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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 24, 1999
COMMISSION FILE NUMBER 33-72574
THE PANTRY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1574463
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1801 DOUGLAS DRIVE, SANFORD, NORTH CAROLINA
(Address of principal executive offices)
27330
(Zip Code)
(919) 774-6700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $0.01 PAR VALUE 18,111,478 SHARES
(Class) (Outstanding at August 2, 1999)
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THE PANTRY, INC.
FORM 10-Q
JUNE 24, 1999
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. ...................................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of 27
Operations
PART II -- OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds ..................................... 38
ITEM 4. Submission of Matters to a Vote of Security Holders ........................... 39
ITEM 6. Exhibits and Reports on Form 8-K. ............................................. 39
PART I -- FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 24, JUNE 24,
1998 1999
--------------- ------------
(AUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 34,404 $ 61,211
Receivables (net of allowances for doubtful accounts of $280 at September 24, 1998 and
$380 at June 24, 1999)................................................................. 9,907 18,682
Inventories (Note 3) .................................................................... 47,809 65,822
Income taxes receivable ................................................................. 488 --
Prepaid expenses ........................................................................ 2,216 3,086
Property held for sale .................................................................. 3,761 114
Deferred income taxes, net .............................................................. 3,988 5,776
-------- --------
Total current assets .................................................................. 102,573 154,691
-------- --------
Property and equipment, net .............................................................. 300,978 396,404
-------- --------
Other assets:
Goodwill (net of accumulated amortization of $11,940 at September 24, 1998 and $15,574
at June 24, 1999) ..................................................................... 120,025 169,033
Deferred lease costs (net of accumulated amortization of $9,001 at September 24, 1998 and
$9,035 at June 24, 1999)............................................................... 269 235
Deferred financing cost (net of accumulated amortization of $4,871 at September 24, 1998
and $6,294 at June 24, 1999)........................................................... 14,545 13,122
Environmental receivables (Note 4) ...................................................... 13,187 13,750
Other noncurrent assets ................................................................. 3,243 8,565
-------- --------
Total other assets .................................................................... 151,269 204,705
-------- --------
Total assets ............................................................................. $554,820 $755,800
======== ========
See Notes to Consolidated Financial Statements.
2
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
SEPTEMBER 24, JUNE 24,
1998 1999
--------------- ------------
(AUDITED) (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 5) ........................................... $ 45 $ 5,431
Current maturities of capital lease obligations ......................................... 1,240 1,240
Accounts payable:
Trade ................................................................................. 49,559 75,890
Money orders .......................................................................... 5,181 4,823
Accrued interest ........................................................................ 11,712 4,027
Accrued compensation and related taxes. ................................................. 6,719 7,904
Income tax payable ...................................................................... -- 924
Other accrued taxes ..................................................................... 7,007 11,951
Accrued insurance ....................................................................... 5,745 9,534
Other accrued liabilities ............................................................... 24,348 31,288
--------- ---------
Total current liabilities ............................................................. 111,556 153,012
--------- ---------
Long-term debt (Note 5) .................................................................. 327,269 425,270
--------- ---------
Other noncurrent liabilities:
Environmental reserves (Note 4) ......................................................... 17,137 18,024
Deferred income taxes ................................................................... 20,366 23,419
Capital lease obligations ............................................................... 12,129 11,190
Employment obligations .................................................................. 934 657
Accrued dividends on preferred stock .................................................... 4,391 --
Other noncurrent liabilities ............................................................ 21,734 27,533
--------- ---------
Total other noncurrent liabilities .................................................... 76,691 80,823
--------- ---------
Commitments and contingencies (Notes 4 and 5) ............................................ -- --
Shareholders' equity (Note 6 and 7):
Preferred stock, $.01 par value, 150,000 shares authorized; 17,500 issued and
outstanding at
September 24, 1998 and no shares issued and outstanding as of June 24, 1999 ........... -- --
Common stock, $.01 par value, 50,000,000 shares authorized; 11,704,857 issued and
outstanding at September 24, 1998 and 18,111,478 issued and outstanding at June 24,
1999 .................................................................................. 117 181
Additional paid in capital .............................................................. 68,939 126,328
Shareholder loans ....................................................................... (215) (937)
Accumulated deficit ..................................................................... (29,537) (28,877)
--------- ---------
Total shareholders' equity ............................................................ 39,304 96,695
--------- ---------
Total liabilities and shareholders' equity ............................................... $ 554,820 $ 755,800
========= =========
See Notes to Consolidated Financial Statements.
3
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- --------------------------
JUNE 25, JUNE 24, JUNE 25, JUNE 24,
1998 1999 1998 1999
------------ ------------ ------------ -------------
(13 WEEKS) (13 WEEKS) (39 WEEKS) (39 WEEKS)
Revenues:
Merchandise sales ...................................... $123,108 $ 199,085 $ 316,873 $ 503,047
Gasoline sales ......................................... 127,780 250,816 343,498 611,733
Commissions ............................................ 3,689 6,803 10,047 17,323
-------- --------- --------- ----------
Total revenues ....................................... 254,577 456,704 670,418 1,132,103
-------- --------- --------- ----------
Cost of sales:
Merchandise ............................................ 80,400 133,633 207,265 338,458
Gasoline ............................................... 113,812 222,640 304,136 537,273
-------- --------- --------- ----------
Total cost of sales .................................. 194,212 356,273 511,401 875,731
-------- --------- --------- ----------
Gross profit ............................................ 60,365 100,431 159,017 256,372
-------- --------- --------- ----------
Operating expenses:
Store expenses ......................................... 35,582 56,851 97,435 152,066
General and administrative expenses .................... 7,874 13,094 23,406 35,450
Depreciation and amortization .......................... 6,750 10,946 18,525 28,776
-------- --------- --------- ----------
Total operating expenses ............................. 50,206 80,891 139,366 216,292
-------- --------- --------- ----------
Income from operations .................................. 10,159 19,540 19,651 40,080
-------- --------- --------- ----------
Other income (expense):
Interest ............................................... (7,502) (10,707) (20,353) (29,580)
Miscellaneous .......................................... 479 286 1,253 414
-------- --------- --------- ----------
Total other expense .................................. (7,023) (10,421) (19,100) (29,166)
-------- --------- --------- ----------
Income before income taxes and extraordinary item ....... 3,136 9,119 551 10,914
Income tax expense ...................................... (916) (3,882) -- (4,600)
-------- --------- --------- ----------
Income before extraordinary item ........................ 2,220 5,237 551 6,314
Extraordinary item, net of taxes ........................ 289 (27) (6,511) (3,584)
-------- --------- --------- ----------
Net income (loss) ....................................... 2,509 5,210 (5,960) 2,730
Preferred dividends ..................................... (667) (624) (2,253) (2,070)
Premium on redemption of preferred stock ................ -- (613) -- (613)
-------- --------- --------- ----------
Net income (loss) applicable to common shareholders ..... $ 1,842 $ 3,973 $ (8,213) $ 47
======== ========= ========= ==========
Earnings per share (Note 7):
Basic:
Income (loss) before extraordinary item .............. $ 0.16 $ 0.31 $ (0.19) $ 0.30
Extraordinary item ................................... 0.03 -- (0.71) (0.29)
-------- --------- --------- ----------
Net income (loss) .................................... $ 0.19 $ 0.31 $ (0.90) $ 0.01
======== ========= ========= ==========
Diluted:
Income (loss) before extraordinary item .............. $ 0.15 $ 0.28 $ (0.19) $ 0.27
Extraordinary item ................................... 0.03 -- (0.71) (0.27)
-------- --------- --------- ----------
Net income (loss) .................................... $ 0.18 $ 0.28 $ (0.90) $ 0.00
======== ========= ========= ==========
See Notes to Consolidated Financial Statements.
4
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
--------------------------
JUNE 25, JUNE 24,
1998 1999
------------ -------------
(39 WEEKS) (39 WEEKS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................................................... $ (5,960) $ 2,730
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Extraordinary loss .................................................................... 6,511 3,405
Depreciation and amortization ......................................................... 18,525 28,776
Provision for deferred income taxes ................................................... (514) (1,518)
(Gain) loss on sale of property and equipment ......................................... 350 (170)
Reserves for environmental expenses ................................................... 92 887
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables ............................................................................. (4,885) (1,238)
Inventories ............................................................................. (2,866) (9,072)
Prepaid expenses ........................................................................ 737 (470)
Other noncurrent assets ................................................................. 4,192 (1,754)
Accounts payable ........................................................................ 4,159 14,379
Other current liabilities and accrued expenses .......................................... (681) (6,614)
Employment obligations .................................................................. (277) (277)
Accrued dividends ....................................................................... -- (6,461)
Other noncurrent liabilities ............................................................ 7,727 2,143
---------- ----------
Net cash provided by operating activities ................................................ 27,110 24,746
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ..................................................... (4,187) (125)
Additions to property and equipment ..................................................... (32,923) (33,452)
Proceeds from sale of property held for sale ............................................ 3,245 1,495
Proceeds from sale of property and equipment ............................................ 1,521 11,163
Acquisitions of related businesses, net of cash acquired ................................ (165,799) (131,230)
---------- ----------
Net cash used in investing activities .................................................... (198,143) (152,149)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases ............................................... (907) (939)
Principal repayments of long-term debt .................................................. (57,044) (173,307)
Proceeds from issuance of long-term debt ................................................ 228,042 275,301
Redemption of series B preferred stock .................................................. -- (17,500)
Net proceeds from initial public offering ............................................... -- 72,984
Net proceeds from other equity issues ................................................... 31,936 1,247
Other financing costs ................................................................... (12,891) (3,576)
---------- ----------
Net cash provided by financing activities ................................................ 189,136 154,210
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................................ 18,103 26,807
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......................................... 3,347 34,404
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................... $ 21,450 $ 61,211
========== ==========
See Notes to Consolidated Financial Statements.
5
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
NINE MONTHS ENDED
------------------------
JUNE 25, JUNE 24,
1998 1999
------------ -----------
(39 WEEKS) (39 WEEKS)
Cash paid during the year:
Interest ................ $19,986 $37,265
======= =======
Taxes ................... $ 687 $ 75
======= =======
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During 1998, The Pantry entered into several business acquisitions and
divestitures (see Note 2 -- Business Acquisitions). In connection with the Lil'
Champ acquisition, the holders of The Pantry's Series A preferred stock
contributed all outstanding shares of Series A preferred stock and related
accrued and unpaid dividends to the capital of The Pantry, resulting in an
increase in paid in capital of $6,508.
On June 8, 1999, the Company redeemed all of its preferred stock
outstanding for $17.5 million and paid accrued dividends on the preferred stock
of $6.5 million. As of June 24, 1999, the Company has no preferred stock issued
or outstanding. In connection with this redemption, the Company recognized a
dividend of $0.6 million.
6
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") and Lil' Champ's wholly-owned subsidiary Miller
Enterprises, Inc., Sandhills, Inc., Global Communications, 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 8 -- Supplemental Guarantor
Information."
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The
interim consolidated financial statements have been prepared from the
accounting records of The Pantry, Inc. and its subsidiaries and all amounts at
June 24, 1999 and for the three and nine months ended June 24, 1999 and June
25, 1998 are unaudited. References herein to "The Pantry" or "the Company"
shall include all subsidiaries. Pursuant to Regulation S-X, certain information
and note disclosures normally included in annual financial statements have been
condensed or omitted. The information furnished reflects all adjustments which
are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented, and which are of a normal, recurring
nature.
We suggest that these interim financial statements be read in conjunction
with the consolidated financial statements and the notes thereto included in
The Pantry's Annual Report on Form 10-K/A for the fiscal year ended September
24, 1998, The Pantry's Registration Statement on Form S-1 (No. 333-74221), as
amended, and The Pantry's Quarterly Report on Form 10-Q/A for the period ended
March 25, 1999, as amended.
Our results of operations for the three and nine months ended June 24,
1999 and June 25, 1998 are not necessarily indicative of results to be expected
for the full fiscal year. Our results of operations and comparisons with prior
and subsequent quarters are materially impacted by the results of operations of
businesses acquired since September 25, 1997. These acquisitions have been
accounted for under the purchase method. See "Note 2 -- Business Acquisitions."
Furthermore, the convenience store industry in The Pantry's marketing areas
experiences higher levels of revenues and profit margins during the summer
months than during the winter months. Historically, we have achieved higher
revenues and earnings in our third and fourth quarters. The Pantry operates on
a 52-53 week fiscal year ending on the last Thursday in September. The
Company's 1999 fiscal year ends on September 30, 1999 and is a 53 week year
while our 1998 fiscal year was 52 weeks. Our 2000 fiscal year will be a 52 week
year.
THE PANTRY
As of June 24, 1999, The Pantry operated approximately 1,135 convenience
stores located in Florida, North Carolina, South Carolina, Tennessee, Kentucky,
Indiana and Virginia. The Pantry's stores offer a broad selection of products
and services designed to appeal to the convenience needs of our customers,
including gasoline, car care products and services, tobacco products, beer,
soft drinks, self-service fast food and beverages, publications, dairy
products, groceries, health and beauty aids, video games and money orders. In
our Florida, Kentucky, Virginia and Indiana stores, we also sell lottery
products. Self-service gasoline is sold at 1,070 locations, 884 of which sell
gasoline under brand names including Amoco, British Petroleum, 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 49% and 51% of total revenues, respectively.
RECENT DEVELOPMENTS
On June 8, 1999, we offered and sold 6,250,000 shares of common stock in
the Company's initial public offering (the "IPO"). The initial offering price
was $13.00 per share and the Company received $75.6 million in net proceeds,
before expenses. The net proceeds were used: (i) to repay $19.0 million in
indebtedness under our 1999 bank credit facility (as defined); (ii) to redeem
$17.5 million in outstanding preferred stock; and (iii) to pay accrued
dividends on the preferred stock of $6.5 million. Of the remaining $32.6
million, $30.2 million was used to fund acquisitions closed subsequent to the
fiscal quarter ended June 24, 1999 and $2.4 million was reserved to pay fees
and expenses associated with the IPO (see "Note 6 -- Shareholders' Equity,"
"Note 9 -- Subsequent Events," and "Part II -- Item 2. Changes in Securities
and Use of Proceeds").
