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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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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 28, 2001
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
27331-1410
(Address of principal executive offices)
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Registrant's telephone number, including area code: (919) 774-6700
----------------
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 18,114,737 SHARES
(Class) (Outstanding at August 6, 2001)
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THE PANTRY, INC.
FORM 10-Q
JUNE 28, 2001
TABLE OF CONTENTS
Page
----
Part I--Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets............................................. 3
Consolidated Statements of Operations................................... 4
Consolidated Statements of Cash Flows................................... 5
Notes to Consolidated Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 26
Part II--Other Information
Item 6. Exhibits and Reports on Form 8-K................................. 28
2
PART I--FINANCIAL INFORMATION.
Item 1. Financial Statements.
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 28, June 28,
2000 2001
------------- ----------
(Audited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 53,354 $ 48,605
Receivables (net of allowances for doubtful
accounts of $1,205 at September 28, 2000 and
$352 at June 28, 2001) ........................... 23,601 26,633
Inventories (Note 3)............................... 87,962 90,576
Prepaid expenses................................... 3,131 5,060
Property held for sale............................. 2,324 467
Deferred income taxes.............................. 2,070 4,044
-------- --------
Total current assets............................... 172,442 175,385
-------- --------
Property and equipment, net......................... 466,967 462,427
-------- --------
Other assets:
Goodwill (net of accumulated amortization of
$24,352 at September 28, 2000 and $31,645 at
June 28, 2001).................................... 250,977 282,155
Deferred financing cost (net of accumulated
amortization of $4,513 at September 28, 2000 and
$6,061 at June 28, 2001).......................... 12,317 10,804
Environmental receivables (Note 4)................. 12,819 13,170
Other noncurrent assets............................ 17,289 15,401
-------- --------
Total other assets................................. 293,402 321,530
-------- --------
Total assets........................................ $932,811 $959,342
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 5)...... $ 20,649 $ 39,498
Current maturities of capital lease obligations.... 1,151 1,151
Accounts payable................................... 104,373 106,107
Accrued interest................................... 12,050 6,329
Accrued compensation and related taxes............. 13,889 13,500
Income tax payable................................. 1,250 2,397
Other accrued taxes................................ 13,396 13,984
Accrued insurance.................................. 5,270 4,136
Other accrued liabilities.......................... 10,551 17,489
-------- --------
Total current liabilities.......................... 182,579 204,591
-------- --------
Long-term debt (Note 5)............................. 506,974 514,351
-------- --------
Other liabilities:
Environmental reserves (Note 4).................... 14,066 13,576
Deferred income taxes.............................. 34,508 32,764
Deferred revenue................................... 54,802 60,351
Capital lease obligations.......................... 12,648 11,936
Other noncurrent liabilities....................... 9,254 5,589
-------- --------
Total other liabilities............................ 125,278 124,216
-------- --------
Commitments and contingencies (Notes 4 and 5)
Shareholders' equity (Notes 6 and 9):
Common stock, $.01 par value, 50,000,000 shares
authorized; 18,111,474 issued and outstanding at
September 28, 2000 and 18,114,737 at June 28,
2001 ............................................. 182 183
Additional paid-in capital......................... 128,018 128,042
Shareholder loans.................................. (912) (862)
Accumulated other comprehensive deficit (net of
deferred taxes of $0 at September 28, 2000 and
$2,110 at June 28, 2001).......................... -- (2,505)
Accumulated deficit................................ (9,308) ( 8,674)
-------- --------
Total shareholders' equity......................... 117,980 116,184
-------- --------
Total liabilities and shareholders' equity.......... $932,811 $959,342
======== ========
See Notes to Consolidated Financial Statements.
