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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 24, 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 232,683 SHARES
(Class) (Outstanding at January 27, 1999)
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THE PANTRY, INC.
FORM 10-Q
DECEMBER 24, 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 21
Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk .................... 27
PART II -- OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds ..................................... 29
ITEM 6. Exhibits and Reports on Form 8-K. ............................................. 29
PART I -- FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 24, DECEMBER 24,
1998 1998
--------------- -------------
(AUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .............. $ 34,404 $ 15,069
Receivables ............................ 9,907 13,393
Inventories, net ....................... 47,809 53,546
Income tax receivable .................. 488 --
Prepaid expenses ....................... 2,216 1,338
Property held for sale ................. 3,761 2,971
Deferred income taxes .................. 3,988 3,521
-------- --------
Total current assets ................. 102,573 89,838
-------- --------
Property and equipment, net ............. 300,978 328,037
-------- --------
Other assets:
Goodwill, net .......................... 120,025 119,534
Deferred lease cost, net ............... 269 258
Deferred financing cost, net ........... 14,545 14,025
Environmental receivables, net ......... 13,187 12,783
Other noncurrent assets ................ 3,243 4,085
-------- --------
Total other assets ................... 151,269 150,685
-------- --------
$554,820 $568,560
======== ========
See Notes to Consolidated Financial Statements.
2
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 24, DECEMBER 24,
1998 1998
--------------- -------------
(AUDITED) (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .......................... $ 45 $ 39
Current maturities of capital lease obligations ............... 1,240 1,240
Short-term debt ............................................... -- 2,000
Accounts payable:
Trade ....................................................... 49,559 50,221
Money orders ................................................ 5,181 5,099
Accrued interest .............................................. 11,712 5,529
Accrued compensation and related taxes ........................ 6,719 6,031
Income taxes payable .......................................... -- 104
Other accrued taxes ........................................... 7,007 4,108
Accrued insurance ............................................. 5,745 6,097
Other accrued liabilities ..................................... 24,348 27,490
--------- ---------
Total current liabilities ................................... 111,556 107,958
--------- ---------
Long-term debt ................................................. 327,269 343,260
--------- ---------
Other noncurrent liabilities:
Environmental reserves ........................................ 17,137 17,291
Deferred income taxes ......................................... 20,366 19,927
Capital lease obligations ..................................... 12,129 11,806
Employment obligations ........................................ 934 842
Accrued dividends on preferred stock .......................... 4,391 5,103
Other noncurrent liabilities .................................. 21,734 21,628
--------- ---------
Total other noncurrent liabilities .......................... 76,691 76,597
--------- ---------
Commitments and contingencies (Notes 4 and 5) .................. -- --
Shareholders' equity:
Preferred stock, $.01 par value, 150,000 shares authorized;
17,500 issued and outstanding ............................... -- --
Common stock, $.01 par value, 300,000 shares authorized;
229,507 issued and outstanding at September 24, 1998 and
232,701 issued and outstanding at December 24, 1998 ......... 2 2
Additional paid in capital .................................... 68,115 69,925
Shareholder loans ............................................. (215) (937)
Accumulated deficit ........................................... (28,598) (28,245)
--------- ---------
Total shareholders' equity .................................. 39,304 40,745
--------- ---------
$ 554,820 $ 568,560
========= =========
See Notes to Consolidated Financial Statements.
3
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
----------------------------
DECEMBER 25, DECEMBER 24,
1997 1998
-------------- -------------
(13 WEEKS) (13 WEEKS)
Revenues:
Merchandise sales ...................................... $ 89,360 $139,390
Gasoline sales ......................................... 103,022 171,789
Commissions ............................................ 2,789 4,428
-------- --------
Total revenues ....................................... 195,171 315,607
-------- --------
Cost of sales:
Merchandise ............................................ 58,897 94,453
Gasoline ............................................... 90,909 148,774
-------- --------
Total cost of sales .................................. 149,806 243,227
-------- --------
Gross profit ............................................ 45,365 72,380
-------- --------
Operating expenses:
Store expenses ......................................... 28,165 43,729
General and administrative expenses .................... 7,172 9,968
Depreciation and amortization .......................... 5,151 8,190
-------- --------
Total operating expenses ............................. 40,488 61,887
-------- --------
Income from operations .................................. 4,877 10,493
-------- --------
Other income (expense):
Interest expense ....................................... (5,817) (8,912)
Miscellaneous income (expense) ......................... 439 (184)
-------- --------
Total other expense .................................. (5,378) (9,096)
-------- --------
Income (loss) before income taxes and extraordinary item (501) 1,397
Income tax benefit (expense) ............................ 412 (332)
-------- --------
Income (loss) before extraordinary loss ................. (89) 1,065
Extraordinary loss, net of taxes ........................ (6,800) --
-------- --------
Net income (loss) ....................................... $ (6,889) $ 1,065
======== ========
See Notes to Consolidated Financial Statements.
4
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
----------------------------
DECEMBER 25, DECEMBER 24,
1997 1998
-------------- -------------
(13 WEEKS) (13 WEEKS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................................. $ (6,889) $ 1,065
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary loss ........................................................... 2,006 --
Depreciation and amortization ................................................ 5,151 8,190
Change in deferred income taxes .............................................. (1,851) --
(Gain) loss on sale of property and equipment ................................ (268) 260
Reserves for environmental issues ............................................ 27 154
Changes in operating assets and liabilities, net:
Receivables .................................................................... (1,227) (2,566)
Inventories .................................................................... (951) (4,677)
Prepaid expenses ............................................................... 614 878
Other noncurrent assets ........................................................ 3,574 36
Accounts payable ............................................................... (335) (480)
Other current liabilities and accrued expenses ................................. (2,614) (6,172)
Employment obligations ......................................................... (92) (92)
Other noncurrent liabilities ................................................... 1,927 (106)
---------- ---------
Net cash used in operating activities ........................................... (928) (3,510)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ............................................ -- (42)
Additions to property and equipment ............................................ (5,932) (9,540)
Proceeds from sale of property held for sale ................................... 2,025 524
Proceeds from sale of property and equipment ................................... 409 91
Acquisitions of related businesses, net of cash acquired of (1997 - $10,487;
1998 - $70) .................................................................. (135,605) (25,541)
---------- ---------
Net cash used in investing activities ........................................... (139,103) (34,508)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases ...................................... (246) (323)
Principal repayments of long-term debt ......................................... (51,004) (15)
Proceeds from issuance of long-term debt ....................................... 200,023 16,000
Proceeds from issuance of short-term debt ...................................... -- 2,000
Net proceeds from equity ....................................................... 32,151 1,088
Other financing costs .......................................................... (12,418) (67)
---------- ---------
Net cash provided by financing activities ....................................... 168,506 18,683
---------- ---------
NET INCREASE (DECREASE) IN CASH ................................................. 28,475 (19,335)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .................................... 3,347 34,404
---------- ---------
CASH AND CASH EQUIVALENTS, END OF QUARTER ....................................... $ 31,822 $ 15,069
========== =========
CASH PAID (REFUNDED) DURING THE PERIOD:
Interest ....................................................................... $ 6,165 $ 15,095
========== =========
Taxes .......................................................................... $ (116) $ 285
========== =========
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
December 24, 1998 and for the three months ended December 24, 1998 and December
25, 1997 are unaudited. References herein to the "Company" shall include all
subsidiaries including 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 24, 1998 (the "Company's 10- K"), 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 November 6, 1998, and the Company's Current
Report on Form 8-K dated February 8, 1999.
The results of operations for the three months ended December 24, 1998 and
December 25, 1997 are not necessarily indicative of results to be expected for
the full fiscal year. The results of operations and comparisons with prior and
subsequent quarters are materially impacted by the results of operations of
businesses acquired since September 25, 1997. These acquisitions have been
accounted for under the purchase method (see "Note 2 -- Businesses
Acquisitions" and "Note 8 -- Subsequent Events"). Furthermore, 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.
THE COMPANY
The Pantry, Inc. is privately held and, as of December 24, 1998, operated
approximately 973 convenience stores located in Florida, North Carolina, South
Carolina, Tennessee, Kentucky, Indiana and Virginia. The Company's stores offer
a broad selection of products and services designed to appeal to the
convenience needs of its customers, including gasoline, car care products and
services, tobacco products, beer, soft drinks, self-service fast food and
beverages, publications, dairy products, groceries, health and beauty aids,
video games and money orders. In its Florida, Kentucky, Virginia and Indiana
stores, the Company also sells lottery products. Self-service gasoline is sold
at 890 locations, 657 of which sell gasoline under brand names including Amoco,
British Petroleum ("BP"), Chevron, Citgo, Exxon, Fina, Shell, and Texaco.
During the last three fiscal years, merchandise revenues (including commissions
from services) and gasoline revenues have averaged approximately 48.6% and
51.4% of total revenues, respectively.
RECENT DEVELOPMENTS
During the quarter ended December 24, 1998 (the "first fiscal quarter
1999") in two separate transactions, the Company acquired certain operating
assets including 32 convenience stores located in North Carolina and South
Carolina. These transactions were funded from borrowings under the Company's
Credit Facility (the "Credit Facility") and cash on hand.
Subsequent to December 24, 1998, the Company acquired 100% of the
outstanding capital stock of Miller Enterprises, Inc. ("Miller Enterprises")
and certain other real estate assets of certain affiliates of Miller
Enterprises. Miller Enterprises operates 121 convenience stores located in
central Florida and operated under the name "Handy Way." This transaction was
primarily funded from borrowings under the Company's Amended Credit Facility,
as defined herein. See "Note 8 -- Subsequent Events."