7
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- THE COMPANY AND RECENT DEVELOPMENTS -- Continued
On June 8, 1999, we redeemed all our preferred stock for $17.5 million and
paid accrued dividends on the preferred stock of $6.5 million. As of June 24,
1999, the Company has no preferred stock issued or outstanding. See "Note 6 --
Shareholders' Equity."
On June 8, 1999, our 1999 bank credit facility lenders amended several
covenants in our Amended and Restated Credit Facility (the "1999 bank credit
facility"). See "Note 5 -- Long-Term Debt" and "Part I -- Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operation --
Liquidity and Capital Resources."
On June 3, 1999, the Company adopted a new 1999 stock option plan
providing for the grant of incentive stock options to our officers, directors,
employees and consultants. See "Note 6 -- Stockholders' Equity" and "Note 7 --
Earnings Per Share."
NOTE 2 -- BUSINESS ACQUISITIONS:
During the nine months ended June 24, 1999, The Pantry acquired the
businesses described below (the "1999 acquisitions"). These acquisitions were
accounted for by the purchase method of accounting:
FISCAL 1999 ACQUISITIONS
DATE ACQUIRED TRADE NAME LOCATIONS STORES
- --------------------- -------------- ---------- -------
February 25, 1999 ETNA North Carolina, Virginia 60
January 28, 1999 Handy Way North-central Florida 121
November 5, 1998 Express Stop Southeast North Carolina and Eastern South Carolina 22
October 22, 1998 Dash-N East-central North Carolina 10
During fiscal 1998, The Pantry acquired and disposed of the businesses
described below (the "1998 acquisitions"). These acquisitions were accounted
for by the purchase method of accounting:
FISCAL 1998 ACQUISITIONS
DATE ACQUIRED TRADE NAME LOCATIONS STORES
- ------------------- ------------ ---------- -------
July 15, 1998 Zip Mart Central North Carolina, Virginia 42
July 2, 1998 Quick Stop Southeast North Carolina and Coastal South Carolina 75
May 2, 1998 Sprint Gainesville, Florida 10
March 19, 1998 Kwik Mart Eastern North Carolina 23
October 23, 1997 Lil' Champ Northeast Florida 440(a)
With the exception of the Lil' Champ acquisition and the March 19, 1998
and May 2, 1998 acquisitions, 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. Goodwill associated with the 1999 and 1998
acquisitions is being amortized over 30 years using the straight-line method.
8
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- BUSINESS ACQUISITIONS: -- Continued
Purchase prices of 1999 acquisitions have been allocated to the assets
purchased and the liabilities assumed based on the fair values on the dates of
the acquisitions as follows (amounts in thousands):
ASSETS ACQUIRED:
Receivables ............................................. $ 7,509
Inventories ............................................. 8,941
Prepaid expenses ........................................ 400
Property and equipment .................................. 94,111
Other noncurrent assets ................................. 3,565
--------
Total assets ............................................ 114,526
--------
LIABILITIES ASSUMED:
Accounts payable ........................................ 11,620
Other current liabilities and accrued expenses .......... 16,437
Long-term debt .......................................... 1,393
Deferred income taxes ................................... 2,783
Other noncurrent liabilities ............................ 3,708
--------
Total liabilities ....................................... 35,941
--------
Net tangible assets acquired ............................ 78,585
Goodwill ................................................ 52,645
--------
Total consideration paid, including direct costs, net
of cash acquired ........................................ $131,230
========
The following unaudited pro forma information presents a summary of
consolidated results of operations of The Pantry and acquired businesses as if
the transactions occurred at the beginning of the fiscal year for each of the
periods presented (amounts in thousands):
NINE MONTHS ENDED
---------------------------
JUNE 25, JUNE 24,
1998 1999
------------- -------------
Total revenues .......................... $1,250,150 $1,262,627
Income before extraordinary loss ........ $ 924 $ 4,274
Net income (loss) ....................... $ (5,588) $ 690
Net loss applicable to common shareholders $ (7,841) $ (1,993)
Earnings per share applicable
to common shareholders:
Basic:
Loss before extraordinary item ......... $ (0.15) $ 0.13
Extraordinary item ..................... (0.71) (0.29)
---------- ----------
Net loss ............................... $ (0.86) $ (0.16)
========== ==========
Diluted:
Income (loss) before extraordinary item $ (0.15) $ 0.12
Extraordinary item ..................... (0.71) (0.27)
---------- ----------
Net loss ............................... $ (0.86) $ (0.15)
========== ==========
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 1998 or fiscal 1999,
or of future operations of the combined companies.
9
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, JUNE 25,
1998 1999
--------------- -----------
Inventories at FIFO cost:
Merchandise ...................... $ 41,967 $ 59,318
Gasoline ......................... 11,510 16,108
-------- --------
53,477 75,426
Less adjustment to LIFO cost:
Merchandise ...................... (5,668) (9,295)
Gasoline ......................... -- (309)
-------- --------
Inventories at LIFO cost ......... $ 47,809 $ 65,822
======== ========
Total inventories at September 24, 1998 and June 24, 1999 include $5.2
million and $6.8 million of gasoline inventories held by Lil' Champ and Miller
(June 24, 1999 only) that are recorded under the FIFO method, respectively.
Inventories are net of estimated obsolescence reserves of approximately
$200,000 at September 24, 1998 and June 24, 1999.
NOTE 4 -- ENVIRONMENTAL LIABILITIES AND OTHER CONTINGENCIES
As of June 24, 1999, The Pantry was contingently liable for outstanding
letters of credit in the amount of $13.9 million related primarily to several
self-insured programs, regulatory requirements, and vendor contract terms. The
letters of credit are not to be drawn against unless The Pantry 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 Pantry , with additional taxes plus
penalties and accrued interest totaling approximately $5.0 million, for the
periods February 1, 1992 to September 26, 1996. In December 1998, The Pantry
reached a tentative settlement with the State of North Carolina, which is
pending final approval by the state. Under the settlement, The Pantry 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 Pantry is contesting the Tennessee assessment and
believes that, in the event of a mutual settlement, the assessment amount and
related penalties (approximately $250,000) would be substantially reduced.
Based on this, The Pantry believes the outcome of the audits will not have a
material adverse effect on its 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 Pantry is subject to various federal, state and local environmental
laws and regulations governing underground petroleum storage tanks that require
The Pantry 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 underground storage tanks. Regulations
enacted by the EPA in 1988 established requirements for (i) installing
underground storage tank systems, (ii) upgrading underground storage tank
systems, (iii) taking corrective action in response to releases, (iv) closing
underground storage tank systems, (v) keeping appropriate records, (vi)
maintaining evidence of financial responsibility for taking corrective action
and (vii) 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
10
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- ENVIRONMENTAL LIABILITIES AND OTHER CONTINGENCIES -- Continued
the 1988 EPA regulations. The Pantry facilities in Florida all meet or exceed
such rules. 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 underground storage tanks. All underground
storage tanks were required to comply with leak detection requirements by
December 22, 1993. The Pantry utilizes several approved leak detection methods
for all company-owned underground storage tank 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 underground storage
tank system and highlights discrepancies. The Pantry believes it is in full or
substantial compliance with the leak detection requirements applicable to
underground storage tanks.
o Corrosion Protection: The 1988 EPA regulations require that all
underground storage tank systems have corrosion protection by December 22,
1998. All of The Pantry's underground storage tanks have been protected from
corrosion either through the installation of fiberglass tanks or upgrading
steel underground storage tanks with interior fiberglass lining and the
installation of cathodic protection.
o Overfill/Spill Prevention: The 1988 EPA regulations require that all
sites have overfill/spill prevention devices by December 22, 1998. The Pantry
has installed spill/overfill equipment on all company-owned underground storage
tank systems to meet these regulations.
In addition to the technical standards, The Pantry 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 underground storage tank systems. In order to comply with this
requirement, The Pantry maintains surety bonds in the aggregate amount of
approximately $900,000 in favor of state environmental enforcement agencies in
the states of North Carolina, Virginia and South Carolina and a letter of
credit in the aggregate amount of approximately $1.1 million issued by a
commercial bank in favor of state environmental enforcement agencies in the
states of Florida, Tennessee, Indiana and Kentucky and relies on reimbursements
from applicable state trust funds. In Florida, The Pantry meets such financial
responsibility requirements by state trust fund coverage through December 31,
1998 and will meet such requirements thereafter through private commercial
liability insurance. The Pantry has sold all of its Georgia stores but has
retained responsibility for pre-closing environmental remediation. 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.
All states in which The Pantry operates or has operated underground
storage tank systems have established trust funds for the sharing, recovering,
and reimbursing of certain cleanup costs and liabilities incurred as a result
of releases from underground storage tank systems. These trust funds, which
essentially provide insurance coverage for the cleanup of environmental damages
caused by the operation of underground storage tank systems, are funded by a
underground storage tank registration fee and a tax on the wholesale purchase
of motor fuels within each state. The Pantry has paid underground storage tank
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 or occurrence for the cleanup
of environmental contamination, and most provide coverage for third party
liabilities.
Costs for which The Pantry does not receive reimbursement include but are
not limited to, the per-site deductible, costs incurred in connection with
releases occurring or reported to trust funds prior to their inception, removal
and disposal of underground storage tank systems, and costs incurred in
connection with sites otherwise ineligible for reimbursement from the trust
funds. The trust funds require The Pantry to pay deductibles ranging from
$10,000 to $100,000 per occurrence depending on the upgrade status of its
underground storage tank system, the date the release is discovered/reported
and the type of cost for which reimbursement is sought. The Florida trust fund
will not cover releases first reported after December 31, 1998. The Pantry will
meet Florida financial responsibility requirements for remediation and third
party claims arising out of releases reported after December 31, 1998 through a
combination of private insurance and a letter of credit. In addition to
material amounts to be spent by The Pantry, a substantial amount will be
expended for remediation on behalf of
11
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 4 -- ENVIRONMENTAL LIABILITIES AND OTHER CONTINGENCIES -- Continued
The Pantry by state trust funds established in The Pantry'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 Pantry, The Pantry
will be obligated to make such payments, which could materially adversely
affect The Pantry'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 $17.1 million and $18.0 million as of September
24, 1998 and June 24, 1999, respectively, represent estimates for future
expenditures for remediation, tank removal and litigation associated with 205
and 207 known contaminated sites, respectively, 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. As of June
24, 1999 the current average remediation cost per site is $70,000. Remediation
costs for known sites are expected to be incurred over the next one to ten
years. Environmental reserves have been established on an undiscounted basis
with remediation costs based on internal and external estimates for each site.
Future remediation costs for amounts of deductibles under, or amounts not
covered by, state trust fund programs and third party insurance arrangements
and for which the timing of payments can be reasonably estimated are discounted
using a ten-percent rate.
The Pantry anticipates that it will be reimbursed for a significant
portion of these expenditures from state insurance funds and private insurance.
As of September 24, 1998, and June 24, 1999, these anticipated reimbursements
of $13.2 million and $13.8 million, respectively, are recorded as long-term
environmental receivables. In Florida, remediation of such contamination
reported before January 1, 1999 will be performed by the state and
substantially all of the costs will be paid by the state trust fund. The Pantry
will perform remediation in other states through independent contractor firms
engaged by The Pantry. 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.
Although The Pantry 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 expenditures, some or
all of which may not be eligible for reimbursement from state trust funds.
The Pantry has reserved $500,000 to cover third party claims for
environmental conditions at adjacent real properties that are not covered by
state trust funds or by private insurance. This reserve is based on
management's best estimate of losses that may be incurred over the next several
years based on, among other things, the average remediation costs for
contaminated sites and The Pantry's historical claims experience.
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 Pantry from responsibility related to
known contamination at those sites. These sites continue to be included in The
Pantry's environmental reserve until a final closure notice is received.
12
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- LONG-TERM DEBT
At September 24, 1998 and June 24, 1999, long-term debt consisted of the
following (in thousands):
SEPTEMBER 24, JUNE 24,
1998 1999
--------------- -----------
Senior notes payable; due November 15, 2000; interest payable
semi-annually at 12% ................................................... $ 48,995 $ --
Senior subordinated notes payable; due October 15, 2007; interest payable
semi-annually at 10.25% ................................................ 200,000 200,000
Term loan facility -- Tranche A; interest payable monthly at LIBOR
(5.03% at June 24, 1999) plus 3.0%; principal due in quarterly
installments beginning April 30, 1999 through January 31, 2004 ......... -- 71,531
Term loan facility -- Tranche B; interest payable monthly at LIBOR
(5.03% at June 24, 1999) plus 3.5%; principal due in quarterly
installments beginning April 30, 1999 through January 31, 2006 ......... -- 157,194
Acquisition facility; interest payable monthly at LIBOR (5.03% at June 24,
1999) plus 3.0%; principal due in quarterly installments beginning
April 30, 2001 through January 31, 2004 ................................ 78,000 --
Notes payable to McLane Company, Inc.; zero (0.0%) interest, with
principal due in annual installments through February 26, 2003 ......... -- 1,694
Other notes payable; various interest rates and maturity dates ........... 319 282
-------- --------
327,314 430,701
Less -- current maturities ............................................... (45) (5,431)
-------- --------
$327,269 $425,270
======== ========
The senior subordinated notes are unconditionally guaranteed, on an
unsecured basis, as to the payment of principal, premium, if any, and interest,
jointly and severally, by all subsidiary guarantors. See "Note 8 --
Supplemental Guarantor Information." On January 28, 1999, The Pantry
repurchased $49.0 million in principal amount of senior notes plus accrued and
unpaid interest up to, but not including, the date of purchase and 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 1999
bank credit facility and cash on hand.