3
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data)
Three Months
Ended Nine Months Ended
------------------ --------------------
June 29, June 28, June 29, June 28,
2000 2001 2000 2001
-------- -------- --------- ---------
(13 (13 (39 (39
weeks) weeks) weeks) weeks)
Revenues:
Merchandise sales.................. $238,556 $256,254 $ 663,208 $ 714,464
Gasoline sales..................... 397,174 446,508 1,082,997 1,247,090
Commissions........................ 7,205 5,195 20,740 16,349
-------- -------- --------- ---------
Total revenues................... 642,935 707,957 1,766,945 1,977,903
-------- -------- --------- ---------
Cost of sales:
Merchandise........................ 160,791 171,558 444,667 473,349
Gasoline........................... 357,978 407,603 985,331 1,140,553
-------- -------- --------- ---------
Total cost of sales.............. 518,769 579,161 1,429,998 1,613,902
-------- -------- --------- ---------
Gross profit......................... 124,166 128,796 336,947 364,001
-------- -------- --------- ---------
Operating expenses:
Operating, general and
administrative expenses........... 85,877 92,473 247,700 270,921
Restructuring and other charges
(Note 7).......................... -- 254 -- 3,724
Depreciation and amortization...... 14,347 15,958 41,642 46,893
-------- -------- --------- ---------
Total operating expenses......... 100,224 108,685 289,342 321,538
-------- -------- --------- ---------
Income from operations............... 23,942 20,111 47,605 42,463
-------- -------- --------- ---------
Other income (expense):
Interest expense (Note 8).......... (13,630) (13,910) (38,737) (42,579)
Miscellaneous...................... 734 383 1,727 1,423
-------- -------- --------- ---------
Total other expense.............. (12,896) (13,527) (37,010) (41,156)
-------- -------- --------- ---------
Income before income taxes........... 11,046 6,584 10,595 1,307
Income tax expense................... (4,860) (2,968) (4,662) (673)
-------- -------- --------- ---------
Net income........................... $ 6,186 $ 3,616 $ 5,933 $ 634
======== ======== ========= =========
Earnings per share (Note 9):
Basic.............................. $ 0.34 $ 0.20 $ 0.33 $ 0.04
Diluted............................ $ 0.33 $ 0.20 $ 0.31 $ 0.03
See Notes to Consolidated Financial Statements.
4
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
---------------------
June 29, June 28,
2000 2001
---------- ----------
(39 weeks) (39 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 5,933 $ 634
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 41,642 46,893
Provision for deferred income taxes................... 7,413 (2,068)
Loss on sale of property and equipment................ 2,186 334
Reserves for environmental expenses................... (1,220) (490)
Provision for closed stores........................... 484 1,029
Amortization of cumulative transition adjustment...... -- 42
Changes in operating assets and liabilities, net of
effects of acquisitions:
Receivables........................................... (8,128) (3,372)
Inventories........................................... (3,627) 463
Prepaid expenses...................................... 368 (1,605)
Other noncurrent assets............................... 417 1,918
Accounts payable...................................... 19,726 1,734
Other current liabilities and accrued expenses........ (13,760) (2,769)
Other noncurrent liabilities.......................... 9,588 845
-------- -------
Net cash provided by operating activities............... 61,022 43,588
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property held for sale................... (1,193) (470)
Additions to property and equipment................... (41,110) (24,040)
Proceeds from sale of property held for sale.......... 8,685 3,504
Proceeds from sale of property and equipment.......... 6,340 3,261
Acquisitions of related businesses, net of cash
acquired............................................. (85,962) (56,122)
-------- -------
Net cash used in investing activities................... (113,240) (73,867)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments under capital leases............. (851) (712)
Principal repayments of long-term debt................ (67,112) (13,827)
Proceeds from issuance of long-term debt.............. 152,000 40,053
Repayments of shareholder loans....................... -- 50
Net proceeds from equity issues....................... (213) --
Proceeds from exercise of stock options............... -- 25
Other financing costs................................. (2,038) (59)
-------- -------
Net cash provided by financing activities............... 81,786 25,530
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 29,568 ( 4,749)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........ 31,157 53,354
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. $ 60,725 $48,605
======== =======
Cash paid during the period:
Interest.............................................. $ 41,669 $46,973
======== =======
Taxes................................................. $ 13,453 $ 1,270
======== =======
See Notes to Consolidated Financial Statements.