6
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- BUSINESS ACQUISITIONS:
During the first fiscal quarter 1999, the Company acquired the businesses
described below, which are accounted for by the purchase method of accounting:
o The October 22, 1998 acquisition of the operating assets of 10
convenience stores in eastern North Carolina which was financed primarily from
cash on hand.
o The November 5, 1998 acquisition of the operating assets of 22
convenience stores in North Carolina and South Carolina which was financed with
proceeds from the Credit Facility and cash on hand.
During fiscal 1998, the Company acquired and disposed of the businesses
described below. These acquisitions were accounted for by the purchase method
of accounting:
o The October 23, 1997 acquisition of all of the common stock of Lil'
Champ. Lil' Champ's 433 (see the September transactions discussed below) stores
are located primarily in northern Florida. 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, cash on hand and the
purchase by existing stockholders and management of the Company of an
additional $32.4 million of the Company's capital stock.
o The March 19, 1998 acquisition of the operating assets of 23 convenience
stores in eastern North Carolina which was financed with proceeds from the
Acquisition Facility and cash on hand.
o The May 1998 acquisitions, in three separate transactions, of 12
convenience stores in the Gainesville, Florida area which were financed with
proceeds from the Acquisition Facility and cash on hand.
o The July 2, 1998 acquisition of certain assets of Quick Stop Food Mart,
Inc. ("Quick Stop") including, but not limited to, 75 convenience stores
located throughout North Carolina and South Carolina.
o The July 16, 1998 acquisition of certain assets of Stallings Oil
Company, Inc. ("Stallings") including, but not limited to, 41 convenience
stores located throughout North Carolina and Virginia. The Stallings and Quick
Stop acquisitions were financed by proceeds of $50.0 million from the
Acquisition Facility, cash on hand, and an equity investment of $25.0 million
by existing shareholders of the Company.
o The September 1, 1998 disposition of certain assets of Lil' Champ
including, but not limited to, 48 convenience stores located throughout eastern
Georgia.
o The September 1, 1998 acquisition of the operating assets of 4
convenience stores located in northern Florida was financed with a portion of
the proceeds from the disposition of the assets discussed above.
With the exception of the Lil' Champ acquisition, the purchase price
allocations are preliminary estimates, based on available information and
certain assumptions management believes are reasonable. Accordingly, the
purchase price allocations are subject to finalization. The purchase price
allocation for the Lil' Champ acquisition has been finalized.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and acquired businesses as if
the transactions occurred at the beginning of the fiscal year for each of the
periods presented (amounts in thousands):
QUARTER ENDED
DECEMBER 25, DECEMBER 24,
1997 1998
-------------- -------------
Total revenues ....................... 325,093 319,885
Income before extraordinary loss ..... 1,390 1,132
Net income (loss) .................... (5,410) 1,132
In management's opinion, the unaudited pro forma information is not
necessarily indicative of actual results that would have occurred had the
acquisitions been consummated at the beginning of fiscal 1997 or fiscal 1998,
or of future operations of the combined companies.
7
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 24, DECEMBER 24,
1998 1998
--------------- -------------
Inventories at FIFO cost:
Merchandise ........................... $ 41,967 $ 48,613
Gasoline .............................. 11,510 11,020
-------- --------
53,477 59,633
Less adjustment to LIFO cost:
Merchandise ........................... (5,668) (5,959)
Gasoline .............................. -- (128)
-------- --------
Inventories at LIFO cost ........ $ 47,809 $ 53,546
======== ========
Total inventories at September 24, 1998 and December 24, 1998 include $5.2
million and $4.6 million of gasoline inventories held by Lil' Champ that are
recorded under the FIFO method, respectively. Inventories are net of estimated
obsolescence reserves of approximately $200,000 at September 24, 1998 and
December 24, 1998.
NOTE 4 -- ENVIRONMENTAL LIABILITIES AND OTHER CONTINGENCIES
As of December 24, 1998, the Company was contingently liable for
outstanding letters of credit in the amount of $13.5 million related primarily
to several self-insured programs of the Company, regulatory requirements, and
vendor contract terms. The letters of credit are not to be drawn against unless
the Company defaults on the timely payment of related liabilities.
The State of North Carolina and the State of Tennessee have assessed
Sandhills, Inc., a subsidiary of the Company, with additional taxes plus
penalties and accrued interest totaling approximately $5 million, for the
periods February 1, 1992 to September 26, 1996. The Company reached a
settlement with the State of North Carolina, which is pending final approval by
the State. Under the settlement, the Company will reduce State net economic
loss carryforwards and pay a de minimis amount of additional tax. The expected
settlement is reflected in the financial statements as a reduction to State net
economic losses and a reduction of deferred tax assets which is fully offset by
a corresponding reduction to the valuation allowance. The Company is contesting
the Tennessee assessment and believes that, in the event of a mutual
settlement, the assessment amount and related penalties would be substantially
reduced. 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
financial statements.
The Pantry is involved in certain legal actions arising in the normal
course of business. In the opinion of management, based on a review of such
legal proceedings, the ultimate outcome of these actions will not have a
material effect on the consolidated financial statements.
ENVIRONMENTAL LIABILITIES AND CONTINGENCIES
The Company is subject to various federal, state and local environmental
laws and regulations governing underground petroleum storage tanks ("USTs")
that require the Company to make certain expenditures for compliance. In
particular, at the federal level, the Resource Conservation and Recovery Act,
as amended, requires the EPA to establish a comprehensive regulatory program
for the detection, prevention, and cleanup of leaking USTs. 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. These regulations permit states to develop, administer and
enforce their own regulatory programs, incorporating requirements which are at
least as stringent as the federal standards. The Florida rules for 1998
upgrades are more stringent than the 1998 EPA regulations. The Company
facilities in Florida all meet or exceed such rules. UST systems upgrading
8
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- ENVIRONMENTAL LIABILITIES AND OTHER CONTINGENCIES -- Continued
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 this requirement, the
Company maintains letters of credit in the aggregate amount of $2.3 million
issued by a commercial bank in favor of state environmental enforcement
agencies in the states of North Carolina, Virginia, South Carolina, Tennessee,
Indiana and Kentucky and relies on reimbursements from applicable state trust
funds. In Florida, the Company meets such financial responsibility requirements
by state trust fund coverage through December 31, 1998 and meets such
requirements thereafter through private commercial liability insurance and by
qualified self insurance. The Company has sold all of its Georgia stores, but
has retained responsibility for pre-closing environmental remediation at
certain locations. The costs of such remediation and third party claims should
be covered by the state trust fund, subject to applicable deductibles and caps
on reimbursements.
The Company believes it is in full compliance with the leak detection
requirements applicable to its USTs and has met the 1998 deadline for
installing corrosion protection and spill/overfill equipment for all of its
USTs. Additional regulations or amendments to the existing UST regulations
could result in future revisions to the Company's upgrade compliance and future
remediation costs.
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 insurance coverage for
the cleanup of environmental damages caused by the operation of 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 programs
and has filed claims and received reimbursement in North Carolina, South
Carolina, Kentucky, Indiana, Florida, Georgia, and Tennessee. The coverage
afforded by each state fund varies but generally provides from $150,000 to $1.0
million per site for the cleanup of environmental contamination, and most
provide coverage for third party liabilities. Costs for which 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 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. The
Florida trust fund does not cover releases first reported after December 31,
1998. The Company has obtained private coverage for remediation and third party
claims arising out of releases reported after December 31, 1998. The Company
believes that this coverage exceeds federal and Florida financial
responsibility regulations. In addition to immaterial amounts to be spent by
the Company, a substantial amount will be expended for remediation on behalf of
the Company by state trust funds established in the Company's operating areas
or other responsible third parties (including insurers). To the extent such
third parties do not pay for remediation as anticipated by the Company, the
Company will be obligated to make such payments, which could materially
adversely affect the Company's financial condition and results of operations.
Reimbursement from state trust funds will be dependent upon the maintenance and
continued solvency of the various funds.
Environmental reserves of $17.3 million as of December 24, 1998 represent
estimates for future expenditures for remediation, tank removal and litigation
associated with all known contaminated sites as a result of releases (e.g.,
overfills, spills and underground storage tank releases) and are based on
current regulations, historical results and certain other factors. The Company
anticipates that it will be reimbursed for a portion of these expenditures from
state insurance funds and private insurance. As of December 24, 1998, these
anticipated reimbursements of $12.8 million are recorded as long-term
environmental receivables. In Florida, remediation of such contamination will
be performed by the state and substantially all of the costs will be paid by
the state trust fund. The Company will perform remediation in other states
through independent contractor firms engaged by the Company. For certain sites
the trust fund does not cover a deductible or has a copay which may be less
than the cost of such remediation.
The Company has reserved $500,000 to cover third party claims that are not
covered by state trust funds or by private insurance. This reserve is based on
management's best estimate of losses that may be incurred over the next several
years
9
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- ENVIRONMENTAL LIABILITIES AND OTHER CONTINGENCIES -- Continued
based on, among other things, the fact that remediation standards and
expectations are evolving, the legal principles regarding the right to and
proper measure of damages for diminution in value, lost profit, lost
opportunity and damage to soil and subsurface water that may be owned by the
state, the absence of controlling authority of the limitation period, if any,
that may be applicable and the possibility that remediation (which will be
funded by state trust funds, private insurance or is included within the
reserve described above for remediation) may be sufficient.
Several of the locations identified as contaminated are being cleaned up
by third parties who have indemnified The Pantry as to responsibility for clean
up matters. Additionally, The Pantry is awaiting closure notices on several
other locations which will release the Company from responsibility related to
known contamination at those sites.