On January 28, 1999, The Pantry entered into the 1999 bank 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; (ii) a $50.0 million acquisition facility
available to finance acquisition of related businesses; and (iii) term loan
facilities with outstanding borrowings of $240.0 million. As of June 24, 1999,
total outstanding borrowings under the 1999 bank credit facility were $228.7
million.
The Pantry used the proceeds of the term loan facility and a $5.0 million
initial draw under the revolving credit facility, along with cash on hand, to:
(i) finance the Miller Enterprises acquisition; (ii) refinance $94.0 million
outstanding under the 1998 bank credit facility; (iii) redeem the outstanding
senior notes in the aggregate principal amount of $49.0 million; and (iv) pay
related transaction costs.
The annual maturities of notes payable are as follows (in thousands):
Year Ended September:
1999 .................... $ 2,896
2000 .................... 10,686
2001 .................... 17,939
2002 .................... 20,943
2003 .................... 37,931
Thereafter .............. 340,306
--------
$430,701
========
13
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- LONG-TERM DEBT -- Continued
As of June 24, 1999, The Pantry was in compliance with all covenants and
restrictions relating to all its outstanding borrowings.
As of June 24, 1999, substantially all of The Pantry's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
For the three months and nine months ended June 25, 1998, the Company
incurred an extraordinary item related to the costs of the redemption of $51.0
million of senior notes. For the three months and nine months ended June 24,
1999, the Company incurred an extraordinary item related to the costs of the
redemption of the remaining $49.0 million of senior notes.
NOTE 6 -- SHAREHOLDERS' EQUITY
On June 8, 1999, the Company offered and sold 6,250,000 shares of common
stock, $0.01 par value per share, in the Company's IPO. The initial offering
price was $13.00 per share and the Company received $75.6 million in net
proceeds, before expenses. The net proceeds were used: (i) to repay $19.0
million in indebtedness under our 1999 bank credit facility; (ii) to redeem
$17.5 million in outstanding preferred stock; and (iii) to pay accrued
dividends on the preferred stock of $6.5 million. Of the remaining $32.6
million, $30.2 million was used to fund acquisitions closed subsequent to the
fiscal quarter ended June 24, 1999 and $2.4 million was reserved to pay fees
and expenses associated with the IPO. See "Note 9 -- Subsequent Events" and
"Part II -- Item 2. Changes in Securities and Use of Proceeds."
On June 4, 1999 and in connection with the IPO, The Pantry effected a
51-for-1 stock split of its common stock. The accompanying financial statements
reflect the stock split, retroactively applied to all periods presented. In
connection with the stock split, the number of authorized shares of common
stock was increased to 50,000,000 (300,000 shares previously). There was no
change in par values of the common stock as a result of the stock split.
On June 3, 1999, the Company adopted a new 1999 stock option plan
providing for the grant of incentive stock options to our officers, directors,
employees and consultants. An aggregate of 3,825,000 shares of common stock is
reserved for issuance under the 1999 stock option plan. On June 8, 1999, the
Pantry granted 200,000 shares to officers and directors. These options will
vest in three annual installments, expire in seven years and are exercisable at
the IPO price of $13.00 per share. See "Note 7 -- Earnings Per Share."
On August 31, 1998, The Pantry adopted the 1998 Stock Subscription Plan.
The Stock Subscription Plan allows us to offer to certain employees the right
to purchase shares of common stock at a purchase price equal to the fair market
value on the date of purchase. During the nine months ended June 24, 1999,
134,436 shares, net of repurchases of 6,273 shares were issued under the Stock
Subscription Plan. These shares were sold at fair value ($11.27), as determined
by the most recent equity investment (July 1998). In connection with these
sales, The Pantry received $722,000 of secured promissory notes receivable,
bearing an interest rate of 8.8%, due August 31, 2003.
14
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- EARNINGS PER SHARE
The Pantry computes earnings per share data in accordance with the
requirements of SFAS No. 128, EARNINGS PER SHARE. Basic earnings per share is
computed on the basis of the weighted average number of common shares
outstanding. Diluted earnings per share is computed on the basis of the
weighted average number of common shares outstanding plus the effect of
outstanding warrants and stock options using the "treasury stock" method. The
following table reflects the calculation of basic and diluted earnings per
share.
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ------------------------
JUNE 25, JUNE 24, JUNE 25, JUNE 24,
1998 1999 1998 1999
---------- ---------- ------------ -----------
Net income (loss) applicable to common shareholders:
Income before extraordinary item ............................... $ 2,220 $ 5,237 $ 551 $ 6,314
Dividends on preferred stock ................................... (667) (624) (2,253) (2,070)
Premium on redemption of preferred stock ....................... -- (613) -- (613)
------- ------- -------- --------
Income (loss) applicable to common shareholders before
extraordinary item ............................................ 1,553 4,000 (1,702) 3,631
Extraordinary item ............................................. 289 (27) (6,511) (3,584)
------- ------- -------- --------
Net income (loss) applicable to common shareholders ............ $ 1,842 $ 3,973 $ (8,213) $ 47
======= ======= ======== ========
Earnings per share -- basic:
Weighted-average shares outstanding ............................ 9,487 12,960 9,111 12,225
======= ======= ======== ========
Income (loss) before extraordinary item per share -- basic ..... $ 0.16 $ 0.31 $ (0.19) $ 0.30
Extraordinary item per share -- basic .......................... 0.03 -- (0.71) (0.29)
------- ------- -------- --------
Net Income (loss) per share -- basic ............................ $ 0.19 $ 0.31 $ (0.90) $ 0.01
======= ======= ======== ========
Earnings per share -- diluted:
Weighted-average shares outstanding ............................ 9,487 12,960 9,111 12,225
Dilutive impact of options and warrants outstanding ............ 1,145 1,166 -- 1,163
------- ------- -------- --------
Weighted-average shares and potential dilutive shares
outstanding ................................................... 10,632 14,126 9,111 13,388
======= ======= ======== ========
Income (loss) before extraordinary item per
share -- diluted .............................................. $ 0.15 $ 0.28 $ (0.19) $ 0.27
Extraordinary item per share -- diluted ........................ 0.03 -- (0.71) (0.27)
------- ------- -------- --------
Net income (loss) per share -- diluted ......................... $ 0.18 $ 0.28 $ (0.90) $ --
======= ======= ======== ========
For the nine months ended June 1998, potential common dilutive shares have
been excluded from the denominator because such earnings per share amounts for
income from continuing operations available to common shareholders would be
antidilutive.
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION
Lil' Champ, Sandhills, Inc. and Global Communications, Inc. (the
"Guarantors") jointly and severally, unconditionally guarantee, on an unsecured
senior subordinated basis, the full and prompt performance of The Pantry's
obligations under its senior subordinated notes indenture and its 1999 bank
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 Pantry 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-Guarantor"). Accordingly, the
following supplemental combining information presents information regarding The
Pantry, the Guarantors, the Non-Guarantor, and related consolidating entries.
15
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
The Pantry 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.
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
YEAR ENDED 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, net ............. 1,262 2,726 -- -- 3,988
-------- -------- ------ ---------- --------
Total current assets ................. 66,674 40,074 4,634 (8,809) 102,573
-------- -------- ------ ---------- --------
Investment in subsidiaries .............. 69,317 -- -- (69,317) --
-------- -------- ------ ---------- --------
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 .......... 19,803 49,705 -- (69,508) --
Other noncurrent assets ................ 155 3,088 -- -- 3,243
-------- -------- ------ ---------- --------
Total other assets ................... 118,713 102,064 -- (69,508) 151,269
-------- -------- ------ ---------- --------
Total assets ............................ $380,044 $317,436 $4,974 $ (147,634) $554,820
======== ======== ====== ========== ========
16
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- 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 notes 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 ................................................ 117 1
Additional paid-in capital .................................. 68,939 6,758
Shareholder loans ........................................... (215) --
Accumulated earnings (deficit) .............................. (29,537) 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 notes 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) 117
Additional paid-in capital .................................. 5,001 (11,759) 68,939
Shareholder loans ........................................... -- -- (215)
Accumulated earnings (deficit) .............................. (325) (56,477) (29,537)
------ ----------- ---------
Total shareholders' equity (deficit) ..................... 4,676 (68,237) 39,304
------ ----------- ---------
Total liabilities and shareholders' equity (deficit) ......... $4,974 $(147,634) $ 554,820
====== =========== =========
17
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
JUNE 24, 1999
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents .......... $ 40,655 $ 16,243 $4,313 $ -- $ 61,211
Receivables, net ................... 24,563 36,962 1,030 (43,873) 18,682
Inventories ........................ 33,838 31,984 -- -- 65,822
Prepaid expenses ................... 2,160 920 6 -- 3,086
Property held for sale ............. 114 -- -- -- 114
Deferred income taxes, net ......... 1,978 3,798 -- -- 5,776
-------- -------- ------ ---------- --------
Total current assets ............. 103,308 89,907 5,349 (43,873) 154,691
-------- -------- ------ ---------- --------
Investment in subsidiaries .......... 85,366 866 -- (86,232) --
-------- -------- ------ ---------- --------
Property and equipment, net ......... 149,427 246,641 336 -- 396,404
-------- -------- ------ ---------- --------
Other assets:
Goodwill, net ...................... 97,861 71,172 -- -- 169,033
Deferred lease cost, net ........... 235 -- -- -- 235
Deferred financing cost, net ....... 13,122 -- -- -- 13,122
Environmental receivables, net ..... 12,566 1,184 -- -- 13,750
Intercompany notes receivable ...... 249,006 49,705 -- (298,711) --
Other noncurrent assets ............ 3,128 4,571 -- 866 8,565
-------- -------- ------ ---------- --------
Total other assets ............... 375,918 126,632 -- (297,845) 204,705
-------- -------- ------ ---------- --------
Total assets ........................ $714,019 $464,046 $5,685 $ (427,950) $755,800
======== ======== ====== ========== ========
18
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
JUNE 24, 1999
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- -----------
(DOLLARS IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
Current liabilities:
Current maturities of long-term debt ................... $ 5,117 $ (296) $ 18 $ -- $ 5,431
Current maturities of capital lease obligations ........ 213 1,027 -- -- 1,240
Accounts payable:
Trade ................................................ 45,345 30,571 -- (26) 75,890
Money orders ......................................... 490 4,333 -- -- 4,823
Accrued interest ....................................... 8,814 -- 1 (4,788) 4,027
Accrued compensation and related taxes ................. 4,160 3,743 1 -- 7,904
Income taxes payable ................................... 3,621 6,239 596 9,532 924
Other accrued taxes .................................... 3,384 8,567 -- -- 11,951
Accrued insurance ...................................... 3,439 6,095 -- -- 9,534
Other accrued liabilities .............................. 31,590 23,394 121 (23,817) 31,288
--------- -------- ------ ---------- ---------
Total current liabilities ............................ 106,173 84,265 737 (38,163) 153,012
--------- -------- ------ ---------- ---------
Long-term debt .......................................... 423,768 1,398 104 -- 425,270
--------- -------- ------ ---------- ---------
Other noncurrent liabilities:
Environmental expenses ................................. 14,428 3,596 -- -- 18,024
Deferred income taxes .................................. (457) 23,876 -- -- 23,419
Capital lease obligations .............................. 1,360 9,830 -- -- 11,190
Employment obligations ................................. 657 -- -- -- 657
Intercompany notes payable ............................. 51,705 252,656 -- (304,361) --
Other noncurrent liabilities ........................... 19,690 7,807 36 -- 27,533
--------- -------- ------ ---------- ---------
Total other noncurrent liabilities ................... 87,383 297,765 36 (304,361) 80,823
--------- -------- ------ ---------- ---------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock ........................................ -- -- -- -- --
Common stock ........................................... 181 1 5,001 (5,002) 181
Additional paid-in capital ............................. 126,328 6,882 -- (6,882) 126,328
Shareholder loans ...................................... (937) -- -- -- (937)
Accumulated earnings (deficit) ......................... (28,877) 73,735 (193) (73,542) (28,877)
--------- -------- ------ ---------- ---------
Total shareholders' equity (deficit) ................. 96,695 80,618 4,808 (85,426) 96,695
--------- -------- ------ ---------- ---------
Total liabilities and shareholders equity (deficit) ..... $ 714,019 $464,046 $5,685 $ (427,950) $ 755,800
========= ======== ====== ========== =========
19
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 25, 1998
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- -----------
(DOLLARS IN THOUSANDS)
Revenues:
Merchandise sales .................................. $ 60,595 $ 62,513 $ -- $ -- $123,108
Gasoline sales ..................................... 61,408 66,372 -- -- 127,780
Commissions ........................................ 1,698 1,991 -- -- 3,689
-------- -------- ---- -------- --------
Total revenues ................................... 123,701 130,876 -- -- 254,577
-------- -------- ---- -------- --------
Cost of sales:
Merchandise ........................................ 39,752 40,648 -- -- 80,400
Gasoline ........................................... 55,001 58,811 -- -- 113,812
-------- -------- ---- -------- --------
Total cost of sales .............................. 94,753 99,459 -- -- 194,212
-------- -------- ---- -------- --------
Gross profit ........................................ 28,948 31,417 -- -- 60,365
-------- -------- ---- -------- --------
Operating expenses:
Store expenses ..................................... 21,197 18,137 (61) (3,691) 35,582
General and administrative expenses ................ 4,185 3,685 4 -- 7,874
Depreciation and amortization ...................... 3,456 3,292 2 -- 6,750
-------- -------- ---- -------- --------
Total operating expenses ......................... 28,838 25,114 (55) (3,691) 50,206
-------- -------- ---- -------- --------
Income from operations .............................. 110 6,303 55 3,691 10,159
-------- -------- ---- -------- --------
Equity in earnings of subsidiaries .................. 7,171 -- -- (7,171) --
-------- -------- ---- -------- --------
Other income (expense):
Interest ........................................... (4,248) (4,283) (3) 1,032 (7,502)
Miscellaneous ...................................... 103 5,093 7 (4,724) 479
-------- -------- ------ -------- --------
Total other income (expense) ..................... (4,145) 810 4 (3,692) (7,023)
-------- -------- ------ -------- --------
Income (loss) before income taxes and extraordinary
item ............................................... 3,136 7,113 59 (7,172) 3,136
Income tax benefit (expense) ........................ (916) (2,087) (60) 2,147 (916)
-------- -------- ------ -------- --------
Net income (loss) before extraordinary item ......... 2,220 5,026 (1) (5,025) 2,220
Extraordinary item, net of taxes .................... 289 -- -- -- 289
-------- -------- ------ -------- --------
Net income (loss) ................................... 2,509 5,026 (1) (5,025) 2,509
Preferred dividends ................................. (667) -- -- -- (667)
-------- -------- ------ -------- --------
Net income (loss) applicable to common
shareholders ....................................... $ 1,842 $ 5,026 $ (1) $ (5,025) $ 1,842
======== ======== ====== ======== ========
20
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 24, 1999
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- -----------
(DOLLARS IN THOUSANDS)
Revenues:
Merchandise sales ..................................... $104,222 $94,863 $ -- $ -- $ 199,085
Gasoline sales ........................................ 143,565 107,251 -- -- 250,816
Commissions ........................................... 3,967 2,836 -- -- 6,803
-------- ------- ---- --------- ---------
Total revenues ...................................... 251,754 204,950 -- -- 456,704
-------- ------- ---- --------- ---------
Cost of sales:
Merchandise ........................................... 70,063 63,570 -- -- 133,633
Gasoline .............................................. 128,137 94,503 -- -- 222,640
-------- ------- ---- --------- ---------
Total cost of sales ................................. 198,200 158,073 -- -- 356,273
-------- ------- ---- --------- ---------
Gross profit ........................................... 53,554 46,877 -- -- 100,431
-------- ------- ---- --------- ---------
Operating expenses:
Store expenses ........................................ 38,184 26,173 (61) (7,445) 56,851