5
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND RECENT DEVELOPMENTS
Unaudited Consolidated Financial Statements
The accompanying consolidated financial statements include the accounts of
The Pantry, Inc. and its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation. On September
28, 2000 the following direct or indirect subsidiaries of The Pantry were
eliminated by being liquidated or being merged into The Pantry: (i) Pantry
Properties, Inc.; (ii) TC Capital Management, Inc.; (iii) PH Holding
Corporation; (iv) Sandhills, Inc.; and (v) Global Communications, Inc. On June
28, 2001, we merged Lil' Champ Food Stores, Inc. into The Pantry. As a result
of the elimination of these subsidiaries, the operations and property formerly
carried on and held by such subsidiaries are now carried on and held directly
by The Pantry.
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 28, 2001 and for the three and nine months ended June 28, 2001 and June
29, 2000 are unaudited. References herein to "The Pantry" or "the Company"
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
our Annual Report on Form 10-K for the fiscal year ended September 28, 2000
and our quarterly reports on Form 10-Q for the quarters ended December 28,
2000 and March 29, 2001.
Our results of operations for the three and nine months ended June 28, 2001
and June 29, 2000 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 30, 1999. These acquisitions have been
accounted for under the purchase method. See "Note 2--Business Acquisitions."
Furthermore, the convenience store industry in our 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. We operate on a 52-53 week fiscal
year ending on the last Thursday in September. Our 2001 fiscal year ends on
September 27, 2001 and is a 52-week year.
The Pantry
As of June 28, 2001, we operated 1,327 convenience stores located in
Florida (507), North Carolina (342), South Carolina (254), Georgia (57),
Mississippi (56), Kentucky (42), Virginia (31), Indiana (16), Tennessee (14)
and Louisiana (8). Our 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, money orders and other ancillary services. In our
Florida, Georgia, Kentucky, Virginia, Louisiana and Indiana stores, we also
sell lottery products. Self-service gasoline is sold at 1,286 locations, 1,008
of which sell gasoline under brand names including Amoco(R), British
Petroleum(R), Chevron(R), Citgo(R), Mobil(R), Exxon(R), Shell(R), and
Texaco(R).
6
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2--BUSINESS ACQUISITIONS
Fiscal 2001 Acquisitions:
During the nine months ended June 28, 2001, we acquired the businesses
described below (the "2001 acquisitions"). These acquisitions were accounted
for by the purchase method of accounting:
Date Acquired Trade Name Locations Stores
- ------------------------------------ ---------- ------------------------------------ ------
December 21, 2000................... Fast Lane Mississippi and Louisiana 26
January 25, 2001.................... East Coast North Carolina and Virginia 11
Mississippi, South Carolina and
Others (less than five stores)...... Various North Carolina 8
---
Total............................................................................. 45
Fiscal 2000 Acquisitions:
During fiscal 2000, we acquired the businesses described below (the "2000
acquisitions"). These acquisitions were accounted for by the purchase method
of accounting:
Date Acquired Trade Name Locations Stores
- --------------------------------- -------------- ------------------------------------ ------
September 14, 2000............... Food Mart Mississippi 18
July 3, 2000..................... Mini Mart South Carolina 14
June 29, 2000.................... Big K Mississippi 19
April 27, 2000................... Market Express South Carolina 5
January 27, 2000................. On-The-Way North Carolina and Southern Virginia 12
November 11, 1999................ Kangaroo Georgia 49
November 4, 1999................. Cel Oil South Carolina 7
October 7, 1999.................. Wicker Mart North Carolina 7
Others (less than five stores)... Various Florida, North Carolina, Virginia,
Mississippi and South Carolina 12
---
Total............................................................................... 143
The purchase price allocations for many of these acquisitions are
preliminary estimates, based on available information and certain assumptions
management believes are reasonable. Accordingly, such purchase price
allocations are subject to finalization. Goodwill associated with the 2000
acquisitions and the 2001 acquisitions is being amortized over 30 years using
the straight-line method.