NOTE 5 -- LONG-TERM DEBT
At September 24, 1998 and December 24, 1998, long-term debt consisted of
the following (in thousands):
SEPTEMBER 24, DECEMBER 24,
1998 1998
--------------- -------------
Notes payable ("Senior Notes"); due November 15, 2000; interest payable
semi-annually at 12% ................................................... $ 48,995 $ 48,995
Notes payable ("Senior Subordinated Notes"); due October 15, 2007;
interest payable semi-annually at 10.25% ............................... 200,000 200,000
Notes payable (Credit Facility); interest payable monthly at LIBOR plus
2.5%; principal due in quarterly installments through October 31, 2002 . 78,000 94,000
Other notes payable; secured by certain property; due monthly through
2005; interest at 8% to 10% ............................................ 319 304
-------- --------
Total long-term debt .................................................... 327,314 343,299
Less -- current maturities .............................................. (45) (39)
-------- --------
$327,269 $343,260
======== ========
The Senior Notes and Senior Subordinated Notes (together, the "Notes") are
unconditionally guaranteed, on an unsecured basis, as to the payment of
principal, premium, if any, and interest, jointly and severally, by all
Guarantors (see "Note 7 -- Supplemental Guarantor Information"). 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. In addition, the Notes contain certain positive
covenants including the maintenance of a Consolidated Fixed Charge Ratio.
Subsequent to December 24, 1998 and on January 28, 1999, the Company
repurchased $49.0 million in principal amount of Senior Notes plus (i) accrued
and unpaid interest up to, but not including, the date of purchase and (ii) a
4% call premium. The repurchase of 100% of the Senior Notes outstanding, the
payment of accrued interest and the call premium were financed with proceeds
from the Term Loan Facility and cash on hand. See "Note 8 -- Subsequent
Events."
The Credit Facility is available to (i) finance the acquisition of related
businesses; (ii) finance working capital, as needed; and (iii) issue commercial
and standby letters of credit. Subsequent to December 24, 1998, the Credit
Facility was amended and balances outstanding were refinanced with proceeds
from the Term Loan Facility. Consequently, $9.0 million due under the Revolving
Credit Facility at December 24, 1998 has been classified as long-term debt. The
Amended Credit Facility (as defined below) contains certain restrictions and
financial covenants. See "Note 8 -- Subsequent Events."
As of December 24, 1998, the Company was in compliance with all covenants
and restrictions relating to all its outstanding borrowings.
As of December 24, 1998, substantially all of the Company's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
10
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- SHAREHOLDERS' EQUITY
On August 31, 1998, the Company adopted the 1998 Stock Subscription Plan
("1998 Subscription Plan"). The 1998 Subscription Plan allows the Company to
offer to certain employees the right to purchase shares of the Company's Common
Stock at a purchase price equal to the fair market value on the date of
purchase. During the three months ended December 24, 1998, 3,184 shares have
been issued under the 1998 Subscription Plan.
NOTE 7 -- SUPPLEMENTAL GUARANTOR INFORMATION
In connection with the Lil' Champ acquisition and commitments under the
Company's Credit Facility, Lil' Champ and Sandhills, Inc. (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, its Senior Notes Indenture and its Credit
Facility.
Management has determined that separate financial statements of the
Guarantors would not provide significant additive information 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 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 and transactions.
11
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
SEPTEMBER 24, 1998
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents .............. $ 24,031 $ 6,300 $4,073 $ -- $ 34,404
Receivables, net ....................... 11,211 9,263 1,030 (11,597) 9,907
Inventories ............................ 24,933 22,876 -- -- 47,809
Income taxes receivable ................ 270 (2,098) (472) 2,788 488
Prepaid expenses ....................... 1,206 1,007 3 -- 2,216
Property held for sale ................. 3,761 -- -- -- 3,761
Deferred income taxes .................. 1,262 2,726 -- -- 3,988
-------- -------- ------ ---------- --------
Total current assets ................. 66,674 40,074 4,634 (8,809) 102,573
-------- -------- ------ ---------- --------
Investment in subsidiaries .............. 68,237 -- -- (68,237) --
-------- -------- ------ ---------- --------
Property and equipment, net ............. 125,340 175,298 340 -- 300,978
-------- -------- ------ ---------- --------
Other assets:
Goodwill, net .......................... 72,375 47,650 -- -- 120,025
Deferred lease cost, net ............... 269 -- -- -- 269
Deferred financing cost, net ........... 14,545 -- -- -- 14,545
Environmental receivables, net ......... 11,566 1,621 -- -- 13,187
Intercompany notes receivable .......... 20,883 49,705 -- (70,588) --
Other noncurrent assets ................ 155 3,088 -- -- 3,243
-------- -------- ------ ---------- --------
Total other assets ................... 119,793 102,064 -- (70,588) 151,269
-------- -------- ------ ---------- --------
Total assets ............................ $380,044 $317,436 $4,974 $ (147,634) $554,820
======== ======== ====== ========== ========
12
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
YEAR ENDED SEPTEMBER 24, 1998
THE PANTRY GUARANTOR
(ISSUER) SUBSIDIARIES
------------ --------------
(DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Current maturities of long-term debt ........................ $ 17 $ 10
Current maturities of capital lease obligations ............. 213 1,027
Accounts payable:
Trade ..................................................... 28,563 20,996
Money orders .............................................. 4,112 1,069
Accrued interest ............................................ 11,564 1,283
Accrued compensation and related taxes ...................... 4,366 2,352
Other accrued taxes ......................................... 3,108 3,899
Accrued insurance ........................................... 3,188 2,557
Other accrued liabilities ................................... 11,118 18,877
--------- --------
Total current liabilities ................................ 66,249 52,070
--------- --------
Long-term debt ............................................... 188,151 139,000
--------- --------
Other noncurrent liabilities:
Environmental reserves ...................................... 13,487 3,650
Deferred income taxes ....................................... (36) 22,001
Capital lease obligations ................................... 1,534 10,595
Employment obligations ...................................... 934 --
Accrued dividends on preferred stock ........................ 4,391 --
Intercompany note payable ................................... 50,705 20,822
Other noncurrent liabilities ................................ 15,325 5,737
--------- --------
Total other noncurrent liabilities ....................... 86,340 62,805
--------- --------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock ............................................. -- --
Common stock ................................................ 2 1
Additional paid-in capital .................................. 68,115 6,758
Shareholder loan ............................................ (215) --
Accumulated earnings (deficit) .............................. (28,598) 56,802
--------- --------
Total shareholders' equity (deficit) ..................... 39,304 63,561
--------- --------
Total liabilities and shareholders' equity (deficit) ......... $ 380,044 $317,436
========= ========
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS TOTAL
-------------- ---------------- ------------
(DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Current maturities of long-term debt ........................ $ 18 $ -- $ 45
Current maturities of capital lease obligations ............. -- -- 1,240
Accounts payable:
Trade ..................................................... -- -- 49,559
Money orders .............................................. -- -- 5,181
Accrued interest ............................................ 1 (1,136) 11,712
Accrued compensation and related taxes ...................... 1 -- 6,719
Other accrued taxes ......................................... -- -- 7,007
Accrued insurance ........................................... -- -- 5,745
Other accrued liabilities ................................... 122 (5,769) 24,348
------ --------- ---------
Total current liabilities ................................ 142 (6,905) 111,556
------ --------- ---------
Long-term debt ............................................... 118 -- 327,269
------ --------- ---------
Other noncurrent liabilities:
Environmental reserves ...................................... -- -- 17,137
Deferred income taxes ....................................... -- (1,599) 20,366
Capital lease obligations ................................... -- -- 12,129
Employment obligations ...................................... -- -- 934
Accrued dividends on preferred stock ........................ -- -- 4,391
Intercompany note payable ................................... -- (71,527) --
Other noncurrent liabilities ................................ 38 634 21,734
------ --------- ---------
Total other noncurrent liabilities ....................... 38 (72,492) 76,691
------ --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock ............................................. -- -- --
Common stock ................................................ -- (1) 2
Additional paid-in capital .................................. 5,001 (11,759) 68,115
Shareholder loan ............................................ -- -- (215)
Accumulated earnings (deficit) .............................. (325) (56,477) (28,598)
------ ----------- ---------
Total shareholders' equity (deficit) ..................... 4,676 (68,237) 39,304
------ ----------- ---------
Total liabilities and shareholders' equity (deficit) ......... $4,974 $(147,634) $ 554,820
====== =========== =========
13
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
DECEMBER 24, 1998
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ................. $ 6,122 $ 4,799 $4,148 $ -- $ 15,069
Receivables, net .......................... 25,458 16,419 1,030 (29,514) 13,393
Inventories ............................... 28,444 25,102 -- -- 53,546
Income taxes receivable (payable) ......... (47) (3,416) (517) 3,980 --
Prepaid expenses .......................... 946 392 -- -- 1,338
Property held for sale .................... 2,971 -- -- -- 2,971
Deferred income taxes ..................... 1,262 2,259 -- -- 3,521
-------- -------- ------ ---------- --------
Total current assets .................... 65,156 45,555 4,661 (25,534) 89,838
-------- -------- ------ ---------- --------
Investment in subsidiaries ................. 73,023 -- -- (73,023) --
-------- -------- ------ ---------- --------
Property and equipment, net ................ 151,710 175,989 338 -- 328,037
-------- -------- ------ ---------- --------
Other assets:
Goodwill, net ............................. 72,261 47,273 -- -- 119,534
Deferred lease cost, net .................. 258 -- -- -- 258
Deferred financing cost, net .............. 14,025 -- -- -- 14,025
Environmental receivables, net ............ 11,566 1,217 -- -- 12,783