General and administrative expenses ................... 6,262 6,828 4 -- 13,094
Depreciation and amortization ......................... 6,096 4,849 1 -- 10,946
-------- ------- ---- --------- ---------
Total operating expenses ............................ 50,542 37,850 (56) (7,445) 80,891
-------- ------- ---- --------- ---------
Income from operations ................................. 3,012 9,027 56 7,445 19,540
-------- ------- ---- --------- ---------
Equity in earnings of subsidiaries ..................... 11,871 (9) -- (11,862) --
-------- ---------- ---- --------- ---------
Other income (expense):
Interest expense ...................................... (5,803) (6,038) (3) 1,137 (10,707)
Miscellaneous ......................................... 39 8,800 38 (8,591) 286
-------- --------- ------ --------- ---------
Total other income (expense) ........................ (5,764) 2,762 35 (7,454) (10,421)
-------- --------- ------ --------- ---------
Income (loss) before income taxes and extraordinary
item .................................................. 9,119 11,780 91 (11,871) 9,119
Income tax benefit (expense) ........................... (3,882) (3,605) (45) 3,650 (3,882)
-------- --------- ------ --------- ---------
Net income (loss) before extraordinary item ............ 5,237 8,175 46 (8,221) 5,237
Extraordinary item, net of taxes ....................... (27) -- -- -- (27)
-------- --------- ------ --------- ---------
Net income (loss) ...................................... 5,210 8,175 46 (8,221) 5,210
Preferred dividends .................................... (624) -- -- -- (624)
Premium on redemption of Series B Preferred Stock ...... (613) -- -- -- (613)
-------- --------- ------ --------- ---------
Net income (loss) applicable to common shareholders..... $ 3,973 $ 8,175 $ 46 $ (8,221) $ 3,973
======== ========= ====== ========= =========
21
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 25, 1998
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- -----------
(DOLLARS IN THOUSANDS)
Revenues:
Merchandise sales .................................... $ 160,208 $ 156,665 $ -- $ -- $ 316,873
Gasoline sales ....................................... 166,874 176,624 -- -- 343,498
Commissions .......................................... 4,613 5,434 -- -- 10,047
--------- --------- ----- --------- ---------
Total revenues ..................................... 331,695 338,723 -- -- 670,418
--------- --------- ----- --------- ---------
Cost of sales:
Merchandise .......................................... 104,126 103,139 -- -- 207,265
Gasoline ............................................. 148,985 155,151 -- -- 304,136
--------- --------- ----- --------- ---------
Total cost of sales ................................ 253,111 258,290 -- -- 511,401
--------- --------- ----- --------- ---------
Gross profit .......................................... 78,584 80,433 -- -- 159,017
--------- --------- ----- --------- ---------
Operating expenses:
Store expenses ....................................... 59,159 48,349 (180) (9,893) 97,435
General and administrative expenses .................. 12,666 10,724 16 -- 23,406
Depreciation and amortization ........................ 9,643 8,877 5 -- 18,525
--------- --------- ----- --------- ---------
Total operating expenses ........................... 81,468 67,950 (159) (9,893) 139,366
--------- --------- ----- --------- ---------
Income (loss) from operations ......................... (2,884) 12,483 159 9,893 19,651
--------- --------- ----- --------- ---------
Equity in earnings of subsidiaries .................... 15,242 -- -- (15,242) --
--------- --------- ----- --------- ---------
Other income (expense):
Interest ............................................. (12,373) (11,068) (9) 3,097 (20,353)
Miscellaneous ........................................ 566 13,655 22 (12,990) 1,253
--------- --------- ------- --------- ---------
Total other income (expense) ....................... (11,807) 2,587 13 (9,893) (19,100)
--------- --------- ------- --------- ---------
Income (loss) before income taxes and extraordinary
item ................................................. 551 15,070 172 (15,242) 551
Income tax benefit (expense) .......................... -- (4,842) (192) 5,034 --
--------- --------- ------- --------- ---------
Net income (loss) before extraordinary item ........... 551 10,228 (20) (10,208) 551
Extraordinary item, net of taxes ...................... (6,511) -- (6,511)
--------- --------- ---------
Net income (loss) ..................................... (5,960) 10,228 (20) (10,208) (5,960)
Preferred dividends ................................... (2,253) -- -- -- (2,253)
--------- --------- ------- --------- ---------
Net income (loss) applicable to common stock .......... $ (8,213) $ 10,228 $ (20) $ (10,208) $ (8,213)
========= ========= ======= ========= =========
22
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JUNE 24, 1999
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- -------------
(DOLLARS IN THOUSANDS)
Revenues:
Merchandise sales .................................... $ 274,519 $ 228,528 $ -- $ -- $ 503,047
Gasoline sales ....................................... 355,751 255,982 -- -- 611,733
Commissions .......................................... 10,261 7,062 -- -- 17,323
--------- --------- ----- --------- ----------
Total revenues ..................................... 640,531 491,572 -- -- 1,132,103
--------- --------- ----- --------- ----------
Cost of sales:
Merchandise .......................................... 185,774 152,684 -- -- 338,458
Gasoline ............................................. 314,692 222,581 -- -- 537,273
--------- --------- ----- --------- ----------
Total cost of sales ................................ 500,466 375,265 -- -- 875,731
--------- --------- ----- --------- ----------
Gross profit .......................................... 140,065 116,307 -- -- 256,372
--------- --------- ----- --------- ----------
Operating expenses:
Store expenses ....................................... 103,819 67,331 (182) (18,902) 152,066
General and administrative expenses .................. 18,111 17,324 15 -- 35,450
Depreciation and amortization ........................ 15,215 13,557 4 -- 28,776
--------- --------- ----- --------- ----------
Total operating expenses ........................... 137,145 98,212 (163) (18,902) 216,292
--------- --------- ----- --------- ----------
Income from operations ................................ 2,920 18,095 163 18,902 40,080
--------- --------- ----- --------- ----------
Equity in earnings of subsidiaries .................... 25,548 7 -- (25,555) --
--------- --------- ----- --------- ----------
Other income (expense):
Interest expense ..................................... (17,367) (15,857) (8) 3,652 (29,580)
Miscellaneous ........................................ (187) 23,037 110 (22,546) 414
--------- --------- ------- --------- ----------
Total other income (expense) ....................... (17,554) 7,180 102 (18,894) (29,166)
--------- --------- ------- --------- ----------
Income (loss) before income taxes and extraordinary
item ................................................. 10,914 25,282 265 (25,547) 10,914
Income tax benefit (expense) .......................... (4,600) (8,322) (134) 8,456 (4,600)
--------- --------- ------- --------- ----------
Net income (loss) before extraordinary item ........... 6,314 16,960 131 (17,091) 6,314
Extraordinary item, net of taxes ...................... (3,584) -- -- -- (3,584)
--------- --------- ------- --------- ----------
Net income (loss) ..................................... 2,730 16,960 131 (17,091) 2,730
Preferred dividends ................................... (2,070) -- -- -- (2,070)
Premium on redemption of Series B Preferred Stock...... (613) -- -- -- (613)
--------- --------- ------- --------- ----------
Net income (loss) applicable to common
shareholders ......................................... $ 47 $ 16,960 $ 131 $ (17,091) $ 47
========= ========= ======= ========= ==========
23
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 25, 1998
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ........................................ $ (5,960) $ 10,228 $(20) $ (10,208) $ (5,960)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Extraordinary loss ...................................... 6,511 -- -- -- 6,511
Depreciation and amortization ........................... 9,652 8,869 4 -- 18,525
Change in deferred income taxes ......................... (498) -- (16) -- (514)
Loss on sale of property and equipment .................. 144 206 -- -- 350
Reserves for environmental issues ....................... 92 -- -- -- 92
Equity earnings of affiliates ........................... (10,208) -- -- 10,208 --
Changes in operating assets and liabilities, net:
Receivables ............................................. (5,761) (14,094) 26 14,944 (4,885)
Inventories ............................................. 1,583 (4,449) -- -- (2,866)
Prepaid expenses ........................................ 460 280 (3) -- 737
Other noncurrent assets ................................. (387) 530 -- 4,049 4,192
Accounts payable ........................................ 2,555 1,604 -- -- 4,159
Other current liabilities and accrued expenses .......... 5,491 8,541 194 (14,907) (681)
Employment obligations .................................. (277) -- -- -- (277)
Other noncurrent liabilities ............................ 5,867 1,861 (1) -- 7,727
--------- --------- ------- --------- ----------
Net cash provided by operating activities ................ 9,264 13,576 184 4,086 27,110
--------- --------- ------ --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ..................... (4,187) -- -- (4,187)
Additions to property and equipment ..................... (18,956) (13,967) -- -- (32,923)
Proceeds from sale of property held for sale ............ 3,245 -- -- -- 3,245
Proceeds from sale of property and equipment ............ 720 801 -- -- 1,521
Intercompany notes receivable (payable) ................. (16,289) 20,401 (26) (4,086) --
Acquisitions of related businesses, net of cash
acquired ............................................... (9,500) (156,299) -- -- (165,799)
--------- --------- ------ --------- ----------
Net cash used in investing activities .................... (44,967) (149,064) (26) (4,086) (198,143)
--------- --------- ------ --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases ............... (227) (680) -- -- (907)
Principal repayments of long-term debt .................. (57,025) (6) (13) -- (57,044)
Proceeds from issuance of long-term debt ................ 82,287 145,755 -- -- 228,042
Net proceeds from equity issue .......................... 31,936 -- -- -- 31,936
Other financing costs ................................... (12,891) -- -- -- (12,891)
--------- ----------- ------ --------- ----------
Net cash provided by (used in) financing activities ...... 44,080 145,069 (13) -- 189,136
--------- ----------- ------ --------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................ 8,377 9,581 145 -- 18,103
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........... 2,247 279 821 -- 3,347
--------- ----------- ------ --------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................. $ 10,624 $ 9,860 $966 $ -- $ 21,450
========= =========== ====== ========= ==========
24
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- SUPPLEMENTAL GUARANTOR INFORMATION -- Continued
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 24, 1999
THE PANTRY GUARANTOR
(ISSUER) SUBSIDIARIES
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ............................................. $ 2,730 $ 16,960
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss ........................................... 3,405 --
Depreciation and amortization ................................ 15,215 13,557
Change in deferred income taxes .............................. 462 (1,980)
(Gain) loss on sale of property and equipment ................ (621) 451
Reserves for environmental issues ............................ 941 (54)
Equity earnings of affiliates ................................ (17,128) --
Changes in operating assets and liabilities, net:
Receivables .................................................. (13,710) (21,421)
Inventories .................................................. (5,343) (3,729)
Prepaid expenses ............................................. (907) 440
Other noncurrent assets ...................................... (132) (1,629)
Accounts payable ............................................. 13,120 1,259
Other current liabilities and accrued expenses ............... 21,664 184
Employment obligations ....................................... (277) --
Accrued dividends ............................................ (6,461) --
Other noncurrent liabilities ................................. 4,364 (1,586)
----------- ----------
Net cash provided by operating activities ..................... 17,322 2,452
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale .......................... (125) --
Additions to property and equipment .......................... (18,746) (14,706)
Proceeds from sale of property held for sale ................. 1,495 --
Proceeds from sale of property and equipment ................. 535 10,628
Intercompany notes receivable (payable) ...................... 6,378 92,834
Acquisitions of related businesses, net of cash acquired ..... (144,933) (80,791)
----------- ----------
Net cash provided by (used in) investing activities ........... (155,396) 7,965
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases .................... (174) (765)
Principal repayments of long-term debt ....................... (173,283) (10)
Proceeds from issuance of long-term debt ..................... 275,000 301
Redemption of series B preferred stock ....................... (17,500) --
Net proceeds from initial public offering .................... 72,984 --
Net proceeds from other equity issues ........................ 1,247 --
Other financing costs ........................................ (3,576) --
----------- ----------
Net cash provided by (used in) financing activities ........... 154,698 (474)
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................... 16,624 9,943
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................ 24,031 6,300
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................... $ 40,655 $ 16,243
=========== ==========
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS TOTAL
-------------- -------------- -------------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ............................................. $ 131 $ (17,091) $ 2,730
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss ........................................... -- -- 3,405
Depreciation and amortization ................................ 4 -- 28,776
Change in deferred income taxes .............................. -- -- (1,518)
(Gain) loss on sale of property and equipment ................ -- -- (170)
Reserves for environmental issues ............................ -- -- 887
Equity earnings of affiliates ................................ -- 17,128 --
Changes in operating assets and liabilities, net:
Receivables .................................................. 18 33,875 (1,238)
Inventories .................................................. -- -- (9,072)
Prepaid expenses ............................................. (3) -- (470)
Other noncurrent assets ...................................... -- 7 (1,754)
Accounts payable ............................................. -- -- 14,379
Other current liabilities and accrued expenses ............... 106 (28,568) (6,614)
Employment obligations ....................................... -- -- (277)
Accrued dividends ............................................ -- -- (6,461)
Other noncurrent liabilities ................................. (2) (633) 2,143
-------- --------- -----------
Net cash provided by operating activities ..................... 254 4,718 24,746
------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale .......................... -- -- (125)
Additions to property and equipment .......................... -- -- (33,452)
Proceeds from sale of property held for sale ................. -- -- 1,495
Proceeds from sale of property and equipment ................. -- -- 11,163
Intercompany notes receivable (payable) ...................... -- (99,212) --
Acquisitions of related businesses, net of cash acquired ..... -- 94,494 (131,230)
------- --------- -----------
Net cash provided by (used in) investing activities ........... -- (4,718) (152,149)
------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases .................... -- -- (939)
Principal repayments of long-term debt ....................... (14) -- (173,307)
Proceeds from issuance of long-term debt ..................... -- -- 275,301
Redemption of series B preferred stock ....................... -- -- (17,500)
Net proceeds from initial public offering .................... -- -- 72,984
Net proceeds from other equity issues ........................ -- -- 1,247
Other financing costs ........................................ -- -- (3,576)
------- --------- -----------
Net cash provided by (used in) financing activities ........... (14) -- 154,210
------- --------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................... 240 -- 26,807
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................ 4,073 -- 34,404
------- --------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................... $4,313 $ -- $ 61,211
======= ========= ===========
25
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 9 -- SUBSEQUENT EVENTS
On July 22, 1999, the Company acquired 100% of the outstanding capital
stock of R & H Maxxon, Inc. for $49 million, subject to certain working capital
and other adjustments. R & H Maxxon, Inc. is a leading operator of convenience
stores in South Carolina and northern Georgia, operating 53 stores under the
name "Depot Food Stores." On July 15, 1999, the Company acquired certain
operating assets of Dilmar Oil Company. Dilmar Oil Company is a leading
operator of convenience stores in eastern South Carolina, operating 28 stores
under the name "Food Chief." The purchase price and the fees and expenses
associated with these acquisitions were financed with proceeds from the IPO,
$12 million in borrowings under the 1999 bank credit facility and cash on hand.