7
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Purchase prices for the 2001 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....................................................... $ 11
Inventories....................................................... 3,077
Prepaid expenses.................................................. 323
Property held for sale............................................ 1,397
Property and equipment............................................ 14,049
Other noncurrent assets........................................... 550
-------
Total assets.................................................... 19,407
-------
Liabilities Assumed:
Other noncurrent liabilities...................................... 963
-------
Total liabilities............................................... 963
-------
Net tangible assets acquired...................................... 18,444
Goodwill........................................................ 37,678
-------
Total consideration paid, including direct costs, net of cash
acquired..................................................... $56,122
=======
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, except per share data):
Nine Months Ended
---------------------
June 29, June 28,
2000 2001
---------- ----------
Total revenues......................................... $1,943,467 $2,009,142
Net income............................................. 6,192 825
Earnings per share:
Basic................................................ $ 0.34 $ 0.05
========== ==========
Diluted.............................................. $ 0.33 $ 0.04
========== ==========
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 2000 or fiscal 2001,
or of future operations of the combined companies.
8
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3--INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out method, except for gasoline inventories for which
cost is determined using the weighted average cost method. Inventories
consisted of the following (amounts in thousands):
September 28, June 28,
2000 2001
------------- --------
Inventories at FIFO cost:
Merchandise.......................................... $ 70,461 $ 77,841
Gasoline............................................. 28,806 25,992
-------- --------
99,267 103,833
Less adjustment to LIFO cost:
Merchandise.......................................... (11,305) (13,257)
-------- --------
Inventories at LIFO cost............................. $ 87,962 $ 90,576
======== ========
NOTE 4--ENVIRONMENTAL LIABILITIES AND OTHER CONTINGENCIES
As of June 28, 2001, we were contingently liable for outstanding letters of
credit in the amount of $15.5 million primarily related to several self-
insured programs, regulatory requirements, and vendor contract terms. The
letters of credit are not to be drawn against unless we default on the timely
payment of related liabilities.
We are 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, we believe the ultimate outcome of these actions will not have a
material effect on the consolidated financial statements.
Environmental Liabilities and Contingencies
We are subject to various federal, state and local environmental laws. We
make financial expenditures in order to comply with regulations governing
underground storage tanks adopted by federal, state, and local regulatory
agencies. In particular, at the federal level, the Resource Conservation and
Recovery Act of 1976, as amended, requires the EPA to establish a
comprehensive regulatory program for the detection, prevention and cleanup of
leaking underground storage tanks.
Federal and state regulations require us to provide and maintain evidence
that we are taking financial responsibility for corrective action and
compensating third parties in the event of a release from our underground
storage tank systems. In order to comply with the applicable requirements, we
maintain surety bonds in the aggregate amount of approximately $2.0 million in
favor of state environmental agencies in the states of North Carolina, South
Carolina, Georgia, Virginia, Tennessee, Indiana, Kentucky and Louisiana. We
also rely upon the reimbursement provisions of applicable state trust funds.
In Florida, we meet our financial responsibility requirements by state trust
fund coverage through December 31, 1998, and meet such requirements thereafter
through private commercial liability insurance. In Georgia, we meet our
financial responsibility requirements by state trust fund coverage through
December 29, 1999, and meet such requirements thereafter through private
commercial liability insurance and a surety bond. In Mississippi, we meet such
financial responsibility requirements by state trust fund coverage.
Regulations enacted by the EPA in 1988 established requirements for:
. installing underground storage tank systems;
. upgrading underground storage tank systems;
9
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. taking corrective action in response to releases;
. closing underground storage tank systems;
. keeping appropriate records; and
. maintaining evidence of financial responsibility for taking corrective
action and compensating third parties for bodily injury and property
damage resulting from releases.