Intercompany note receivable .............. 19,803 49,705 -- (69,508) --
Other ..................................... 1,037 3,048 -- -- 4,085
-------- -------- ------ ---------- --------
Total other assets ...................... 118,950 101,243 -- (69,508) 150,685
-------- -------- ------ ---------- --------
Total assets ............................... $408,839 $322,787 $4,999 $ (168,065) $568,560
======== ======== ====== ========== ========
14
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
DECEMBER 24, 1998
THE PANTRY GUARANTOR
(ISSUER) SUBSIDIARIES
------------ --------------
(DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
Current liabilities:
Current maturities of long-term debt ....................... $ 17 $ 4
Current maturities of capital lease obligations ............ 213 1,027
Short-term debt ............................................ 2,000 --
Accounts payable:
Trade .................................................... 31,634 18,613
Money orders ............................................. 3,962 1,137
Accrued interest ........................................... 11,255 4,049
Accrued compensation and related taxes ..................... 3,430 2,600
Income taxes payable ....................................... -- --
Other accrued taxes ........................................ 2,194 1,914
Accrued insurance .......................................... 3,356 2,741
Other accrued liabilities .................................. 18,730 21,634
--------- --------
Total current liabilities ................................ 76,791 53,719
--------- --------
Long-term debt .............................................. 204,147 139,000
--------- --------
Other noncurrent liabilities:
Environmental reserves ..................................... 13,641 3,650
Deferred income taxes ...................................... (1,550) 21,477
Capital lease obligations .................................. 1,466 10,340
Employment obligations ..................................... 842 --
Accrued dividends on preferred stock ....................... 5,103 --
Intercompany note payable .................................. 51,705 20,642
Other ...................................................... 15,949 5,642
--------- --------
Total other noncurrent liabilities ....................... 87,156 61,751
--------- --------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock ............................................ -- --
Common stock ............................................... 2 1
Additional paid-in capital ................................. 69,925 6,758
Shareholder loans .......................................... (937) --
Accumulated earnings (deficit) ............................. (28,245) 61,558
--------- --------
Total shareholders' equity (deficit) ..................... 40,745 68,317
--------- --------
Total liabilities and shareholders equity (deficit) ......... $ 408,839 $322,787
========= ========
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS TOTAL
-------------- -------------- ------------
(DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
Current liabilities:
Current maturities of long-term debt ....................... $ 18 $ -- $ 39
Current maturities of capital lease obligations ............ -- -- 1,240
Short-term debt ............................................ -- -- 2,000
Accounts payable:
Trade .................................................... -- (26) 50,221
Money orders ............................................. -- -- 5,099
Accrued interest ........................................... 1 (9,776) 5,529
Accrued compensation and related taxes ..................... 1 -- 6,031
Income taxes payable ....................................... -- 104 104
Other accrued taxes ........................................ -- -- 4,108
Accrued insurance .......................................... -- -- 6,097
Other accrued liabilities .................................. 123 (12,997) 27,490
------- ---------- ---------
Total current liabilities ................................ 143 (22,695) 107,958
------- ---------- ---------
Long-term debt .............................................. 113 -- 343,260
------- ---------- ---------
Other noncurrent liabilities:
Environmental reserves ..................................... -- -- 17,291
Deferred income taxes ...................................... -- -- 19,927
Capital lease obligations .................................. -- -- 11,806
Employment obligations ..................................... -- -- 842
Accrued dividends on preferred stock ....................... -- -- 5,103
Intercompany note payable .................................. -- (72,347) --
Other ...................................................... 37 -- 21,628
------- ---------- ---------
Total other noncurrent liabilities ....................... 37 (72,347) 76,597
------- ---------- ---------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock ............................................ -- -- --
Common stock ............................................... 5,001 (5,002) 2
Additional paid-in capital ................................. -- (6,758) 69,925
Shareholder loans .......................................... -- -- (937)
Accumulated earnings (deficit) ............................. (295) (61,263) (28,245)
------- ---------- ---------
Total shareholders' equity (deficit) ..................... 4,706 (73,023) 40,745
------- ---------- ---------
Total liabilities and shareholders equity (deficit) ......... $ 4,999 $ (168,065) $ 568,560
======= ========== =========
15
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED DECEMBER 25, 1997
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)
Revenues:
Merchandise sales ................................ $ 50,880 $ 38,480 $ -- $ -- $ 89,360
Gasoline sales ................................... 56,830 46,192 -- -- 103,022
Commissions ...................................... 1,432 1,357 -- -- 2,789
-------- -------- ---- -------- --------
Total revenues ................................. 109,142 86,029 -- -- 195,171
-------- -------- ---- -------- --------
Cost of sales:
Merchandise ...................................... 33,102 25,795 -- -- 58,897
Gasoline ......................................... 50,443 40,466 -- -- 90,909
-------- -------- ---- -------- --------
Total cost of sales ............................ 83,545 66,261 -- -- 149,806
-------- -------- ---- -------- --------
Gross profit ...................................... 25,597 19,768 -- -- 45,365
-------- -------- ---- -------- --------
Operating expenses:
Store expenses ................................... 19,002 12,489 (60) (3,266) 28,165
General and administrative expenses .............. 4,335 2,832 5 -- 7,172
Depreciation and amortization .................... 2,870 2,279 2 -- 5,151
-------- -------- ---- -------- --------
Total operating expenses ....................... 26,207 17,600 (53) (3,266) 40,488
-------- -------- ---- -------- --------
Income from operations ............................ (610) 2,168 53 3,266 4,877
-------- -------- ---- -------- --------
Equity in earnings of subsidiaries ................ 3,973 -- -- (3,973) --
-------- -------- ---- -------- --------
Other income (expense):
Interest expense ................................. (4,148) (2,747) (3) 1,081 (5,817)
Miscellaneous .................................... 284 4,465 6 (4,316) 439
-------- -------- ------ -------- --------
Total other expense ............................ (3,864) 1,718 3 (3,235) (5,378)
-------- -------- ------ -------- --------
Income (loss) before income taxes and extraordinary
loss ............................................. (501) 3,886 56 (3,942) (501)
Income tax benefit (expense) ...................... 412 (1,387) (75) 1,462 412
-------- -------- ------ -------- --------
Income (loss) before extraordinary loss ........... (89) 2,499 (19) (2,480) (89)
Extraordinary loss, net of taxes .................. 6,800 -- -- -- (6,800)
-------- -------- ------ -------- --------
Net income (loss) ................................. $ (6,889) $ 2,499 $(19) $ (2,480) $ (6,889)
======== ======== ====== ======== ========
16
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED DECEMBER 24, 1998
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- -----------
(DOLLARS IN THOUSANDS)
Revenues:
Merchandise sales ................................ $ 83,377 $ 56,013 $ -- $ -- $139,390
Gasoline sales ................................... 107,075 64,714 -- -- 171,789
Commissions ...................................... 2,508 1,920 -- -- 4,428
-------- -------- ---- -------- --------
Total revenues ................................. 192,960 122,647 -- -- 315,607
-------- -------- ---- -------- --------
Cost of sales:
Merchandise ...................................... 56,966 37,487 -- -- 94,453
Gasoline ......................................... 93,447 55,327 -- -- 148,774
-------- -------- ---- -------- --------
Total cost of sales ............................ 150,413 92,814 -- -- 243,227
-------- -------- ---- -------- --------
Gross profit ...................................... 42,547 29,833 -- -- 72,380
-------- -------- ---- -------- --------
Operating expenses:
Store expenses ................................... 32,139 17,356 (61) (5,705) 43,729
General and administrative expenses .............. 5,675 4,288 5 -- 9,968
Depreciation and amortization .................... 4,536 3,652 2 -- 8,190
-------- -------- ---- -------- --------
Total operating expenses ....................... 42,350 25,296 (54) (5705) 61,887
-------- -------- ---- -------- --------
Income (loss) from operations ..................... 197 4,537 54 5,705 10,493
-------- -------- ---- -------- --------
Equity in earnings of subsidiaries ................ 7,252 -- -- (7,252) --
-------- -------- ---- -------- --------
Other income (expense):
Interest expense ................................. (5,772) (4,372) (3) 1,235 (8,912)
Miscellaneous .................................... (280) 7,002 34 (6,940) (184)
-------- -------- ------ -------- --------
Total other expense ............................ (6,052) 2,630 31 (5,705) (9,096)
-------- -------- ------ -------- --------
Income (loss) before income taxes.................. 1,397 7,167 85 (7,252) 1,397
Income tax benefit (expense) ...................... (332) (2,411) (55) 2,466 (332)
-------- -------- ------ -------- --------
Net income (loss) ................................. $ 1,065 $ 4,756 $ 30 $ (4,786) $ 1,065
======== ======== ====== ======== ========
17
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 25, 1997
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $ (6,889) $ 2,499 $(19) $ (2,480) $ (6,889)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary loss ..................................... 2,006 -- -- -- 2,006
Depreciation and amortization .......................... 2,870 2,280 1 -- 5,151
Provision for deferred income taxes .................... (1,834) -- (17) -- (1,851)
(Gain) loss on sale of property and equipment .......... (190) (78) -- -- (268)
Provision for environmental expenses ................... 27 -- -- -- 27
Equity earnings of affiliates .......................... (2,480) -- -- 2,480 --
Changes in operating assets and liabilities, net:
Receivables ............................................ (2,533) (5,269) 26 6,549 (1,227)
Inventories ............................................ (12) (939) -- -- (951)
Prepaid expenses ....................................... 477 135 2 -- 614
Other noncurrent assets ................................ 140 3,460 (26) -- 3,574
Accounts payable ....................................... (942) 607 -- -- (335)