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's discussion and analysis should be read in conjunction with
the financial statements and notes thereto. Further information is contained in
our Annual Report on Form 10-K/A for the year ended September 24, 1998, our
Registration Statement on Form S-1 (File No. 333-74221) and our Quarterly
Reports on Form 10-Q and 10-Q/A for the periods ended December 24, 1998 and
March 25, 1999. 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.
These statements include without limitation the words "believes,"
"anticipates," "estimates," "intends," "expects," and words of similar import.
All statements other than statements of historical fact included in statements
under "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation" include forward-looking information and may reflect
certain judgments by management. These forward-looking statements, which are
subject to numerous risks, uncertainties, and assumptions about The Pantry,
include, among other things (i) our anticipated acquisition and growth
strategies, (ii) anticipated trends in our businesses, (iii) future
expenditures for capital projects including the cost of environmental
compliance, (iv) our ability to pass along cigarette price increases to our
customers without a decrease in cigarette sales, (v) our ability to
successfully deal with Year 2000 issues that may arise in our or third party
operations and (vi) our ability to control costs, including our ability to
achieve cost savings in connection with our acquisitions.
These forward-looking statements are subject to numerous risks and
uncertainties, including risks related to our dependence on gasoline and
tobacco sales, our acquisition strategy, our rapid growth since 1996, our
dependence on one principal wholesaler, the intense competition in the
convenience store and retail gasoline industries, our dependence on favorable
weather conditions in spring and summer months, the concentration of our stores
in the southeastern United States, our history of losses, extensive
environmental regulation of our business, governmental regulation, control of
The Pantry by one principal stockholder, our dependence on senior management,
the failure of The Pantry and others to be year 2000 compliant and other risk
factors identified in our Registration Statement relating to our IPO under the
caption "Risk Factors." As a result of these risks actual results may differ
from these forward-looking statements included in this Quarterly Report. The
Pantry disclaims any obligation to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
INTRODUCTION
The Pantry is a leading convenience store operator in the southeastern
United States. Our stores offer a broad selection of merchandise and gasoline
as well as ancillary services designed to appeal to the convenience needs of
our customers. Since the arrival of our current management team in fiscal 1996,
we have grown through a combination of management initiatives and strategic
acquisitions.
Specific elements of our operating strategy include (i) enhancing our
merchandising to increase same store merchandise sales growth and margins, (ii)
improving our gasoline offering in order to increase customer traffic and same
store gasoline volume growth, (iii) reducing expenses through strengthened
vendor relationships and tightened expense controls, (iv) increasing
expenditures for facilities improvement and store automation and (v) growing
through acquisitions and new store development. As a result, we have
experienced increases in total revenue, same store merchandise sales and
gasoline volume growth and income from operations. Additionally, we have
expanded the geographic scope of our operations which we believe will result in
less seasonality from period to period. We intend to continue our acquisition
strategy and, accordingly, future results may not be necessarily comparable to
historic results.
We believe that there is significant opportunity to continue to increase
profitability at our existing and new stores. We continue to focus on same
store sales and profit growth through upgraded facilities, improved technology,
new service offerings, competitive merchandise and gasoline prices and cost
savings initiatives. We are upgrading our management information systems and
continue to remodel our stores. Finally, we continue to seek acquisitions and
believe that there is a large number of attractive acquisition opportunities in
our markets. Subsequent to June 24, 1999, we completed two acquisitions
bringing our store count as of August 2, 1999 to 1,215 stores making us the
10th largest convenience store operator and the second largest independent
operator in the United States.
On June 8, 1999, the Company offered and sold 6,250,000 shares of common
stock in its IPO. The IPO price was $13.00 per share and the Company received
$75.6 million in net proceeds, before expenses. The net proceeds were used: (i)
to repay $19.0 million in indebtedness under our 1999 bank credit facility;
(ii) to redeem $17.5 million in outstanding preferred stock; and (iii) to pay
accrued dividends on the preferred stock of $6.5 million. Of the remaining
$32.6 million, $30.2
27
million was used to fund acquisitions closed subsequent to the quarter ended
June 24, 1999 and $2.4 million was reserved to pay fees and expenses associated
with the IPO.
ACQUISITION HISTORY
Our acquisition strategy focuses on acquiring convenience stores within or
contiguous to our existing market areas. We believe acquiring locations with
demonstrated revenue volumes involves lower risk and is an economically
attractive alternative to traditional site selection and new store development.
The table below provides information concerning the Company's 1999 and
1998 acquisitions with store count exceeding ten (10) stores:
NUMBER OF
DATE ACQUIRED TRADE NAME LOCATIONS STORES
- -------------------------- ------------------- ---------------------------------- ------------
Fiscal 1999 Acquisitions:
- --------------------------
July 22, 1999 Depot Food Stores South Carolina, Georgia 53(a)
July 15, 1999 Food Chief Eastern South Carolina 28(a)
February 25, 1999 ETNA North Carolina, Virginia 60
January 28, 1999 Handy Way North-central Florida 121
November 5, 1998 Express Stop Southeast North Carolina, 22
Eastern South Carolina
Fiscal 1998 Acquisitions:
- --------------------------
October 22, 1998 Dash-N East-central North Carolina 10
July 15, 1998 Zip Mart Central North Carolina, Virginia 42
July 2, 1998 Quick Stop Southeast North Carolina, 75
Coastal South Carolina
May 2, 1998 Sprint Gainesville, Florida 10
March 19, 1998 Kwik Mart Eastern North Carolina 23
October 23, 1997 Lil' Champ Northeast Florida 440(b)
- ---------
(a) These stores were acquired subsequent to June 24, 1999.
(b) Net of the disposition of 48 convenience stores located throughout eastern
Georgia.
IMPACT OF ACQUISITIONS. The acquisitions highlighted above and related
transactions have had a significant impact on our financial condition and
results of operations since their respective transaction dates. All of these
acquisitions were accounted for under the purchase method and as a result the
consolidated statements of operations herein include the results of operations
of acquired stores from the date of acquisition only. Moreover, the
consolidated balance sheet as of September 24, 1998 does not include the assets
and liabilities relating to those acquisitions consummated after September 24,
1998. As a result, comparisons to prior operating results and prior balance
sheets are materially impacted. Subsequent to the quarter ended June 24, 1999,
the Company acquired 81 stores in two separate transactions. These transactions
were funded with proceeds from our IPO borrowings under the 1999 bank credit
facility and cash on hand. See "PART I. -- Financial Information -- Item 1.
Financial Statements -- Notes to Consolidated Financial Statements -- Note 2 --
Business Acquisitions."
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 24, 1999 COMPARED TO THE NINE MONTHS ENDED JUNE 25,
1998
TOTAL REVENUE. Total revenue for the nine months ended June 24, 1999 was
$1.1 billion compared to $670.4 million during the nine months ended June 25,
1998, an increase of $461.7 million or 68.9%. The increase in total revenue is
primarily attributable to the revenue from stores acquired or opened since June
26, 1998 of $378.7 million, as well as an additional month of Lil' Champ
revenue of $38.0 million and same store merchandise sales growth of 10.4% (or
$15.7 million). Our total revenue increase was partially offset by a lower
average retail gasoline price of $1.03 for the nine months ended June 24, 1999
compared to $1.12 for the nine months ended June 25, 1998.
MERCHANDISE REVENUE. Merchandise revenue for the nine months ended June
24, 1999 was $503.0 million compared to $316.9 million during the nine months
ended June 25, 1998, an increase of $186.1 million or 58.7%. The increase in
merchandise revenue is primarily attributable to the revenue from stores
acquired or opened since June 26, 1998 of $141.5 million, as well as an
additional month of Lil' Champ merchandise revenue of $17.3 million and same
store merchandise sales growth of $15.7 million. Same store merchandise revenue
for the nine months ended June 24, 1999 increased 10.4% over the nine months
ended June 25, 1998. The increase in same store merchandise revenue is
primarily attributable to increased
28
customer traffic, higher average transaction size and general economic and
market conditions. The increases in store traffic and average transaction size
are primarily attributable to focused store merchandising, more competitive
gasoline pricing, enhanced store appearance and increased in-store promotional
activity.
GASOLINE REVENUE AND GALLONS. Gasoline revenue for the nine months ended
June 24, 1999 was $611.7 million compared to $343.5 million during the nine
months ended June 25, 1998, an increase of $268.2 million or 78.1%. The
increase in gasoline revenue is primarily attributable to the revenue from
stores acquired or opened since June 26, 1998 of $232.3 million, as well as an
additional month of Lil' Champ gasoline revenue of $20.1 million. Gasoline
revenue growth was partially offset by a $0.09 or 8.0% decrease in average
gasoline gallon retail prices compared to the nine months ended June 25, 1998.
The revenue impact of the average retail price decline was approximately $47.1
million.
In the nine months ended June 24, 1999, gasoline gallons sold were 592.6
million compared to 307.1 million during the nine months ended June 25, 1998,
an increase of 285.5 million gallons or 93.0%. The increase is primarily
attributable to the gasoline gallons sold by stores acquired or opened since
June 26, 1998 of 229.8 million, as well as an additional month of Lil' Champ
gasoline gallons of 18.5 million and same store gallon growth of 9.2 million.
Same store gasoline gallon sales for the nine months ended June 24, 1999
increased 6.4% over the nine months ended June 25, 1998. The same store gallon
increase is primarily attributable to increased customer traffic resulting from
more competitive gasoline pricing, rebranding and promotional activity,
gasoline equipment upgrades, enhanced store appearance and general economic and
market conditions.
COMMISSION REVENUE. Commission revenue for the nine months ended June 24,
1999 was $17.3 million compared to $10.0 million during the nine months ended
June 25, 1998, an increase of $7.3 million or 73.0%. The increase in commission
revenue is primarily attributable to the revenue from stores acquired or opened
since June 26, 1998 of $4.9 million, as well as an additional month of Lil'
Champ lottery commissions of $0.6 million. Commission revenue includes lottery
commissions, video gaming income, money order commissions, telephone income and
revenue from other ancillary product and service offerings.
TOTAL GROSS PROFIT. Total gross profit for the nine months ended June 24,
1999 was $256.4 million compared to $159.0 million for the nine months ended
June 25, 1998, an increase of $97.4 million or 61.3%. The increase in gross
profit is primarily attributable to the profits from stores acquired or opened
since June 26, 1998 of $76.7 million, as well as an additional month of Lil'
Champ gross profit of approximately $8.7 million and same store gross profit
increases. The total gross profit increases were achieved despite a decrease in
total gross margin to 22.6% for the nine months ended June 24, 1999 from 23.7%
for the nine months ended June 25, 1998. The decrease in total gross margin is
attributable to the decreases in merchandise and gasoline gross margins
discussed below.
MERCHANDISE GROSS PROFIT AND MARGIN. Merchandise gross profit was $164.6
million for the nine months ended June 24, 1999 compared to $109.6 million for
the nine months ended June 25, 1998, an increase of $55.0 million or 50.2%.