These regulations permit states to develop, administer and enforce their
own regulatory programs, incorporating requirements which are at least as
stringent as the federal standards. The Florida rules for 1998 upgrades are
more stringent than the 1988 EPA regulations. We believe our facilities in
Florida meet or exceed such rules. We believe all company-owned underground
storage tank systems are in material compliance with these 1998 EPA
regulations and all applicable state environmental regulations.
State Trust Funds. All states in which we operate or have 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 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 trust fund programs. We have filed
claims and received reimbursement in North Carolina, South Carolina, Kentucky,
Indiana, Georgia, Florida and Tennessee. We also have filed claims and
received credit against our trust fund deductibles in Virginia. The coverage
afforded by each state fund varies but generally provides up 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:
. 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 generally require us to pay deductibles ranging from $5,000
to $150,000 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 obtained private
coverage for remediation and third party claims arising out of releases
reported after December 31, 1998. We believe that this coverage exceeds
federal and Florida financial responsibility regulations. In Georgia, we opted
not to participate in the state trust fund effective December 30, 1999. We
obtained private coverage for remediation and third party claims arising out
of releases reported after December 29, 1999. We believe that this coverage
exceeds federal and Georgia financial responsibility regulations. During the
next five years, we may spend up to $406.0 thousand for remediation. In
addition, we estimate that state trust funds established in our operating
areas or other responsible third parties (including insurers) may spend up to
$13.2 million on our behalf. To the extent those third parties do not pay for
remediation as we anticipate, we will be obligated to make such payments. This
could materially adversely affect our financial condition and results of
operations. Reimbursements from state trust funds will be dependent upon the
continued maintenance and continued solvency of the various funds.
Several of the locations identified as contaminated are being remediated by
third parties who have indemnified us as to responsibility for cleanup
matters. Additionally, we are awaiting closure notices on several other
locations that 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.
10
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--LONG-TERM DEBT
At September 28, 2000 and June 28, 2001, long-term debt consisted of the
following (amounts in thousands):
September 28, June 28,
2000 2001
------------- --------
Senior subordinated notes payable; due October 15,
2007; interest payable semi-
annually at 10.25%.................................... $200,000 $200,000
Tranche A term loan; interest payable monthly at LIBOR
plus 3.0%;
principal due in quarterly installments through
January 31, 2004...................................... 61,906 50,406
Tranche B term loan; interest payable monthly at LIBOR
plus 3.5%;
principal due in quarterly installments through
January 31, 2006...................................... 179,973 178,552
Tranche C term loan; interest payable monthly at LIBOR
plus 3.75%;
principal due in quarterly installments through July
31, 2006.............................................. 74,625 74,063
Acquisition facility; interest payable monthly at LIBOR
plus 3.0%; principal due in quarterly installments
beginning July 30, 2001 through January 31, 2004...... 10,000 50,000
Notes payable to McLane Company, Inc.; zero (0.0%)
interest, with principal due in annual installments
through February 26, 2003............................. 889 592
Other notes payable; various interest rates and
maturity dates........................................ 230 236
-------- --------
Total long-term debt................................... 527,623 553,849
Less--current maturities............................... (20,649) (39,498)
-------- --------
Long-term debt, net of current maturities.............. $506,974 $514,351
======== ========
Our 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 $50.0 million
acquisition facility with outstanding borrowings of $50.0 million, and (iii)
term loan facilities with outstanding borrowings of $303.0 million. As of June
28, 2001, total outstanding borrowings under our bank credit facility, as
amended, were $353.0 million. In addition, as of June 28, 2001, we had $15.5
million in outstanding letters of credit. The LIBOR associated with our bank
credit facility resets monthly and as of June 28, 2001, was 4.06%.