Other current liabilities and accrued expenses ......... 2,551 1,068 78 (6,311) (2,614)
Employment obligations ................................. (92) -- -- -- (92)
Other noncurrent liabilities ........................... 1,392 773 -- (238) 1,927
--------- ---------- ---- -------- ----------
Net cash provided by operating activities ............... (5,509) 4,536 45 -- (928)
--------- ---------- ---- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment .................... (4,110) (1,822) -- -- (5,932)
Proceeds from sale of property held for sale ........... 2,025 -- -- -- 2,025
Proceeds from sale of property and equipment ........... 273 136 -- -- 409
Intercompany notes receivable (payable) ................ 4,048 (4,048) -- -- --
Acquisitions of related businesses ..................... -- (135,605) -- -- (135,605)
--------- ---------- ---- -------- ----------
Net cash provided by (used in) investing
activities .......................................... 2,236 (141,339) -- -- (139,103)
--------- ---------- ---- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases .............. (76) (170) -- -- (246)
Principal repayments of long-term debt ................. (51,000) -- (4) -- (51,004)
Proceeds from issuance of long-term debt ............... 54,267 145,756 -- -- 200,023
Net proceeds from equity issue ......................... 32,151 -- -- -- 32,151
Other financing costs .................................. (12,418) -- -- -- (12,418)
--------- ---------- ------ -------- ----------
Net cash provided by (used in) financing activities ..... 22,924 145,586 (4) -- 168,506
--------- ---------- ------- -------- ----------
NET INCREASE IN CASH .................................... 19,651 8,783 41 -- 28,475
CASH & CASH EQUIVALENTS, BEG. OF YEAR ................... 2,247 279 821 -- 3,347
--------- ---------- ------ -------- ----------
CASH & CASH EQUIVALENTS, END OF YEAR .................... $ 21,898 $ 9,062 $862 $ -- $ 31,822
========= ========== ====== ======== ==========
18
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 24, 1998
THE PANTRY GUARANTOR
(ISSUER) SUBSIDIARIES
--------------- --------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ........................................ $ 1,065 $ 4,756
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ........................... 4,536 3,650
Change in deferred income taxes ......................... --
(Gain) loss on sale of property and equipment ........... 176 86
Reserves for environmental issues ....................... 154 --
Equity earnings of affiliates ........................... (4,786) --
Changes in operating assets and liabilities, net:
Receivables ............................................. (15,444) (6,857)
Inventories ............................................. (2,451) (2,226)
Prepaid expenses ........................................ 260 615
Other noncurrent assets ................................. (4) 40
Accounts payable ........................................ 1,861 (2,315)
Other current liabilities and accrued expenses .......... 5,621 5,336
Employment obligations .................................. (92) --
Other noncurrent liabilities ............................ 624 (95)
----------- --------
Net cash provided by (used in) operating activities ...... (8,480) 2,990
----------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ..................... (42) --
Additions to property and equipment ..................... (5,474) (4,066)
Proceeds from sale of property held for sale ............ 524 --
Proceeds from sale of property and equipment ............ 75 16
Intercompany notes receivable (payable) ................. 2,080 (180)
Acquisitions of related businesses, net of cash
acquired of $70......................................... (25,541) --
----------- --------
Net cash used in investing activities .................... (28,378) (4,230)
----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases ............... (68) (255)
Principal repayments of long-term debt .................. (4) (6)
Proceeds from issuance of short-term debt ............... 2,000 --
Proceeds from issuance of long-term debt ................ 16,000 --
Net proceeds from equity issue .......................... 1,088 --
Other financing costs ................................... (67) --
----------- ----------
Net cash provided by (used in) financing activities ...... 18,949 (261)
----------- ----------
NET INCREASE (DECREASE) IN CASH .......................... (17,909) (1,501)
CASH & CASH EQUIVALENTS, BEGINNING OF YEAR ............... 24,031 6,300
----------- ----------
CASH & CASH EQUIVALENTS, END OF YEAR ..................... $ 6,122 $ 4,799
=========== ==========
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS TOTAL
-------------- -------------- ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ........................................ $ 30 $ (4,786) $ 1,065
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ........................... 4 -- 8,190
Change in deferred income taxes ......................... -- -- --
(Gain) loss on sale of property and equipment ........... (2) -- 260
Reserves for environmental issues ....................... -- -- 154
Equity earnings of affiliates ........................... -- 4,786 --
Changes in operating assets and liabilities, net:
Receivables ............................................. 17 19,718 (2,566)
Inventories ............................................. -- -- (4,677)
Prepaid expenses ........................................ 3 -- 878
Other noncurrent assets ................................. -- -- 36
Accounts payable ........................................ -- (26) (480)
Other current liabilities and accrued expenses .......... 29 (17,158) (6,172)
Employment obligations .................................. -- -- (92)
Other noncurrent liabilities ............................ (1) (634) (106)
-------- --------- ----------
Net cash provided by (used in) operating activities ...... 80 1,900 (3,510)
------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ..................... -- -- (42)
Additions to property and equipment ..................... -- -- (9,540)
Proceeds from sale of property held for sale ............ -- -- 524
Proceeds from sale of property and equipment ............ -- -- 91
Intercompany notes receivable (payable) ................. -- (1,900) --
Acquisitions of related businesses, net of cash
acquired of $70......................................... -- -- (25,541)
------- --------- ----------
Net cash used in investing activities .................... -- (1,900) (34,508)
------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases ............... -- -- (323)
Principal repayments of long-term debt .................. (5) -- (15)
Proceeds from issuance of short-term debt ............... -- -- 2,000
Proceeds from issuance of long-term debt ................ -- -- 16,000
Net proceeds from equity issue .......................... -- -- 1,088
Other financing costs ................................... -- -- (67)
------- --------- ----------
Net cash provided by (used in) financing activities ...... (5) -- 18,683
-------- --------- ----------
NET INCREASE (DECREASE) IN CASH .......................... 75 -- (19,335)
CASH & CASH EQUIVALENTS, BEGINNING OF YEAR ............... 4,073 -- 34,404
------- --------- ----------
CASH & CASH EQUIVALENTS, END OF YEAR ..................... $4,148 $ -- $ 15,069
======= ========= ==========
19
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUBSEQUENT EVENTS
On January 28, 1999, the Company entered into an Amended and Restated
Credit Facility (the "Amended Credit Facility") consisting of (i) a $45.0
million revolving credit facility available for working capital financing,
general corporate purposes and issuing commercial and standby letters of credit
(the "Revolving Credit Facility"); (ii) a $50.0 million acquisition facility
available to finance acquisition of related businesses (the "Acquisition
Facility") and (iii) a term loan facility with outstanding borrowings of $240.0
million (the "Term Loan Facility").
The Amended Credit Facility contains covenants restricting the ability of
the Company and any of its 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 or 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.
The Company used the proceeds of the Term Loan Facility and a $5.0 million
initial draw under its Revolving Credit Facility, along with cash on hand, to
(i) finance the Miller Acquisition (as defined below), (ii) refinance $85.0
million outstanding under the Acquisition Facility, (iii) refinance $9.0
million outstanding under the Revolving Credit Facility, (iv) redeem the
Company's outstanding Senior Notes in the aggregate principal amount of $49.0
million and (v) pay related transaction costs.
On January 28, 1999, the Company acquired 100% of the outstanding capital
stock of Miller Enterprises and certain other real estate assets of certain
affiliates of Miller Enterprises for $82.0 million in cash plus certain working
capital and other adjustments (the "Miller Acquisition"). Miller Enterprises is
a leading operator of convenience stores, operating 121 stores located in
central Florida and operated under the name "Handy Way." The purchase price and
the fees and expenses of the Miller Acquisition were financed with proceeds from
the Company's Term Loan Facility, a draw under its Revolving Credit Facility and
cash on hand.
Also on January 28, 1999, the Company repurchased $49.0 million in
principal amount of Senior Notes and paid (i) accrued and unpaid interest up to,
but not including, the date of purchase and (ii) a 4% call premium. The
repurchase of 100% of the Senior Notes outstanding, the payment of accrued
interest and the call premium were financed with proceeds from the Company's
Term Loan Facility, a draw under its Revolving Credit Facility and cash on hand.
The Company recognized an extraordinary loss of approximately $5.5 million
in connection with the repurchase of the Senior Notes including the payment of
the 4% call premium of $2.0 million, the amendments and commitments under the
Credit Facility, and the write-off of related deferred financing costs.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Actual
results could differ materially from those projected in such forward-looking
statements and are subject to risks including, but not limited to, those
identified in the Company's Registration Statement 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 Registration Statement on Form S-4, as
amended, effective January 8, 1998, the Company's Current Report on Form 8-K
dated November 6, 1998 and the Company's Current Report on Form 8-K dated
February 8, 1998.
INTRODUCTION
Since late 1996, the Company has focused on several strategic initiatives
to improve same store operations and to capitalize on and enhance the Company's
position as a leading convenience store retailer in the Southeast. Specific
elements of management's operating strategy include the following: (i) focus on
merchandising mix and improve merchandise gross profit, (ii) leverage
relationships with suppliers, (iii) strengthen expense controls, (iv) improve
gasoline operations, (v) upgrade store facilities and equipment and (vi) review
operating performance of stores and close poor performing locations. These
management strategies, coupled with strong economic and market conditions in
the Company's marketing areas, have resulted in same store merchandise sales
and same store gasoline gallon growth of 10.5% and 5.1%, respectively, for the
three-month period ended December 24, 1998 (the "first fiscal quarter 1999").