This increase is primarily attributable to the profits from stores acquired or
opened since June 26, 1998 of $50.0 million, as well as an additional month of
Lil' Champ merchandise gross profit of $5.9 million and same store profit
increases. The decline in merchandise gross margin to 32.7% for the nine months
ended June 24, 1999 from 34.6% for the nine months ended June 25, 1998 is
attributable to the addition of stores acquired or opened since June 26, 1998
which, on average reported merchandise margins of 32.5% for the nine months
ended June 24, 1999 and the impact of product cost increases in our tobacco
category.
GASOLINE GROSS PROFIT AND PER GALLON MARGIN. Gasoline gross profit was
$74.5 million for the nine months ended June 24, 1999 compared to $39.4 million
for the nine months ended June 25, 1998, an increase of $35.1 million or 89.1%.
This increase is primarily attributable to the profits from stores acquired or
opened since June 26, 1998 of $25.8 million, as well as an additional month of
Lil' Champ gasoline gross profit of $2.2 million and same store profit
increases. The gasoline gross profit per gallon was $0.126 for the nine months
ended June 24, 1999 compared to $0.128 for the nine months ended June 25, 1998,
a 1.6% decrease in gasoline margin per gallon.
STORE OPERATING AND GENERAL AND ADMINISTRATIVE EXPENSES. Store operating
expenses for the nine months ended June 24, 1999 were $152.1 million compared
to $97.4 million for the nine months ended June 25, 1998, an increase of $54.7
million or 56.2%. The increase in store operating expenses is primarily
attributable to the personnel and lease expenses associated with the stores
acquired or opened since June 26, 1998 of $44.3 million, as well as an
additional month of Lil' Champ store operating expenses of $5.1 million. As a
percentage of total revenue, store operating expenses decreased to 13.4% in the
nine months ended June 24, 1999 from 14.5% in the nine months ended June 25,
1998.
29
General and administrative expenses for the nine months ended June 24,
1999 were $35.5 million compared to $23.4 million during the nine months ended
June 25, 1998, an increase of $12.1 million or 51.7%. The increase in general
and administrative expenses is attributable to increased administrative
expenses associated with the stores acquired or opened since June 26, 1998 of
$8.8 million, as well as an additional month of Lil' Champ general and
administrative expenses of $1.0 million. As a percentage of total revenue,
general and administrative expenses decreased to 3.1% in the nine months ended
June 24, 1999 from 3.5% in the nine months ended June 25, 1998.
INCOME FROM OPERATIONS. Income from operations was $40.1 million for the
nine months ended June 24, 1999 compared to $19.7 million during the nine
months ended June 25, 1998, an increase of $20.4 million or 103.6%. The
increase in operating income was partially offset by a $10.3 million increase
in depreciation and amortization. The increase in depreciation and amortization
expense is primarily attributed to an additional amount of Lil' Champ
depreciation and amortization expense of $1.2 million, the depreciation and
amortization of goodwill expense associated with other businesses acquired, as
well as increases in depreciation associated with other capital improvements
and the amortization of deferred financing costs. As a percentage of total
revenue, income from operations increased to 3.5% in the nine months ended June
24, 1999 from 2.9% in the nine months ended June 25, 1998.
EBITDA. EBITDA represents income from operations before depreciation,
amortization and extraordinary and unusual items. EBITDA for the nine months
ended June 24, 1999 was $68.9 million compared to $38.2 million for the nine
months ended June 25, 1998, an increase of $30.7 million or 80.4%. The increase
is attributable to the items discussed above.
EBITDA is not a measure of performance under generally accepted accounting
principles, and should not be considered as a substitute for net income, cash
flows from operating activities and other income or cash flow statement data
prepared in accordance with generally accepted accounting principles, or as a
measure of profitability or liquidity. We have included information concerning
EBITDA as one measure of our cash flow and historical ability to service debt.
EBITDA as defined may not be comparable to similarly titled measures reported
by other companies.
INTEREST EXPENSE. Interest expense is primarily interest on our senior
subordinated notes, borrowings under our 1999 and 1998 bank credit facilities
and our previously outstanding senior notes. Interest expense for the nine
months ended June 24, 1999 was $29.6 million compared to $20.4 million for the
nine months ended June 25, 1998, an increase of $9.2 million or 45.1%. The
increase in interest expense is attributable to an additional month of interest
on the senior subordinated notes of $1.6 million and interest on borrowings
under our 1999 and 1998 bank credit facilities of $5.9 million.
INCOME TAX EXPENSE. The income tax expense for the nine months ended June
24, 1999 was $4.6 million compared to no income tax expense for the nine months
ended June 25, 1998. This increase was primarily attributable to the increase
in income before income taxes. Income tax expense is recorded net of changes in
a valuation allowance to reduce federal and state deferred tax assets to a net
amount which we believe more likely than not will be realized, based on
estimates of future earnings and the expected timing of temporary difference
reversals.
EXTRAORDINARY ITEM. In the nine months ended June 24, 1999, we recognized
an extraordinary loss, net of taxes, of approximately $3.6 million in
connection with the January 28, 1999 redemption of the remaining $49.0 million
in outstanding principal amount of our senior notes and the replacement of our
1998 bank credit facility with the 1999 bank credit facility. The loss was the
sum, net of taxes, of a $1.2 million call premium, and the write-off of
deferred financing costs associated with the senior notes and 1998 bank credit
facility of $2.4 million.
In the nine months ended June 25, 1998, we recognized an extraordinary
loss, net of taxes, of approximately $6.5 million in connection with the
October 23, 1997 redemption of $51.0 million in principal amount of our
outstanding senior notes and related consents obtained from the holders of the
senior notes to amendments and waivers to covenants contained in the indenture.
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.
NET INCOME (LOSS). The net income for the nine months ended June 24, 1999
was $2.7 million compared to a net loss of $6.0 million for the nine months
ended June 25, 1998. In the nine months ended June 24, 1999 and June 26, 1998,
we recognized extraordinary losses as discussed above. The Pantry's income
before extraordinary loss was $6.3 million for the nine months ended June 24,
1999 compared to $0.6 million during the nine months ended June 25, 1998, an
increase of $5.7 million.
30
THREE MONTHS ENDED JUNE 24, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 25,
1998
TOTAL REVENUE. Total revenue for the three months ended June 24, 1999 was
$456.7 million compared to $254.6 million for the three months ended June 25,
1998, an increase of $202.1 million or 79.4%. The increase in total revenue is
primarily attributable to the revenue from stores acquired or opened since June
26, 1998 of $181.7 million and same store merchandise sales and gallon growth.
In the three months ended June 24, 1999, total revenue increases were partially
offset by a lower average retail gasoline gallon price of $0.96 for the three
months ended June 24, 1999 compared to $1.10 for the three months ended June
25, 1998.
MERCHANDISE REVENUE. Merchandise revenue for the three months ended June
24, 1999 was $199.1 million compared to $123.1 million during the three months
ended June 25, 1998, an increase of $76.0 million or 61.7%. The increase in
merchandise revenue is primarily attributable to the revenue from stores
acquired or opened since June 26, 1998 of $68.3 million and same store
merchandise sales growth.
Same store merchandise revenue for the three months ended June 24, 1999
increased 12.8% over the three months ended June 25, 1998. The increase in same
store merchandise revenue is primarily attributable to the November increase in
cigarette prices (see "Inflation"), increased customer traffic, higher average
transaction size and general economic and market conditions. The increases in
store traffic and average transaction size are primarily attributable to store
merchandising, more competitive gasoline pricing, enhanced store appearance and
increased in-store promotional activity.
GASOLINE REVENUE AND GALLONS. Gasoline revenue for the three months ended
June 24, 1999 was $250.8 million compared to $127.8 million during the three
months ended June 25, 1998, an increase of $123.0 million or 96.2%. The
increase in gasoline revenue is primarily attributable to the revenue from
stores acquired or opened since June 26, 1998 of $111.3 million and same store
gallon sales growth. The gasoline revenue increase for the three months ended
June 24, 1999 was partially impacted by a $0.02 or 1.8% increase in average
gasoline retail prices compared to three months ended June 25, 1998.
In the three months ended June 24, 1999, gasoline gallons sold were 227.3
million compared to 117.9 million during the three months ended June 25, 1998,
an increase of 109.4 million gallons or 92.8%. The increase is primarily
attributable to the gasoline sold by stores acquired or opened since June 26,
1998 of 103.2 million and same store gallon growth. Same store gasoline gallon
sales for the three months ended June 24, 1999 increased 8.1% over the three
months ended June 25, 1998. The same store gallon increase is primarily
attributable to increased customer traffic resulting from more competitive
gasoline pricing, rebranding and promotional activity, enhanced store
appearance and general economic and market conditions.
COMMISSION REVENUE. Commission revenue for the three months ended June 24,
1999 was $6.8 million compared to $3.7 million during the three months ended
June 25, 1998, an increase of $3.1 million or 83.8%. The increase is primarily
attributable to the revenue from stores acquired or opened since June 26, 1998
of $2.1 million and same store commission revenue increases.
TOTAL GROSS PROFIT. Total gross profit for the three months ended June 24,
1999 was $100.4 million compared to $60.4 million during the three months ended
June 25, 1998, an increase of $40.0 million or 66.2%. The increase in gross
profit is primarily attributable to the profits from stores acquired or opened
since June 26, 1998 of $36.6 million and same store gross profit increases.
MERCHANDISE GROSS PROFIT AND MARGIN. Merchandise gross profit was $65.5
million for the three months ended June 24, 1999 compared to $42.7 million for
the three months ended June 25, 1998, an increase of $22.8 million or 53.4%.
This increase is primarily attributable to the profits from stores acquired or
opened since June 26, 1998 of $22.9 million and same store profit increases.
The decline in merchandise gross margin to 32.9% for the three months ended
June 24, 1999 from 34.7% for the three months ended June 25, 1998 is
attributable to the addition of several lower margin stores acquired or opened
since June 26, 1998 and lower gross margin on cigarettes. See " -- Inflation."
GASOLINE GROSS PROFIT AND PER GALLON MARGIN. Gasoline gross profit was
$28.2 million for the three months ended June 24, 1999 compared to $14.0
million for the three months ended June 25, 1998, an increase of $14.2 million
or 101.4%. This increase is primarily attributable to the profits from stores
acquired or opened since June 26, 1998 of $11.7 million and same store profit
increases. The gasoline gross profit per gallon was $0.124 in the three months
ended June 24, 1999 compared to $0.119 for the three months ended June 25,
1998.
STORE OPERATING AND GENERAL AND ADMINISTRATIVE EXPENSES. Store operating
expenses for the three months ended June 24, 1999 totaled $56.9 million
compared to store operating expenses of $35.6 million for the three months
ended
31
June 25, 1998, an increase of $21.3 million or 59.8%. The increase in store
expenses is primarily attributable to the operating and lease expenses
associated with the stores acquired or opened since June 26, 1998 of $20.0
million. As a percentage of total revenue, store operating expenses decreased
to 12.5% in the three months ended June 24, 1999 from 14.0% in the three months
ended June 25, 1998.
General and administrative expenses for the three months ended June 24,
1999 was $13.1 million compared to $7.9 million during the three months ended
June 25, 1998, an increase of $5.2 million or 65.8%. The increase in general
and administrative expenses is attributable to increased administrative
expenses associated with the stores acquired or opened since June 26, 1998 of
$4.0 million. As a percentage of total revenue, general and administrative
expenses decreased 1998 to 2.9% in the three months ended June 24, 1999 from
3.1% in the three months ended June 26, 1998.
INCOME FROM OPERATIONS. Income from operations totaled $19.5 million for
the three months ended June 24, 1999 compared to $10.2 million during the three
months ended June 25, 1998, an increase of $9.3 million or 91.2%. The increase
is attributable to the factors discussed above and is partially reduced by the
$4.1 million increase in depreciation and amortization.
EBITDA. EBITDA for the three months ended June 24, 1999 totaled $30.5
million compared to EBITDA of $16.9 million during the three months ended June
25, 1998, an increase of $13.6 million or 80.5%. The increase is attributable
to the items discussed above.
INTEREST EXPENSE. Interest expense is primarily interest on our senior
subordinated notes, borrowing under our 1999 and 1998 bank credit facilities
and our senior notes. Interest expense for the three months ended June 24, 1999
totaled $10.7 million compared to $7.5 million for the three months ended June
25, 1998, an increase of $3.2 million or 42.7%. The increase in interest
expense is attributable to increased borrowings under our 1999 bank credit
facility, which is partially offset by the interest savings related to the
repurchase of $49.0 million in principal amount of senior notes at the lower
interest rates associated with our 1999 bank credit facility. See "PART I. --
Financial Information -- Item 1. Financial Statements -- Notes to Consolidated
Financial Statements -- Note 1 -- Recent Developments" and "Note 5 -- Long-Term
Debt."
INCOME TAX EXPENSE. Income tax expense totaled $3.9 million for the three
months ended June 24, 1999 compared to $0.9 million for the three months ended
June 25, 1998. The increase in income tax expense was primarily attributable to
the increase in income before income taxes, and is offset by the income tax
benefit associated with the extraordinary loss discussed above. Income tax
expense is recorded net of changes in valuation allowance to reduce federal and
state deferred tax assets to a net amount which we believe more likely than not
will be realized, based on estimates of future earnings and the expected timing
of temporary difference reversals.
NET INCOME. The net income for three months ended June 24, 1999 was $5.2
million compared to a net income of $2.5 million for the three months ended
June 25, 1998, an increase of $2.7 million or 108.0%. In the three months ended
June 25, 1998, the Company recognized extraordinary gain as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS. Due to the nature of our business,
substantially all sales are for cash, and cash provided by operations is our
primary source of liquidity. Capital expenditures, acquisitions and interest
expense represent our primary uses of funds. We rely primarily upon cash
provided by operating activities, supplemented as necessary from time to time
by borrowings under our bank facilities, sale-leaseback transactions, asset
dispositions and equity investments to finance our operations, pay interest,
and fund capital expenditures and acquisitions. Cash provided by operating
activities decreased to $24.7 million for the nine months ended June 24, 1999
from $27.1 million for the nine months ended June 25, 1998, due to increases in
inventory and receivables and a decrease in accrued interest. We had $61.2
million of cash and cash equivalents on hand at June 24, 1999.
