENUE. Total merchandise revenue for the third fiscal
quarter 1998 increased $70.5 million over the third fiscal quarter 1997. The
increase in merchandise revenue is primarily attributable to Lil' Champ
merchandise revenue of $62.5 million for the third fiscal quarter 1998, the
revenue from stores acquired or opened since June 26, 1997, and same store
sales growth. The Pantry locations and Lil' Champ locations same store
merchandise revenue for the third fiscal quarter 1998 increased 6.3% and 3.9%
over the third fiscal quarter 1997, respectively. Overall same store
merchandise sales growth was 5.0% (see footnote [b] to the table above). Same
store sales increases at the Pantry locations are primarily attributable to
general economic and market conditions, 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 enhanced store merchandising, increases in food
service sales, and promotional activity.
GASOLINE REVENUE AND GALLONS. Total gasoline revenue for the third fiscal
quarter 1998 increased $70.7 million over the third fiscal quarter 1997. The
increase in gasoline revenue is primarily attributable to Lil' Champ gasoline
revenue of $66.4 million for the third fiscal quarter 1998, the revenue from
stores acquired or opened since June 26, 1997, and same store gallon sales
growth. Overall gasoline revenue growth was partially offset by lower average
gasoline retail prices in the third fiscal quarter 1998 versus the third fiscal
quarter 1997.
In the third fiscal quarter 1998, total gasoline gallons increased 70.3
million gallons over the third fiscal quarter 1997, 59.5 million of which is
attributable to Lil' Champ volume and to an increase of 10.8 million gallons
from Pantry operations. Pantry locations and Lil' Champ locations same store
gasoline gallon sales for the third fiscal quarter 1998 increased 2.0% and
increased 2.6% over the comparable periods in 1997, respectively. Overall same
store gallon sales growth was 2.3% (see footnote [b] to the table above). Same
store gallon increases at Pantry and Lil' Champ locations are primarily
attributable to general economic and market conditions, more competitive
gasoline pricing, rebranding and promotional activity, and enhanced store
appearance.
COMMISSION REVENUE. Total commission revenue for the third fiscal quarter
1998 increased $2.4 million over the third fiscal quarter 1997. The increase in
commission revenue is attributable to Lil' Champ revenue of $2.0 million for
the third fiscal quarter 1998 and the revenue from stores acquired or opened
since June 26, 1997. Lil' Champ's commission revenue is principally lottery
revenue in locations throughout Florida and Georgia.
27
TOTAL GROSS PROFIT. Total gross profit for the third fiscal quarter 1998
increased $35.1 million over the third fiscal quarter 1997. The increase in
gross profit is primarily attributable to Lil' Champ gross profit of $31.4
million for the third fiscal quarter 1998 and an increase of $3.7 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 June 26, 1997 and same store volume growth.
MERCHANDISE GROSS MARGIN. The merchandise gross margin increase from 34.2%
for the third fiscal quarter 1997 to 34.7% for the third fiscal quarter 1998 is
attributable to enhanced store merchandising at Lil' Champ 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 Pantry locations.
GASOLINE GROSS PROFIT PER GALLON. The gasoline gross profit per gallon
decrease from $0.124 for the third fiscal quarter 1997 to $0.119 in third
fiscal quarter 1998 is the result of relatively lower gasoline margins in
Pantry's marketing areas and general gasoline market conditions.
STORE OPERATING AND GENERAL AND ADMINISTRATIVE EXPENSES. Store operating
expenses for the third fiscal quarter 1998 increased $20.6 million over the
third fiscal quarter 1997. The increase in store expenses is primarily
attributable to Lil' Champ expenses of $18.2 million for the third fiscal
quarter 1998 and the personnel and lease expenses associated with the stores
acquired or opened since June 26, 1997.
General and administrative expenses for the third fiscal quarter 1998
increased $3.6 million over the third fiscal quarter 1997. The increase in
general and administrative expenses is attributable to Lil' Champ expenses of
$3.6 million for the third fiscal quarter 1998. General and administrative
expenses decreased as a percentage of total revenues.
INCOME FROM OPERATIONS. Income from operations for the third fiscal
quarter 1998 increased $6.4 million over the third fiscal quarter 1997. The
increase is attributable to Lil' Champ income from operations of $6.4 million.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA, as
previously defined, represents income before interest expense, income tax
benefit, depreciation and amortization, and extraordinary loss. EBITDA for the
third fiscal quarter 1998 increased $10.7 million over the third fiscal quarter
in 1997. The increase is attributable to Lil' Champ EBITDA of $10.0 million for
the third fiscal quarter 1998 and an increase of $0.7 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.
INTEREST EXPENSE (SEE "LIQUIDITY AND CAPITAL RESOURCES; LONG-TERM DEBT").
Interest expense is primarily interest on the Company's Senior Notes, Senior
Subordinated Notes, and borrowing under the Acquisition Facility. Interest
expense increased $4.2 million for the third fiscal quarter 1998 over the third
fiscal quarter 1997 and is attributable to interest on the Senior Subordinated
Notes and borrowings under the Acquisition Facility, 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 operating activities for the first fiscal nine months 1997 and the
first fiscal nine months 1998 totaled $1.9 million and $27.1 million,
respectively. The Company had $21.5 million of cash and cash equivalents on
hand at June 25, 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, which consists of a $45.0 million "Revolving Credit
Facility" and a $30.0 million Acquisition Facility." 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. On July 2, 1998 and in connection with
subsequent acquisition activity and an additional equity investment by existing
stockholders, the New Credit Facility was amended to: (i) increase the amount
available under the Acquisition Facility from $30.0 million to $85.0 million;
and (ii) amend certain financial covenants. See "PART I. -- Financial
Information -- Item 1. Financial Statements -- Notes to Consolidated Financial
Statements -- Note 2 -- The Lil' Champ Acquisition and Pro Forma Information"
and "Note 8 -- Subsequent Events." As of June 25, 1998, there were no borrowings
outstanding under the Revolving Credit Facility and $28.0 million outstanding
under the Acquisition Facility (see "Tuck In Acquisitions" and "Long-Term
Debt"). As of June 25, 1998, approximately $11.7 million of letters of credit
were issued under the standby letter of credit facility.