In addition to focusing on underlying same store growth, management
believes there are opportunities to increase the Company's sales and gain
operating efficiencies through store acquisitions and new store development.
The Company's "tuck in" acquisition strategy focuses on acquiring chains within
its existing and contiguous marketing areas. These acquired locations with
demonstrated revenue volume characteristically have a lower risk component than
traditional site selection and new store development programs. Further, the
Company believes that its ability to target selected marketing areas and
incorporate the Company's operating initiatives into the acquired operations
has made a significant contribution to the consolidated operating results for
first fiscal quarter 1999 and strengthens the Company's position in the
Southeast.
IMPACT OF "TUCK IN" ACQUISITIONS AND THE LIL' CHAMP ACQUISITION. "Tuck in"
acquisitions, the Lil' Champ Acquisition, and related transactions have had a
significant impact on the Company's financial condition and results of
operations since their respective transaction dates. All of these acquisitions
were accounted for under the purchase method and as a result the Consolidated
Statements of Operations herein include the respective results of operations
from the date of acquisition, only. (see "PART I. -- Financial Information --
Item 1. Financial Statements -- Notes to Consolidated Financial Statements --
Note 2 -- Business Acquisitions"). Moreover, the Consolidated Balance Sheet as
of September 24, 1998 does not include the assets and liabilities relating to
those acquisitions consummated during the first fiscal quarter 1999. As a
result, comparisons to prior operating results and prior balance sheets are
materially impacted.
The combination of Pantry "same stores," the Lil' Champ Acquisition, the
"tuck in" acquisitions, and selected new store development has created the
third largest independent convenience store chain in the United States (based
on number of stores as of December 24, 1998) with 970 stores located primarily
in the Southeast and estimated annual pro forma revenues of $1.3 billion.
RESULTS OF OPERATIONS
FIRST QUARTER ENDED DECEMBER 24, 1998 COMPARED TO THE FIRST QUARTER ENDED
DECEMBER 25, 1997
GROSS REVENUE. Revenue for the first fiscal quarter 1999 totaled $315.6
million compared to revenue of $195.2 million during the comparable period
ended December 25, 1997 (the "first fiscal quarter 1998" or the "comparable
period"), an increase of $120.4 million or 61.7% over the comparable period.
The increase in total revenue is primarily attributable to the revenue from
stores acquired or opened since December 25, 1997, a full quarter of Lil' Champ
revenue, and same store merchandise sales and gallon growth. In the first
fiscal quarter 1999, Company gross revenue increases were partially offset by
lower average retail gasoline prices versus the comparable period.
MERCHANDISE REVENUE. Merchandise revenue for the first fiscal quarter 1999
totaled $139.4 million compared to merchandise revenue of $89.4 million during
the first fiscal quarter 1998, an increase of $50.0 million or 56%. The
increase in merchandise revenue is primarily attributable to the revenue from
stores acquired or opened since December 25, 1997, a full quarter of Lil' Champ
merchandise revenue, and same store merchandise sales growth. Same store
merchandise revenue for
21
the first fiscal quarter 1999 increased 10.5% over the first fiscal quarter
1998. The increase in same store merchandise revenue is primarily attributable
to increased customer traffic, average transaction size and general economic
and market conditions (see "Inflation"). The increases in store traffic and
average transaction size are primarily attributable to store merchandising,
more competitive gasoline pricing, enhanced store appearance and increased
in-store promotional activity.
GASOLINE REVENUE AND GALLONS. Total gasoline revenue for the first fiscal
quarter 1999 was $171.8 million compared to total gasoline revenue of $103.0
million during the first fiscal quarter 1998, an increase of $68.8 million or
66.7%. The increase in gasoline revenue is primarily attributable to the
revenue from stores acquired or opened since December 25, 1997, a full quarter
of Lil' Champ gasoline revenue, and same store gallon sales growth. Gasoline
revenue growth was partially offset by a $0.16 or 13.7% decrease in average
gasoline retail prices versus the comparable period.
In the first fiscal quarter 1999, gasoline gallons totaled 169.0 million
gallons compared to 87.5 million gallons during the first fiscal quarter 1998,
an increase of 81.5 million gallons or 93.1%. The increase is primarily
attributable to the volume from stores acquired or opened since December 25,
1997, a full quarter of Lil' Champ gasoline gallons, and same store gallon
growth. Same store gasoline gallon sales for the first fiscal quarter 1999
increased 5.1% over the comparable period. The same store gallon increase is
primarily attributable to increased customer traffic resulting from general
economic and market conditions, more competitive gasoline pricing, rebranding
and promotional activity, and enhanced store appearance.
COMMISSION REVENUE. Total commission revenue for the first fiscal quarter
1999 totaled $4.4 million compared to total commission revenue of $2.8 million
during the first fiscal quarter 1998, an increase of $1.6 million or 58.8%. The
increase in commission revenue is primarily attributable to the revenue from
stores acquired or opened since December 25, 1997, a full quarter of Lil' Champ
lottery commissions, and same store commission revenue increases. Commission
revenue includes lottery commissions, video gaming income, money order
commissions, telephone income and revenues from other ancillary product and
service offerings.
TOTAL GROSS PROFIT. Total gross profit for the first fiscal quarter 1999
totaled $72.4 million compared to total gross profit of $45.4 million during
the first fiscal quarter 1998, an increase of $27.0 million or 59.6%. The
increase in gross profit is primarily attributable to the profits from stores
acquired or opened since December 25, 1997, a full quarter of Lil' Champ gross
profit, and same store profit increases.
MERCHANDISE GROSS PROFIT AND MARGIN. Merchandise gross profit totaled
$44.9 million for the first fiscal quarter 1999 compared to merchandise gross
profit of $30.5 million for the first fiscal quarter 1998, an increase of $14.5
million or 47.5%. This increase is primarily attributable to the profits from
stores acquired or opened since December 25, 1997, a full quarter of Lil' Champ
merchandise gross profit, and same store profit increases. The decline in
merchandise gross margin from 34.1% for the first fiscal quarter 1998 to 32.2%
is attributable to the addition of several lower margin stores acquired or
opened since December 25, 1997 and lower gross margin on cigarettes (see
"Inflation").
GASOLINE GROSS PROFIT AND PER GALLON MARGIN. Gasoline gross profit totaled
$23.0 million for the first fiscal quarter 1999 compared to gasoline gross
profit of $12.1 million for the first fiscal quarter 1998, an increase of $10.9
million or 90.0%. This increase is primarily attributable to the profits from
stores acquired or opened since December 25, 1997, a full quarter of Lil' Champ
gasoline gross profit, and same store profit increases. The gasoline gross
profit per gallon was $0.136 in the first fiscal quarter 1999 compared to
$0.139 for the first fiscal quarter 1998.
STORE OPERATING AND GENERAL AND ADMINISTRATIVE EXPENSES. Store operating
expenses for the first fiscal quarter 1999 totaled $43.7 million compared to
store operating expenses of $28.2 million for the first fiscal quarter 1998, an
increase of $15.6 million or 55.3%. The increase in store expenses is primarily
attributable to the personnel and lease expenses associated with the stores
acquired or opened since December 25, 1997 and a full quarter of Lil' Champ
store operating expenses.
General and administrative expenses for the first fiscal quarter 1999
totaled $10.0 million compared to general and administrative expenses of $7.2
million during the first fiscal quarter 1998, an increase of $2.8 million or
39.0%. The increase in general and administrative expenses is attributable to
increased administrative expenses associated with the stores acquired or opened
since December 25, 1997 and a full quarter of Lil' Champ general and
administrative expenses. Both store operating and general and administrative
expenses decreased as a percentage of merchandise sales and total revenues.
INCOME FROM OPERATIONS. Income from operations totaled $10.5 million for
the first fiscal quarter 1999 compared to income from operations of $4.9
million during the first fiscal quarter 1998, an increase of $5.6 million or
115.2% from the comparable period. The increase is attributable to the factors
discussed above and is partially reduced by the $4.0 million increase in
depreciation and amortization.
22
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA
represents income before interest expense, income tax benefit and expense,
depreciation and amortization, and extraordinary loss. EBITDA for the first
fiscal quarter 1999 totaled $18.5 million compared to EBITDA of $10.5 million
during the first fiscal quarter 1998, an increase of $8.0 million or 76.7% over
the comparable period. The increase is attributable to the items discussed
above and is partially offset by losses on the sale of assets and other
miscellaneous expenses.
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 Company's Credit Facility. Interest
expense for the first fiscal quarter 1999 totaled $8.9 million compared to
interest expense of $5.8 million for the first fiscal quarter 1998, an increase
of $3.1 million or 53.2%. The increase in interest expense is attributable to a
full quarter of interest on the Senior Subordinated Notes and borrowings under
the Company's Credit Facility, which was partially offset by the (i) interest
savings related to the October 27, 1997 repurchase of $51.0 million in
principal amount of Senior Notes and (ii) a 50 basis point reduction in the
interest rate on the $49.0 million outstanding Senior Notes. Subsequent to
December 24, 1998, 100% of the outstanding Senior Notes were repurchased and
refinanced with proceeds from a Term Loan Facility under the terms of the
Amended Credit Facility. See "PART I. -- Financial Information -- Item 1.
Financial Statements -- Notes to Consolidated Financial Statements -- Note 5 --
Long-Term Debt" and "Note 8 -- Subsequent Event."