FISCAL 1999 ACQUISITIONS. For the nine months ended June 24, 1999, we have
acquired a total of 214 convenience stores in five transactions for
approximately $131.2 million, net of cash acquired. These acquisitions were
funded with borrowings under our bank credit facility and cash on hand.
Subsequent to June 24, 1999, the Company acquired 81 additional convenience
stores in two transactions for approximately $57.0 million, which were funded
with proceeds from our IPO, borrowings under our 1999 bank credit facility and
cash on hand.
CAPITAL EXPENDITURES. Capital expenditures (excluding all acquisitions)
were approximately $33.6 million in the nine months ended June 24, 1999 and
approximately $37.1 million in the nine months ended June 25, 1998. Capital
expenditures are primarily expenditures for existing store improvements, store
equipment, new store development, information systems and expenditures to
comply with regulatory statutes, including those related to environmental
matters.
32
We finance our capital expenditures and new store development through cash
flow from operations, a sale-leaseback program or similar lease activity,
vendor reimbursements and asset dispositions. Our sale-leaseback program
includes the packaging of our owned convenience store real estate, both land
and buildings, for sale to investors in return for their agreement to leaseback
the property to The Pantry under long-term leases. Generally, the leases are
operating leases at market rates with terms of twenty years with four five-year
renewal options. The lease payment is based on market rates ranging from 10.5%
to 11.5% applied to the cost of each respective property. We retain ownership
of all personal property and gasoline marketing equipment. The 1999 bank credit
facility limits or caps the proceeds of sale-leasebacks that The Pantry can use
to fund its operations or capital expenditures. Vendor reimbursements primarily
relate to oil company payments to either enter into long term supply agreements
or to upgrade gasoline marketing equipment including canopies, gasoline
dispensers and signs. Under our sale-leaseback program The Pantry received
$10.5 million during the nine months ended June 24, 1999.
In the nine months ended June 24, 1999, we received approximately $16.1
million from sale-leaseback proceeds, asset dispositions, and vendor
reimbursements for capital improvements. Net capital expenditures, excluding
all acquisitions, for the nine months ended June 24, 1999 were $17.5 million.
We anticipate capital expenditures for fiscal 1999 will be approximately $46.0
million, of which $33.6 million has been expended to date.
LONG-TERM DEBT. As of August 2, 1999, our long-term debt consisted
primarily of $200.0 million of senior subordinated notes and $240.7 million
outstanding under the 1999 bank credit facility (as of June 24, 1999, we had
$228.7 outstanding under our 1999 bank credit facility). We are currently in
compliance with our debt covenants.
In January 1999, we restructured and expanded our 1998 bank credit
facility in connection with the Miller acquisition and the redemption of our
senior notes. Our 1999 bank credit facility consists of: (i) a $45.0 million
revolving credit facility available for working capital financing, general
corporate purposes and issuing commercial and standby letters of credit; (ii) a
$79.1 million Tranche A term loan facility and a $159.9 million Tranche B term
loan facility, both of which are borrowed; and (iii) a $50.0 million
acquisition term facility which is available through January 31, 2001 to
finance acquisitions of related businesses. As of August 2, 1999, we had $13.9
million in letters of credit outstanding and $31.1 million available for
borrowing or additional letters of credit under the revolving credit facility
and $38.0 million available for borrowing under the acquisition term facility.
The interest rates we pay on borrowings under the 1999 bank credit
facility are variable and are based, at our option, on either a Eurodollar rate
plus a percentage or a base rate plus a percentage. If we choose the Eurodollar
base rate, we pay 3.0% per year in addition to the Eurodollar base rate for our
revolving credit facility, our acquisition term facility, and our Tranche A
term loan facility. For the Tranche B term loan facility, the Company pays 3.5%
per year in addition to the Eurodollar base rate. If we opt for the base rate,
we pay 1.5% per year in addition to the base rate for our revolving credit
facility, the acquisition term facility, and the Tranche A term loan facility.
For our Tranche B term loan facility, we pay 2.0% per year in addition to the
base rate. On March 2, 1999, we entered into an interest rate swap arrangement
to reduce our exposure to interest rate fluctuations with respect to $45.0
million of borrowings under our Tranche A and Tranche B term loan facilities.
The interest rate swap arrangement fixes the interest rate on these borrowings
at 8.62% for the Tranche A facility and 9.12% for the Tranche B facility for
approximately two years.
On January 31, 2001, all amounts then outstanding under the acquisition
term facility convert into a three year term loan. The Tranche A and
acquisition term facilities mature in January 2004, and the Tranche B term loan
facility matures in January 2006. The Tranche A and Tranche B term loan
facilities require quarterly payments of principal beginning in April 1999,
with annual payments of principal totaling approximately $2.6 million in fiscal
1999, $10.3 million in fiscal 2000, $17.6 million in fiscal 2001, $20.6 million
in fiscal 2002, $23.9 million in fiscal 2003, $45.1 million in fiscal 2004,
$76.0 million in fiscal 2005, and $44.0 million in fiscal 2006. The acquisition
term facility requires quarterly payments of principal beginning in April 2001
in an amount equal to 8.33%, or 8.37% with respect to the installment payable
in January 2004, of the aggregate acquisition term loans outstanding at January
31, 2001.
We are also required to pay down our 1999 bank credit facility as follows
(i) with net proceeds from asset sales, subject to exceptions for
sale-leaseback transactions, (ii) with 50% of the proceeds from the issuance of
any of our equity securities other than sales of our equity securities to our
management employees, (iii) with all of the proceeds from the issuance of new
debt other than debt of the types permitted under our 1999 bank credit facility
and (iv) with 50% of our excess cash flow.
The loans under the 1999 bank credit facility are secured by a first
priority security interest in most of our tangible and intangible assets
including the stock of our subsidiaries, whether we own these assets now or
acquire them in the future. In addition, all of our subsidiaries except PH
Holding and its subsidiaries guaranteed our obligations under the 1999 bank
credit
33
facility and these guarantees are secured by a first priority security interest
in most of the tangible and intangible assets of each of the guarantors.
With the successful completion of our IPO, the 1999 bank credit facility
lenders agreed to amend the facility to (i) permit the use of offering proceeds
to redeem our outstanding preferred stock (and pay related accrued dividends),
(ii) permit us to use up to $50.5 of offering proceeds for acquisitions during
the nine month period after the offering, (iii) permit the repayment of $19.0
million outstanding under the acquisition term facility and maintain the
acquisition term facility at $50.0 million in available borrowings, (iii)
permit the authorization of preferred stock, (iv) amend the debt to pro forma
EBITDA ratio from 4.75 to 1.00 in fiscal 1999 and 2000, 4:25 to 1:00 in fiscal
2001, 4:00 to 1:00 in fiscal 2002, 3:50 to 1:00 in fiscal 2003 and 3:25 to 1:00
in fiscal 2004 and thereafter and (iii) increase our maximum permitted capital
expenditures to $46.0 million for fiscal 1999 and $40.0 million in fiscal 2000
and thereafter.
The 1999 bank credit facility contains covenants restricting or limiting
our ability to, among other things, (i) declare dividends or redeem or
repurchase capital stock, (ii) prepay, redeem or purchase debt, (iii) incur
liens, (iv) make loans and investments, (v) engage in transactions with
affiliates and (vi) engage in mergers, acquisitions or asset sales, except that
(a) we may sell assets with a fair market value that do not exceed $10.0
million, (b) we may engage in sale/leaseback transactions, (c) we may make
acquisitions so long as the consideration we pay does not exceed $50.0 million,
including any assumption of debt, (d) we may transfer properties or assets in
transactions where 80% of the consideration we receive consists of assets we
will use in our business, so long as the fair market value of the assets we
transfer does not exceed $20.0 million in any one year.
Our 1999 bank credit facility also provides that our revenues and assets
related to gaming may not exceed 4% of our total revenues. Also, our 1999 bank
credit facility limits our capital expenditures to $46.0 million in fiscal 1999
and $40.0 million each year thereafter. It also prohibits us from incurring
debt other than under the bank credit facility itself except for (i) up to $3.0
million for contingent obligations, (ii) up to $30.0 million for capital leases
used or debt incurred to acquire, construct or improve our business assets,
(iii) intercompany debt, (iv) $0.7 million of pre-existing debt, (v) up to
$200.0 million of debt under our senior subordinated notes, (vi) up to $50.0
million for other similar subordinated debt we may wish to incur in the future
and (vii) up to $5.0 million in any type of debt.
We also have outstanding $200.0 million of 10 1/4% senior subordinated
notes due 2007. Interest on the senior subordinated notes is due on October 15
and April 15 of each year. The senior subordinated notes are unconditionally
guaranteed, on an unsecured basis, as to the payment of principal, premium, if
any, and interest, jointly and severally, by our subsidiaries, except for PH
Holding and its subsidiaries. The senior subordinated notes contain covenants
that, among other things, restrict our ability and any restricted subsidiary's
ability to (i) pay dividends or make distributions, (ii) issue stock of
subsidiaries, (iii) make investments in non-affiliated entities, (iv)
repurchase stock, (v) incur liens not securing debt permitted under the senior
subordinated notes, (vi) enter into transactions with affiliates, (vii) enter
into sale-leaseback transactions or (viii) engage in mergers or consolidations.
On January 28, 1999, we redeemed all remaining $49.0 million of our senior
notes at 104% of their principal amount plus accrued and unpaid interest. These
payments were financed with proceeds from the 1999 bank credit facility. We
recognized an extraordinary loss, net of taxes, of approximately $3.6 million
resulting from the refinancing of our debt. This loss included the payment of
the call premium, fees paid in connection with the replacement of our 1998 bank
credit facility and the write-off of deferred financing costs.
CASH FLOWS FROM FINANCING ACTIVITIES. During the nine months ended June
24, 1999, we financed (i) our fiscal 1999 acquisitions, (iii) the redemption of
$49.0 million of senior notes, (iii) the redemption of $17.5 million of
preferred stock, (iv) the payment of $6.5 million in preferred dividends and
(v) the related fees and expenses with (a) proceeds from our 1999 bank credit
facility, (b) proceeds from our IPO, (c) cash on hand and (d) the net proceeds
of approximately $1.2 million from the sale of common stock to employees under
our stock subscription plan.
CASH REQUIREMENTS. We believe that cash on hand, cash flow anticipated to
be generated from operations, short-term borrowing for seasonal working capital
needs and permitted borrowings under our credit facilities will be sufficient
to enable us to satisfy anticipated cash requirements for operating, investing
and financing activities, including debt service, for the next twelve to
sixteen months. To continue our acquisition strategy after that time, we will
have to obtain additional debt or equity financing. There can be no assurance
that such financing will be available on favorable terms, or at all.
SHAREHOLDERS' EQUITY. As of June 24, 1999, our shareholders' equity
totaled $96.7 million. The $57.4 million increase in shareholders' equity is
attributed to $73.0 million in net proceeds from our IPO and our net income of
$2.7 and is partially offset by the redemption of $17.5 million in preferred
stock.
34
Additional paid-in-capital is impacted by the accounting treatment applied
to the 1987 leveraged buyout of the outstanding common stock of our 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 by
our former shareholders.
The accumulated deficit as of June 24, 1999 includes the cumulative effect
of the accrued dividends on previously outstanding preferred stock of $5.0
million, the accrued dividends on the series B preferred stock of $5.8 million,
the net cost of equity transactions and 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
We are required by federal and state regulations to maintain evidence of
financial responsibility for taking corrective action and compensating third
parties in the event of a release from our underground storage tank systems. In
order to comply with this requirement, as of August 2, 1999, we maintain surety
bonds in the aggregate amount of approximately $900,000 in favor of state
environmental enforcement agencies in the states of North Carolina, South
Carolina and Virginia and a letter of credit in the amount of approximately
$1.1 million issued by a commercial bank in favor of state environmental
enforcement agencies in the states of Florida, Tennessee, Indiana and Kentucky
and rely on reimbursements from applicable state trust funds. In Florida, we
also meet such financial responsibility requirements through private commercial
liability insurance.
All states in which we operate or have operated underground storage tank
systems have established trust funds for the sharing, recovering, and
reimbursing of cleanup costs and liabilities incurred as a result of releases
from underground storage tank systems. These trust funds, which essentially
provide insurance coverage for the cleanup of environmental damages caused by
the operation of underground storage tank systems, are funded by an underground
storage tank registration fee and a tax on the wholesale purchase of motor
fuels within each state. We have paid underground storage tank registration
fees and gasoline taxes to each state where we operate to participate in these
programs and have filed claims and received reimbursement in North Carolina,
South Carolina, Kentucky, Indiana, Georgia, Florida and Tennessee. The coverage
afforded by each state fund varies but generally provides from $150,000 to $1.0
million per site or occurrence for the cleanup of environmental contamination,
and most provide coverage for third party liabilities.
Costs for which we do not receive reimbursement include but are not
limited to the per-site deductible; costs incurred in connection with releases
occurring or reported to trust funds prior to their inception; removal and
disposal of underground storage tank systems; and costs incurred in connection
with sites otherwise ineligible for reimbursement from the trust funds. The
trust funds require us to pay deductibles ranging from $10,000 to $100,000 per
occurrence depending on the upgrade status of our underground storage tank
system, the date the release is discovered/reported and the type of cost for
which reimbursement is sought. The Florida trust fund will not cover releases
first reported after December 31, 1998. We meet Florida financial
responsibility requirements for remediation and third party claims arising out
of releases reported after December 31, 1998 through a combination of private
insurance and a letter credit (described above). In addition to up to $4.3
million that we may expend for remediation, we estimate that up to $12.7
million may be expended for remediation on our behalf by state trust funds
established in our operating areas and other responsible third parties
including insurers. To the extent such third parties do not pay for remediation
as we anticipate, we will be obligated to make such payments, which could
materially adversely affect our financial condition and results of operations.