The remaining annual maturities of notes payable are as follows (amounts in
thousands):
Year Ended September:
---------------------
2001............................... $ 9,675
2002............................... 40,000
2003............................... 43,254
2004............................... 52,912
2005............................... 88,654
Thereafter......................... 319,354
--------
$553,849
========
As of June 28, 2001, we were in compliance with all covenants and
restrictions relating to all outstanding borrowings and substantially all of
our net assets are restricted as to payment of dividends and other
distributions.
11
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER COMPREHENSIVE INCOME
On September 29, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments
and Hedging Activities, which requires that all derivatives be recorded on the
balance sheet at fair value. Upon adoption on September 29, 2000, the
cumulative transition adjustment was approximately $364.0 thousand (net of
taxes of $386.0 thousand).
The Company enters into interest rate swap and collar agreements to modify
the interest characteristics of its outstanding long-term debt and has
designated each qualifying instrument as a cash flow hedge. The Company
formally documents its hedge relationships, including identifying the hedge
instruments and hedged items, as well as its risk management objectives and
strategies for entering into the hedge transaction. At hedge inception, and at
least quarterly thereafter, the Company assesses whether derivatives used to
hedge transactions are highly effective in offsetting changes in the cash flow
of the hedged item. The Company measures effectiveness by the ability of the
interest rate swaps to offset cash flows associated with changes in the
variable LIBOR rate associated with its term loan facilities. To the extent
the instruments are considered to be effective, changes in fair value are
recorded as a component of other comprehensive income (loss). To the extent
the instruments are considered ineffective, any changes in fair value relating
to the ineffective portion are immediately recognized in earnings (interest
expense). When it is determined that a derivative ceases to be a highly
effective hedge, the Company discontinues hedge accounting, and any gains or
losses on the derivative instrument are recognized in earnings. Interest
expense of $439.0 thousand was recorded in the third quarter of fiscal 2001
for both the ineffective portion of the cash flow hedges and the mark-to-
market adjustment of those instruments that do not qualify for hedge
accounting.
The fair values of the Company's interest rate swaps and collars are
obtained from dealer quotes. These values represent the estimated amount the
Company would receive or pay to terminate the agreement taking into
consideration the difference between the contract rate of interest and rates
currently quoted for agreements of similar terms and maturities. Interest rate
swap liabilities are included in other accrued liabilities. Our derivative
liabilities were $5.8 million as of June 28, 2001.
The components of accumulated other comprehensive deficit, net of related
taxes, are as follows (amounts in thousands):
Cumulative effect of adoption of SFAS No. 133, net of taxes of
$386............................................................. $ (364)
Amortization reclassified into other comprehensive deficit, net of
taxes of $35..................................................... 42
Unrealized losses on qualifying cash flow hedges, net of taxes of
$1,642........................................................... (2,183)
-------
Accumulated other comprehensive deficit........................... $(2,505)
=======
The components of comprehensive income (loss), net of related taxes, are as
follows (amounts in thousands):
Three Months Ended Nine Months Ended
-------------------- -------------------
June 29, June 28, June 29, June 28,
2000 2001 2000 2001
--------- --------- -------------------
Net income......................... $ 6,186 $ 3,616 $ 5,933 $ 634
Amortization of cumulative effect.. -- 48 -- 42
Unrealized gains (losses) on
qualifying cash flow hedges....... -- 132 -- (2,183)
--------- --------- -------- ---------
Comprehensive income (loss)........ $ 6,186 $ 3,796 $ 5,933 $ (1,507)
========= ========= ======== =========
12
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--RESTRUCTURING CHARGE
During the quarter ended March 29, 2001 the Company announced a plan
designed to strengthen its organizational structure and reduce operating costs
by centralizing corporate administrative functions. The plan includes closing
an administrative facility located in Jacksonville, Florida, and integrating
key marketing, finance and administrative activities into the Company's
corporate headquarters located in Sanford, North Carolina. The Company expects
that this integration, which is scheduled for completion by fiscal year end,
will reduce pre-tax operating expenses by approximately $4.0 to $5.0 million
annually. Effective June 28, 2001, the Company completed the merger of Lil'
Champ Food Stores, Inc. into The Pantry. The Company anticipates this merger
will provide for more efficient and streamlined operations.