INCOME TAX BENEFIT (EXPENSE). The income tax benefit for the first fiscal
quarter 1998 totaled $0.4 million compared to income tax expense of $0.3
million for the first fiscal quarter 1999. This decrease was primarily
attributable to the increase in income for operations. Income tax benefit
(expense) is recorded net of a valuation allowance to reduce federal and state
deferred tax assets to a net amount which the Company believes is more likely
than not will be realized based on estimates of future earnings and the
expected timing of temporary difference reversals.
EXTRAORDINARY ITEM. In the first fiscal quarter 1998, the Company
recognized an extraordinary loss, net of taxes, of approximately $6.8 million
in connection with the October 23, 1997 purchase of $51.0 million in principal
amount of its outstanding Senior Notes and related consents obtained from the
holders of the Senior Notes to amendments and waivers to certain covenants
contained in the Indenture relating to the Senior Notes. The loss was 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.
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 Credit Facility, sale-leaseback
transactions, asset dispositions and equity investments, to finance its
operations, pay interest, and fund capital expenditures and acquisitions. The
Company had $15.1 million of cash and cash equivalents on hand at December 24,
1998.
LINE AND LETTER OF CREDIT FACILITY. To supplement cash on hand and cash
provided by operating activities, the Company has borrowing capacity under its
Amended Credit Facility, which consists of a $45.0 million Revolving Credit
Facility and a $50.0 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. As of December 24, 1998, the Company was
contingently liable for outstanding letters of credit in the amount of $13.5
million related primarily to several self-insured programs of the Company,
regulatory requirements, and vendor contract terms. The letters of credit are
not to be drawn against unless the Company defaults on the timely payment of
related liabilities.
"TUCK IN" ACQUISITIONS. During the first fiscal quarter 1999, the Company
acquired a total of 32 convenience stores located in North Carolina and South
Carolina for approximately $25.5 million. The Company funded the transactions
with cash on hand and $18.0 million in proceeds from its Credit Facility.
23
Subsequent to December 24, 1998, the Company acquired 121 convenience
stores and certain related property located in central Florida. The
transactions were funded from borrowings under the Amended Credit Facility. See
"PART I. -- Financial Information -- Item 1. Financial Statements -- Notes to
Consolidated Financial Statements -- Note 8 -- Subsequent Events."
CAPITAL EXPENDITURES. Capital expenditures (excluding all acquisitions)
for the first fiscal quarter 1998 and the first fiscal quarter 1999, were
approximately $5.9 million and $9.6 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, asset
dispositions and other reimbursements for capital improvements. In the first
fiscal quarter 1999, the Company received approximately $2.4 million in
sale-leaseback proceeds, asset dispositions, and other reimbursements for
capital improvements; therefore net capital expenditures, excluding all
acquisitions, for the first fiscal quarter 1999 were $7.2 million.
LONG-TERM DEBT. At December 24, 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
$94.0 million outstanding under the Credit 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 5 -- Long-Term Debt."
During the first fiscal quarter 1999 relating to the "tuck in" acquisition
activities discussed above, the Company borrowed $18.0 million under the Credit
Facility. The Credit Facility, (see "PART I -- Financial Information -- Item
1. Financial Statements -- Notes to Consolidated Financial Statements -- Note
8 -- Subsequent Events"), contains covenants restricting the ability of the
Company and any its of subsidiaries to, among other things: (i) incur
additional debt; (ii) declare dividends or redeem or repurchase capital stock;
(iii) prepay, redeem or purchase debt; (iv) incur liens; (v) make loans and
investments; (vi) make capital expenditures; (vii) engage in mergers,
acquisitions and asset sales; and (viii) engage in transactions with
affiliates. The Company is also required to comply with financial covenants
with respect to (a) a minimum coverage ratio, (b) a minimum pro forma EBITDA,
(c) a maximum pro forma leverage ratio, and (d) a maximum capital expenditure
allowance.
Subsequent to December 24, 1998 and on January 28, 1998, the Company
entered into the Amended Credit Facility and refinanced its Senior Notes and
outstanding borrowings under the Credit Facility with proceeds from the Term
Loan Facility, which is part of the Amended Credit Facility. See "PART I. --
Financial Information -- Item 1. Financial Statements -- Notes to Consolidated
Financial Statements -- Note 5 -- Long-Term Debt" and "Note 8 -- Subsequent
Events."
CASH FLOWS FROM FINANCING ACTIVITIES. The first fiscal quarter 1999 "tuck
in" acquisitions were partially financed with $18.0 million in proceeds from
the Credit Facility. In the first fiscal quarter 1999, the Company sold 3,184
shares of Common Stock for approximately $1.8 million to certain employees
under its 1998 Stock Subscription Plan (see "PART I -- Financial Information --
Item 1. Financial Statements -- Notes to Consolidated Financial Statements --
Note 6 -- Shareholders' Equity and Stock Based Compensation").
CASH REQUIREMENTS. The Company believes that cash on hand, together with
cash flow anticipated to be generated from operations, short-term borrowing for
seasonal working capital, permitted borrowings under the Amended Credit
Facility (see "PART I -- Financial Information -- Item 1. Financial Statements
- -- Notes to Consolidated Financial Statements -- Note 8 -- Subsequent Events"),
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.
SHAREHOLDERS' EQUITY. As of December 24, 1998, the Company's shareholders'
equity totaled $40.7 million. The increase in shareholders' equity is
attributed to the proceeds from the sale of additional Common Stock and the
Company's net income of $1.1 million for the first fiscal quarter 1999.
24
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 equity 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 former shareholders. Additionally, the
accumulated deficit includes the cumulative effect of (i) the accrued dividends
on previously outstanding preferred stock of $5.0 million, (ii) the accrued
dividends on current outstanding Series B Preferred Stock of $5.1 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 and regulations governing USTs that require
the Company to make certain expenditures for compliance. In particular, at the
federal level, the Resource Conservation and Recovery Act of 1976, as amended,
requires the EPA to establish a comprehensive regulatory program for the
detection, prevention, and cleanup of leaking USTs. 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. These regulations permit states to develop, administer and enforce
their own regulatory programs, incorporating requirements which are at least as
stringent as the federal standards. The following is an overview of the
requirements imposed by these regulations:
o LEAK DETECTION: The EPA and states' release detection regulations were
phased in based on the age of the USTs. All USTs were required to comply with
leak detection requirements by December 22, 1993. The Company utilizes several
approved leak detection methods for all Company-owned UST systems. Daily and
monthly inventory reconciliations are completed at the store level and at the
corporate support center. The daily and monthly reconciliation data is also
analyzed using statistical inventory reconciliation which compares the reported
volume of gasoline purchased and sold with the capacity of each UST system and
highlights discrepancies. The Company believes it is in full compliance with
the leak detection requirements applicable to USTs.
o CORROSION PROTECTION: The 1988 EPA regulations required that all UST
systems have corrosion protection by December 22, 1998. The Company's UST
systems have been protected from corrosion either through the installation of
fiberglass tanks or upgrading steel USTs with interior fiberglass lining or the
installation of cathodic protection. The Company believes it is in full
compliance with the corrosion protection requirements applicable to USTs.
o OVERFILL/SPILL PREVENTION: The 1988 EPA regulations required that all
sites have overfill/spill prevention devices by December 22, 1998. The Company
has installed these devices on all Company-owned UST systems to meet these
regulations. The Company believes it is in full compliance with the
overfill/spill prevention requirements applicable to USTs.
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 this requirement, the Company maintains letters of credit
in the aggregate amount of $2.3 million issued by a commercial bank in favor of
state environmental enforcement agencies in the states of North Carolina, South
Carolina, Virginia, Tennessee, Indiana and Kentucky and relies on
reimbursements from applicable state trust funds. In Florida, the Company meets
such financial responsibility requirements by state trust fund coverage through
December 31, 1998 and through private commercial liability insurance and
qualified self-insurance for any releases after December 31, 1998.
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 insurance coverage for
the cleanup of environmental damages caused by the operation of 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 or has operated to participate
in these programs and has filed claims and received reimbursement in North
Carolina, South Carolina, Kentucky, Indiana, Georgia, Florida, Virginia and
Tennessee. The coverage afforded by each state fund varies but generally
provides from $150,000 to $1.0 million per site for the cleanup of
environmental contamination, and most provide coverage for third party
liabilities. Costs for which 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
25
per occurrence depending 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. The Florida trust fund does not cover releases first reported after
December 31, 1998. The Company has obtained private coverage for remediation
and third party claims arising out of releases reported after December 31,
1998. The Company believes that this coverage exceeds federal and Florida
financial responsibility regulations. In addition to immaterial amounts to be
spent by the Company, a substantial amount will be expended for remediation on
behalf of the Company by state trust funds established in the Company's
operating areas or other responsible third parties (including insurers). To the
extent such third parties do not pay for remediation as anticipated by the
Company, the Company will be obligated to make such payments, which could
materially adversely affect the Company's financial condition and results of
operations. Reimbursement from state trust funds will be dependent upon the
maintenance and continued solvency of the various funds.
Environmental reserves of $17.3 million as of December 24, 1998, represent
estimates for future expenditures for remediation, tank removal and litigation
associated with all known contaminated sites as a result of releases (e.g.,
overfills, spills and underground storage tank releases) and are based on
current regulations, historical results and certain other factors. Although the
Company can make no assurances, the Company anticipates that it will be
reimbursed for a portion of these expenditures from state insurance funds and
private insurance. As of December 24, 1998, these anticipated reimbursements of
$12.8 million are recorded as long-term environmental receivables. In Florida,
remediation of such contamination will be performed by the state and
substantially all of the costs will be paid by the state trust fund. The
Company will perform remediation in other states through independent contractor
firms engaged by the Company. For certain sites the trust fund does not cover a
deductible or has a copay which may be less than the cost of such remediation.