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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 $6.5 million in connection
with the Tender Offer and Consent Solicitation. See "Results of Operations."
"TUCK IN" ACQUISITIONS. During the quarter ended June 25, 1998, the
Company acquired a total of twelve convenience stores in three separate
transactions for approximately $19.0 million. These stores are located in or
around Gainesville, Florida. The Company funded these transactions with cash on
hand and $19.0 million in proceeds from the Acquisition Facility.
Subsequent to June 25, 1998, the Company acquired 116 convenience stores
in two separate transactions. These stores are located in North Carolina, South
Carolina, and Virginia. Both acquisitions were funded primarily from cash on
hand, borrowings under the Company's Acquisition Facility (which is a part of
the New Credit Facility), and an additional equity investment by existing
stockholders. See "PART I. -- Financial Information -- Item 1. Financial
Statements -- Notes to Consolidated Financial Statements -- Note 6 --
Shareholders' Equity" and "Note 8 -- Subsequent Events."
CAPITAL EXPENDITURES. Capital expenditures (excluding all acquisitions),
for the first fiscal nine months 1997 and the first fiscal nine months 1998,
were approximately $9.0 million and $32.9 million, respectively. Capital
expenditures are primarily expenditures for existing store improvements, store
equipment, 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 nine months 1998, the
Company has received approximately $11.6 million in sale-leaseback, asset
dispositions, and other reimbursements for capital improvements; therefore net
capital expenditures, excluding all acquisitions, for the first fiscal nine
months 1998 were $21.3 million.
LONG-TERM DEBT. At June 25, 1998, the Company's long-term debt consisted
primarily of $49.0 million of the Senior Notes, $200.0 million of the Senior
Subordinated Notes (together with the Senior Notes, the "Notes"), and $28.0
million outstanding under the Acquisition Facility. 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 interest payments
on the Acquisition Facility are due monthly.
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 2 -- The Lil' Champ Acquisition and Pro Forma
Information" and "Note 5 -- Long-Term Debt."
During the quarter ended June 25, 1998 and relating to the "tuck in"
acquisitions discussed above, the Company borrowed $19.0 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 2 --
The Lil' Champ Acquisition and Pro Forma Information" and "Note 8 -- Subsequent
Events"). 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,
29
(b) a minimum pro forma EBITDA, (c) a maximum pro forma leverage ratio, and (d)
a maximum capital expenditure allowance. See "PART I -- Financial Information
- -- Item 1. Financial Statements -- Notes to Consolidated Financial Statements
- -- Note 8 -- Subsequent Events."
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 2 -- The Lil' Champ Acquisition and Pro Forma Information."
SHAREHOLDERS' EQUITY. As of June 25, 1998, the Company's shareholders'
equity totaled $12.4 million. The increase in shareholders' equity of $30.2
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 2 --
The Lil' Champ Acquisition and Pro Forma Information" and "Note 6 --
Shareholders' Equity"), which was partially offset by the Company's net loss of
$6.0 million for the nine months ended June 25, 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 stockholders. 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 $3.7 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 six
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
30
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 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 in the amount
of $25 million issued and sold on July 2, 1998, 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.
YEAR 2000 INITIATIVE. The Company has determined that it will need to
modify or replace portions of its software so that its computer systems will
function properly with respect to the year 2000 and beyond. The Company has also
initiated discussions with its significant suppliers and financial institutions
to ensure that those parties have appropriate plans to remediate Year 2000
issues where their systems interface with the Company's systems or otherwise
impact its operations. The Company is assessing the extent to which its
operations are vulnerable should those organizations fail to properly remediate
their computer systems.
The Company's comprehensive Year 2000 initiative is being managed by a team
of internal staff. The team's activities are designed to ensure that there is no
adverse effect on the Company's core business operations and that transactions
with customers, suppliers and financial institutions are fully supported. The
Company currently estimates that the overall cost will not be material and that
its Year 2000 initiative implementation will be complete by approximately
fiscal year-end 1999.
While the Company believes its planning efforts are adequate to address its
Year 2000 concerns, there can be no assurances that the systems of other
companies on which the Conmpany's systems and operations rely will be converted
on a timely basis and will not have a material effect on the Company.
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.
(1) On July 17, 1998, the Company filed a Current Report on Form 8-K
announcing the acquisition of certain assets of each of Quick Stop
Food Mart, Inc. ("Quick Stop") and Stallings Oil Company
("Stallings") and certain other related transactions which were
consummated on July 2, 1998 and July 16, 1998, respectively. On
August 7, 1998, the Company filed a Current Report on Form 8-K/A
(Amendment No. 1) amending the July 17, 1998 Current Report on Form
8-K to add financial statements of Quick Stop and Stallings.
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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: August 10, 1998
By: /s/ WILLIAM T. FLYG
---------------------------------------------------
WILLIAM T. FLYG
SENIOR VICE PRESIDENT FINANCE AND SECRETARY
(AUTHORIZED OFFICER AND PRINCIPAL FINANCIAL OFFICER)
32
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ------------- ------------------------
27.1 Financial Data Schedule
33