As a result of these actions, the Company recorded a pre-tax restructuring
charge of $3.3 million during the second quarter of fiscal 2001. The
restructuring charge consisted of $1.5 million of employee termination
benefits, $1.3 million of lease obligations, and $365.0 thousand of legal and
other professional consultant fees. During the second and third quarters of
fiscal 2001, the Company has also incurred $474.0 thousand in other non-
recurring charges for related actions. The other non-recurring charges were
one-time expenses as a result of this restructuring plan and included charges
for the following: (i) relocation and staffing, (ii) non-capital systems
integration, (iii) travel and (iv) other miscellaneous costs. Employee
termination benefits represent severance and outplacement benefits for 82
employees, 52 of which are in administrative positions and 30 are in
managerial positions. Lease obligations represent remaining lease payments in
excess of estimated sublease rentals for the Jacksonville facility. Activity
related to the restructuring accruals was as follows (amounts in thousands):
Restructuring charges
-------------------------------------------
Total 2001 Cash Non-cash June 28, 2001
Expense Outlays Write-offs Reserve
---------- ------- ---------- -------------
Severance and related costs....... $1,546 $272 $-- $1,274
Lease buyout costs................ 1,339 -- -- 1,339
Legal and other professional
costs............................ 365 241 -- 124
------ ---- --- ------
Total restructuring reserve..... $3,250 $513 $-- $2,737
====== ==== === ======
NOTE 8--INTEREST EXPENSE
The components of interest expense are as follows (amounts in thousands):
Three Months Nine Months
Ended Ended
--------------- ----------------
June June June June
29, 28, 29, 28,
2000 2001 2000 2001
------- ------- ------- -------
Interest on long-term debt................... $13,285 $12,284 $37,613 $39,273
Interest on capital lease obligations........ 312 432 1,147 1,295
Interest rate swap settlements............... 17 642 (47) 611
Fair market value change in non-qualifying
derivatives................................. -- 524 -- 1,357
Miscellaneous................................ 16 28 24 43
------- ------- ------- -------
$13,630 $13,910 $38,737 $42,579
======= ======= ======= =======
13
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--EARNINGS PER SHARE
We compute 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 (amounts in thousands, except per share data).
Three Months
Ended Nine Months Ended
----------------- -----------------
June 29, June 28, June 29, June 28,
2000 2001 2000 2001
-------- -------- -------- --------
Net income................................. $ 6,186 $ 3,616 $ 5,933 $ 634
======= ======= ======= =======
Earnings per share--basic:
Weighted-average shares outstanding...... 18,111 18,115 18,111 18,113
======= ======= ======= =======
Net income per share--basic.............. $ 0.34 $ 0.20 $ 0.33 $ 0.04
======= ======= ======= =======
Earnings per share--diluted:
Weighted-average shares outstanding...... 18,111 18,115 18,111 18,113
Dilutive impact of options and warrants
outstanding............................. 576 -- 789 487
------- ------- ------- -------
Weighted-average shares and potential
dilutive shares outstanding............. 18,687 18,115 18,900 18,600
======= ======= ======= =======
Net income per share--diluted............ $ 0.33 $ 0.20 $ 0.31 $ 0.03
======= ======= ======= =======
Options and warrants to purchase shares of common stock that were not
included in the computation of diluted earnings per share, because their
inclusion would have been antidilutive, were 3.4 million and 662.0 thousand
for the three and nine months ended June 28, 2001, respectively.
14
THE PANTRY, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the Consolidated
Financial Statements and accompanying notes. Additional discussion and
analysis related to the Company is contained in our Annual Report on Form 10-K
for the fiscal year ended September 28, 2000 and our quarterly reports on Form
10-Q for the quarters ended December 28, 2000 and March 29, 2001.