The Company has reserved $500,000 to cover third party claims that are not
covered by state trust funds or by private insurance. This reserve is based on
management's best estimate of losses that may be incurred over the next several
years based on, among other things, the fact that remediation standards and
expectations are evolving, the legal principles regarding the right to and
proper measure of damages for diminution in value, lost profit, lost
opportunity and damage to soil and subsurface water that may be owned by the
state, the absence of controlling authority of the limitation period, if any,
that may be applicable and the possibility that remediation (which will be
funded by state trust funds, private insurance or is included within the
reserve described above for remediation) may be sufficient. 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.
Several of the locations identified as contaminated are being cleaned up
by third parties who have indemnified the Company as to responsibility for
clean up matters. Additionally, the Company is awaiting closure notices on
several other locations which will release the Company from responsibility
related to known contamination at those sites.
YEAR 2000 INITIATIVE
The Year 2000 ("Y2K") issue is the result of computer programs being
written using two digits rather than four to define the applicable year in
respective date fields. The Company uses a combination of hardware devices run
by computer programs at its support centers and retail locations to process
transactions and other data which are essential to the Company's business
operations. The Y2K issue and its impact on data integrity could result in
system interruptions, miscalculations or failures causing disruption of
operations.
The Company completed its assessment phase of Y2K vulnerability early in
fiscal year 1998 including a formal third-party assessment completed in
November 1997. Based on this formal assessment, internal assessment, and project
results as of January 27, 1999, the Company believes all system modifications,
hardware and software replacements or upgrades and related testing will be
completed by September 1999. In order to meet this date, the Company has
engaged outside consultants and contractors to assist in the overall project
and remediation effort. The Company does not believe either the direct or
indirect costs of Y2K compliance will be material to the Company's operations
or operating results.
The Company has tested, replaced, or plans to replace significant portions
of its existing systems and related hardware which did not properly interpret
dates beyond December 31, 1999. In addition, the Company has tested, modified,
or plans to modify the remaining systems and related hardware to ensure Y2K
compliance. The Company's testing methodology includes, but is not limited to,
rolling dates forward to critical dates in the future and simulating
transactions, inclusion of
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several critical date scenarios, and utilizing software programs which test for
compliance on certain equipment. The Company's expenditures to date have been
immaterial and consist primarily of internal costs and expenses associated with
third-party contractors. The Company believes the total costs of its Y2K
project will be immaterial and, therefore, should not have a material impact on
the Company's financial condition or financial statements.
The Company has initiated communications with its significant vendors,
suppliers, and financial institutions to determine the extent to which the
Company is vulnerable to those third-parties' failure to be Y2K compliant.
Based on these communications and presently available information, the Company
does not anticipate any material effects related to vendor, supplier, or
financial institution compliance. Additionally, the Company does not believe it
has any customers whose failure to be Y2K compliant would materially impact
business operations or operating results. Noncompliance by suppliers and credit
card processing companies utilized by the Company could result in a material
adverse effect on the financial condition and results of operations of the
Company.
While the Company believes its planning efforts are adequate to address
its Y2K concerns, there can be no assurances that the systems of other
companies on which the Company's systems and operations rely will be converted
on a timely basis and will not have a material impact on the Company. The
Company is in the process of formulating a contingency plan to address possible
noncompliance by its vendors, suppliers, financial institutions and credit card
processors.
INFLATION
General inflation has not had a significant impact on the Company over the
past three years. As reported by the Bureau of Labor Statistics (the "BLS") for
the calendar quarter ended December 31, 1998, the Consumer Price Index (the
"CPI," a measure of retail inflation) for the category labeled "food at home"
increased less than one percent. For the same period, the Producer Price Index
(the "PPI," a measure of wholesale cost inflation) for the category labeled
"processed food" actually decreased less than one percent. The Company does not
expect general inflation to have a significant impact on the results of
operations or financial condition of the Company in the foreseeable future.
As reported by the BLS for the calendar quarter ended December 31, 1998,
the CPI for the category labeled "cigarettes" increased approximately 17.8%.
For the same period, the PPI for the category labeled "cigarettes" increased
31.0%. On November 23, 1998, major cigarette manufacturers which supply the
Company increased prices by $0.45 per pack. During the first fiscal quarter
1999, the cigarette cost increase was directly offset by cigarette manufacturer
support including cigarette rebates and other incentive dollars. Since December
24, 1998, these increases have been passed on in higher retail prices
throughout the chain. The cigarette cost increases are expected to reduce the
Company's gross margin percentage for the cigarette category, but are not
expected to have a material impact on the cigarette category gross profit
dollars. Although it is too early to determine the potential impact on
cigarette unit volume, management believes it can pass along these and other
cost increases to its customers over the long-term and, therefore, does not
expect cigarette inflation to have a significant impact on the results of
operations or financial condition of the Company in the foreseeable future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative Disclosures:
The Company is exposed to certain market risks inherent in the Company's
financial instruments. These instruments arise from transactions entered into
in the normal course of business and, in some cases, relate to the Company's
acquisitions of related businesses. Certain of the Company's financial
instruments are fixed rate, short-term investments which are held-to-maturity.
The Company is subject to interest rate risk on its existing short-term and
long-term debt (including without limitation, the Notes and the Term Loan
Facility) and any future financing requirements. The Company's fixed rate debt
consists primarily of outstanding balances on its Notes and its variable rate
debt relates to borrowings under its Credit Facility (see "Liquidity and
Capital Resources").
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The following table presents the future principal cash flows and weighted
average interest rates on the Company's debt instruments as of December 24,
1998.
EXPECTED MATURITY DATE
(as of December 24, 1998)
(IN THOUSANDS) FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 THEREAFTER TOTAL
Long-Term Debt .................... $ 39 $ 39 $ 49,034 $ 39 $ 94,039 $ 200,109 $343,299
Short-Term Debt ................... $ 2,000 $ -- $ -- $ -- $ -- $ -- $ 2,000
Weighted Average Interest Rate .... 9.87% 9.88% 9.53% 9.53% 9.53% 10.25%
Subsequent to December 24, 1998 and on January 28, 1998, the Company
refinanced its Senior Notes and outstanding borrowings under its Credit
Facility with proceeds from a new Term Loan Facility. On January 28, 1998 and
in connection with the Miller Enterprises Acquisition, the Company borrowed
approximately $97.0 million under the Term Loan Facility and $5.0 million under
the Revolving Credit Facility. The Term Loan Facility requires quarterly
principal and interest payments with interest based on a spread over the London
Interbank Borrowing Rate ("LIBOR," a variable interest rate). This debt
restructuring and the additional borrowings increased the Company's annual
principal and interest requirements. However, the lower borrowing rates under
the Company's Term Loan Facility reduced its weighted average interest rate.
See "PART I. -- Financial Information -- Item 1. Financial Statements -- Notes
to Consolidated Financial Statements -- Note 5 -- Long-Term Debt" and "Note 8
- -- Subsequent Events."
The following table updates the expected principal cash flows and expected
weighted average interest rates for these transactions, as of January 28, 1998
EXPECTED MATURITY DATE
(as of January 28, 1999)
(IN THOUSANDS) FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 THEREAFTER TOTAL
Long-Term Debt ..................... $ 2,595 $ 10,395 $ 17,645 $ 20,645 $ 23,895 $ 365,134 $440,309
Short-Term Debt .................... $ 5,000 $ -- $ -- $ -- $ -- $ -- $ 5,000
Weighted Average Interest Rate ..... 9.19% 9.22% 9.26% 9.32% 9.40% 9.44%
Qualitative Disclosures:
The Company's primary exposure relates to (i) interest rate risk on
long-term and short-term borrowings; (ii) its ability to pay or refinance
long-term borrowings at maturity at market rates; (iii) the impact of interest
rate movements on its ability to meet interest expense requirements and exceed
financial covenants; and (iv) the impact of interest rate movements on the
Company's ability to obtain adequate financing to fund future acquisitions. The
Company manages interest rate risk on its outstanding long-term and short-term
debt through its use of fixed and variable rate debt. In addition, the Company
is currently exploring other methods to limit its exposure to short-term
interest rate movements, including but not limited to, hedging through the use
of interest rate swaps. While the Company can not predict or manage its ability
to refinance existing debt or the impact interest rate movements will have on
its existing debt, management evaluates its financial position on an ongoing
basis.
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PART II -- OTHER INFORMATION.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On January 28, 1998, the Company repurchased $49.0 million in principal
amount of Senior Notes plus (i) accrued and unpaid interest up to, but not
including, the date of purchase and (ii) a 4% call premium.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
(1) On November 6, 1998, the Company filed a Current Report on Form 8-K
announcing its acquisition of certain assets of each of Express Stop,
Inc., Bryan Oil Company, Inc., Market Express of Shallote, Inc. and
Lennon Oil Company on November 5, 1998.
(2) On February 8, 1999, the Company filed a Current Report on Form 8-K
announcing (i) its acquisition of all of the outstanding capital stock
of Miller Enterprises and certain real estate assets of certain
affiliates of Miller Enterprises on January 28, 1999, (ii) the
refinancing of its 12% Senior Notes and (iii) the amendment and
restatement of the Credit Facility.
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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: February 8, 1999
By: /S/ WILLIAM T. FLYG
-------------------------------------
WILLIAM T. FLYG
SENIOR VICE PRESIDENT FINANCE AND SECRETARY
(AUTHORIZED OFFICER AND PRINCIPAL FINANCIAL OFFICER)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ------------- ------------------------
27.1 Financial Data Schedule
31