Reimbursement from state trust funds will be dependent upon the maintenance and
continued solvency of the various funds.
Environmental reserves of $18.0 million as of June 24, 1999 represent
estimates for future expenditures for remediation, tank removal and litigation
associated with 207 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 other factors. Although we can make
no assurances, we anticipate that we will be reimbursed for a portion of these
expenditures from state insurance funds and private insurance. As of June 24,
1999, amounts which are probable of reimbursement (based on our experience)
from those sources total $13.8 million and are recorded as long-term
environmental receivables. These receivables are expected to be collected
within a period of twelve to eighteen months after the reimbursement claim has
been submitted. In Florida, remediation of such contamination reported before
January 1, 1999 will be performed by the state and we expect that substantially
all of the costs will be paid by the state trust fund. We will perform
remediation in other states through independent contractor firms that we have
engaged. We do have locations where the applicable trust fund does not cover a
deductible or has a co-pay which may be less than the cost of such remediation.
Although we are not aware of releases or
35
contamination at other locations where we currently operate or have operated
stores, any such releases or contamination could require substantial
remediation expenditures, some or all of which may not be eligible for
reimbursement from state trust funds.
We have reserved $500,000 to cover third party claims for environmental
conditions at adjacent real properties that are not covered by state trust
funds or by private insurance. This reserve is based on management's best
estimate of losses that may be incurred over the next several years based on,
among other things, the average remediation cost for contaminated sites and our
historical claims experience.
Several of our locations identified as contaminated are being cleaned up
by third parties who have assumed responsibility for such clean up matters.
Additionally, we are awaiting closure notices on several other locations which
will release us from responsibility related to known contamination at those
sites. These sites continue to be included in our environmental reserve until a
final closure notice is received.
YEAR 2000 INITIATIVE
The following discussion about the implementation of our Year 2000
program, the costs expected to be associated with the program and the results
we expect to achieve constitute forward-looking information. As noted below,
there are many uncertainties involved with the Year 2000 issue, including the
extent to which we will be able to adequately provide for contingencies that
may arise, as well as the broader scope of the Year 2000 issue as it may affect
third parties and our trading partners. Accordingly, the costs and results of
our Year 2000 program and the extent of any impact on our results of operations
could vary materially from that stated herein.
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year in respective date
fields. We use a combination of hardware devices run by computer programs at
our support centers and retail locations to process transactions and other data
which are essential to our business operations. The Year 2000 issue and its
impact on data integrity could result in system interruptions, miscalculations
or failures causing disruption of operations.
We completed 90% of our assessment phase of Year 2000 vulnerability early
in fiscal 1998, after a formal third-party assessment was completed in November
1997. Assessment activities found that 30% of our systems would require
remediation and 20% of our systems were planned for replacement or would be
best served if replaced. Based on this third-party assessment, internal
assessment and project results as of August 2, 1999, we believe all system
modifications, hardware and software replacements or upgrades and related
testing will be completed by September 1999. In order to meet this date, we
have engaged outside consultants and contractors to assist in the overall
project and remediation effort.
We have tested, modified or replaced, or plan to modify or replace our
existing systems and related hardware which did not properly interpret dates
beyond December 31, 1999 to ensure Year 2000 compliance. We have assessed
software and technology infrastructures, embedded systems such as point-of-sale
systems, fuel consoles and office equipment, and building facilities such as
telephone-related systems, HVAC and security. Our testing methodology includes,
but is not limited to, rolling dates forward to critical dates in the future
and simulating transactions, inclusion of several critical date scenarios and
utilizing software programs which test for compliance on equipment. To date 85%
of our applications requiring remediation have been tested and implemented and
80% of the systems being replaced have been implemented and are in use.
We have initiated communications with our significant vendors, suppliers
and financial institutions to determine the extent to which we are vulnerable
to those third parties' failure to be Year 2000 compliant. To date, 85% of
those surveyed have responded. The replies indicate that they will be Year 2000
compliant before the end of the calendar year. Specifically, our grocery
wholesaler, McLane, has stated in their "Year 2000 Readiness Disclosure" that
they are "committed to identifying and correcting all business critical Year
2000 problems by June 1, 1999." Based on these communications and presently
available information, we do not anticipate any material effects related to
vendor, supplier, third-party credit card processing company or financial
institution compliance. Additionally, due to the nature of our business, Year
2000 compliance with respect to our customers is not relevant. Noncompliance by
vendors, suppliers, credit card processing companies and financial institutions
utilized by us could result in a material adverse effect on our financial
condition and results of operations. The Pantry will continue to update its
assessment of the readiness of key vendors, suppliers and financial
institutions until they are compliant. If during this ongoing assessment, we
determine a third party's level of compliance will have an adverse effect on
The Pantry, we will seek an alternate third party to provide similar products
or services. We believe that the worst case scenario in the event of a Year
2000 related failure would be delays in the receipt of payment from credit card
processing companies and a return to manual accounting processing at our
individual stores.
36
In addition, we have reviewed the assets acquired since our original
assessment for Year 2000 compliance. This includes the acquisition of other
companies, as well as procurement and service arrangements. We believe that our
recently acquired assets will be Year 2000 compliant by September 1999. The
assessments have been conducted through the due diligence process, vendor
compliance communications and requests for disclosure statements as part of
contract negotiations. In general, the systems and suppliers of acquired
companies are the same as those used in our existing operations.
STATE OF READINESS AS OF AUGUST 2, 1999
ESTIMATED ESTIMATED
PERCENT COMPLETION
PHASE COMPLETE DATE(A)
- ---------------------------------- ----------- ----------------
Awareness .................... 95% December, 1999
Assessment ................... 99% August, 1999
Remediation .................. 85% September, 1999
Replacement .................. 80% September, 1999
Testing ...................... 75% October, 1999
Contingency Planning ......... 5% November, 1999
- ---------
(a) Indicates month when work should be substantially completed. We will
continue to reevaluate awareness, assess acquired assets and update
contingency plans as needed.
We do not believe either the direct or indirect costs of Year 2000
compliance will be material to our operations or operating results. Our
expenditures, which will be funded through operating cash flow, consist
primarily of internal costs and expenses associated with third-party
contractors. To date, our spending with contractors and consultants has been
approximately $200,000. We anticipate spending for the remainder of the fiscal
year to be approximately $200,000.
While we believe our planning efforts are adequate to address our Year
2000 concerns, there can be no assurances that the systems of other companies
on which our systems and operations rely will be converted on a timely basis
and will not have a material impact on us. We are in the process of formulating
a contingency plan to address possible noncompliance by our vendors, suppliers,
financial institutions and credit card processors. These plans will be drafted
and in place by September 1999, leaving the fourth calendar quarter to address
low priority and low impact issues.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. Statement of Financial Accounting Standards No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. In June 1999, the Statement of Financial
Accounting Standards No. 133 was amended to defer the effective date to the
first fiscal quarter of fiscal 2001. As of June 24, 1999, we have not
determined the effect of Statement of Financial Accounting Standards No. 133 on
our consolidated financial statements, however, we do not believe adoption of
this accounting standard will have a material impact on our financial
condition.
INFLATION
General inflation has not had a significant impact on The Pantry over the
past three years. As reported by the Bureau of Labor Statistics for the nine
months ended June 24, 1999, the consumer price index increased approximately
1.6%. For the same period, the producer price index, a measure of wholesale
cost inflation, decreased approximately one percent. We do not expect general
inflation to have a significant impact on our results of operations or
financial condition in the foreseeable future.
As reported by the Bureau of Labor Statistics for the nine months ended
June 24, 1999, the consumer price index for the category labeled "cigarettes"
increased approximately 21.9%. For the same period, the producer price index
for the category labeled "cigarettes" increased approximately 30.9%. On
November 23, 1998, major cigarette manufacturers that supply The Pantry
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 incentives. Since December 24, 1998,
these increases have been passed on in higher retail prices throughout the
chain. Because we expect to pass cigarette cost
37
increases on to our customers through higher retail prices, these cost
increases are expected to reduce our 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 our customers over the long term and,
therefore, does not expect cigarette inflation to have a significant impact on
our results of operations or financial condition in the foreseeable future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES. We are exposed to market risks inherent in our
financial instruments. These instruments arise from transactions entered into
in the normal course of business and, in some cases, relate to our acquisitions
of related businesses. We are subject to interest rate risk on our existing
long-term debt and any future financing requirements. Our fixed rate debt
consists primarily of outstanding balances on our senior subordinated notes and
our variable rate debt relates to borrowings under the 1999 bank credit
facility.
On March 2, 1999, we entered into an interest rate swap arrangement with
respect to $45.0 million of borrowings under our outstanding Tranche A and
Tranche B term loan facilities. The interest rate swap arrangement fixes the
interest rate on these borrowings at 8.62% for the Tranche A facility and 9.12%
for the Tranche B facility for approximately two years.
The following tables presents the future principal cash flows and
weighted- average interest rates expected on our existing long-term debt
instruments. Fair values have been determined based on quoted market prices as
of August 2, 1999.
EXPECTED MATURITY DATE
(AS OF JUNE 24, 1999)
FISCAL FISCAL FISCAL FISCAL FISCAL FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
----------- ------------ ------------ ------------ ------------ ------------ ------------- -----------
Long-term debt ......... $ 2,896 $ 10,686 $ 17,939 $ 20,943 $ 37,931 $ 340,306 $ 430,701 $428,701
Weighted average
Interest rate ......... 9.18% 9.20% 9.25% 9.31% 9.38% 9.46% 9.17%
QUALITATIVE DISCLOSURES. Our primary exposure relates to: (i) interest
rate risk on long-term and short-term borrowings; (ii) our ability to pay or
refinance long-term borrowings at maturity at market rates; (iii) the impact of
interest rate movements on our ability to meet interest expense requirements
and exceed financial covenants; and (iv) the impact of interest rate movements
on our ability to obtain adequate financing to fund future acquisitions.
We manage interest rate risk on our outstanding long-term and short-term
debt through our use of fixed and variable rate debt. The interest rate swap
mentioned above will reduce our exposure to short-term interest rate
fluctuations. While we cannot predict or manage our ability to refinance
existing debt or the impact interest rate movements will have on our existing
debt, management evaluates our financial position on an ongoing basis.
PART II -- OTHER INFORMATION.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On June 8, 1999, pursuant to an effective Registration Statement on Form
S-1 (File No. 333-74221, declared effective on June 8, 1999), the Company
offered and sold 6,250,000 shares of its common stock, $0.01 par value per
share, in an initial public offering. The aggregate offering price was
$81,250,000 ($13.00 per share) and the Company received $75.6 million in net
proceeds (net of $5.7 million in underwriting discounts), before expenses. The
net proceeds were used: (i) to repay $19.0 million in indebtedness under our
1999 bank credit facility; (ii) to redeem $17.5 million in outstanding
preferred stock; and (iii) to pay accrued dividends on the preferred stock of
$6.5 million. Of the remaining $32.6 million, $30.2 million was used to fund
acquisitions closed subsequent to the fiscal quarter ended June 24, 1999 and
$2.4 million used to pay fees and expenses associated with the IPO. The
lead underwriters of the IPO were Merrill Lynch & Co., Banc of America
Securities LLC and Goldman, Sachs & Co.
38
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 1, 1999, stockholders holding a majority of the outstanding common
stock of the Company (11,711,049 shares, as adjusted for the Company's June 4,
1999 stock split) and stockholders holding all of the outstanding preferred
stock of the Company (17,500 shares), executed a written consent authorizing
(i) the amendment of the Company's certificate of incorporation, (ii) the
amendment of the Company's bylaws, and (iii) the adoption of the Company's 1999
Stock Option Plan. A form of the Company's Amended and Restated Certificate of
Incorporation, the Company's Amended and Restated Bylaws and the Company's 1999
Stock Option Plan were each filed with the Commission as an exhibit to the
Company's Registration Statement on Form S-1.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.33 First Amendment to Amended Credit Agreement dated as of April 30, 1999 among
the Company, the Lenders listed therein, First Union National Bank, Canadian Imperial Bank
of Commerce and NationsBank, N.A.
10.34 Amendment No. 1 to Employment Agreement between the Company and
Peter J. Sodini.
10.35 Amendment No. 1 to the Amended and Restated Stockholders' Agreement dated
as of June 1, 1999 among the Company, FS Equity Partners III, L.P., FS Equity Partners IV,
L.P., FS Equity Partners International, L.P., Chase Manhattan Capital, L.P., CB Capital
Investors, L.P., Baseball Partners and Peter J. Sodini.
10.36 Amendment No. 1 to the Amended and Restated Registration Rights Agreement
dated as of June 1, 1999 among the Company, FS Equity Partners III, L.P., FS Equity
Partners IV, L.P., FS Equity Partners International, L.P., Chase Manhattan Capital, L.P., CB
Capital Investors, L.P., Baseball Partners and Peter J. Sodini.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
(1) On August 6, 1999, The Pantry filed a Current Report on Form 8-K announcing its
acquisition of 100% of the outstanding stock of R&H Maxxon, Inc.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PANTRY, INC.
Date: August 9, 1999
By: /s/ WILLIAM T. FLYG
-------------------------------------
WILLIAM T. FLYG
SENIOR VICE PRESIDENT FINANCE AND SECRETARY
(AUTHORIZED OFFICER AND PRINCIPAL FINANCIAL OFFICER)
40
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
------------- -------------------------
10.33 First Amendment to Amended Credit Agreement.
10.34 Amendment No. 1 to Employment Agreement between the Company and
Peter J. Sodini.
10.35 Amendment No. 1. to the Amended and Restated Stockholders' Agreement.
10.36 Amendment No. 1. to the Amended and Restated Registration Rights Agreement.
27.1 Financial Data Schedule.
41