Introduction
The Pantry is the leading convenience store operator in the Southeast and
the second largest independent operator in the United States. As of June 28,
2001, we operate 1,327 stores in ten Southeastern states under approximately
two dozen banners including The Pantry(R), Handy Way, Lil' Champ(R), Quick
Stop(R), Zip Mart, Kangaroo, Fast Lane, Depot and Big K. We currently operate
in selected markets in Florida (507), North Carolina (342), South Carolina
(254), Georgia (57), Mississippi (56), Kentucky (42), Virginia (31), Indiana
(16), Tennessee (14) and Louisiana (8). Our network of retail locations offers
a broad selection of merchandise, gasoline and services designed to appeal to
the convenience needs of today's time-constrained consumer.
In the third quarter of fiscal 2001, our net income was $3.6 million, or 20
cents per share compared to 33 cents per share in the third quarter of fiscal
2000. During the quarter, we recognized $778 thousand in restructuring and
other unusual charges related to (i) our restructuring plan announced in
January 2001 discussed in note 7 of item 1 and (ii) the impact of fair market
changes in non-qualifying derivatives relating to the adoption of SFAS No. 133
discussed in note 8 of item 1 (together, the "unusual charges"). Our net
income before the unusual charges was $4.0 million, or 22 cents per share. The
decrease in our earnings before these unusual charges is primarily
attributable to softening customer spending, tighter gasoline margins and the
loss of South Carolina video gaming income. As a result of these factors, our
third quarter EBITDA declined 5.1% to $36.3 million and income from operations
before the unusual charges declined 14.9% percent to $20.4 million.
Total revenues for the quarter increased 10.1% to $708.0 million. The
increase is primarily attributable to the contribution from acquired stores
and a 3.4% increase in our average retail gasoline price per gallon.
Comparable store gasoline gallon sales declined 3.8% and comparable store
merchandise sales declined 0.6%. We believe these declines are indicative of
the short-term impact sustained economic weakness and higher gasoline retail
prices has on the disposable income of our customers.
We continue to focus our attention on several key operating principles:
. the consistent execution of our core strategies, including focused
attention on leveraging the quality of our growing retail network in
terms of revenues, product costs and operating expenses;
. the continuous effort to apply technology in all facets of our business;
. our research and investment in new merchandise programs; and
. sensible store growth in existing and contiguous markets.
We believe our growing retail network, merchandise programs, purchasing
leverage and in-store execution will allow us to improve merchandise and
gasoline gallon comparable store sales, support stable merchandise margins and
control store operating expenses. We continue to focus attention and resources
on upgrading existing and acquired locations with the latest gasoline
marketing technology and designing site plans to drive customer traffic. We
also are investing in retail and gasoline information technology to enhance
decision support tools, improve inventory management and reduce overhead
costs.
15
THE PANTRY, INC.
On January 24, 2001, we announced plans to centralize and integrate
corporate administrative functions into our primary support center located in
Sanford, North Carolina. Our restructuring plan will reduce a number of
administrative positions, eliminate our primary Florida administrative
facility located in Jacksonville and reduce duplicative expenses. We expect
these activities to generate approximately $5.0 million in annualized savings
and anticipate realizing these savings beginning in fiscal 2002. In
conjunction with these actions, we anticipate approximately $5.0 million in
non-recurring, restructuring charges; year-to-date, we have recorded $3.7
million in charges. We believe the integration will provide a more efficient
and cost effective administrative support structure and, more importantly,
enhance the level of service our support functions provide to our growing
retail network.
On the merchandise front, we continue to maintain a fresh and open approach
to convenience focusing on products and services designed to appeal to the
convenience needs of today's time-constrained consumer. We are constantly
reviewing opportunities to get the most out of our growing retail network--now
at more than 1,300 stores located in 10 southeastern states. We have focused
our attention on increasing ancillary or complementary services and revenues
such as food service sales, lottery commissions, prepaid cellular services,
phone cards, car wash offerings and other service revenues.
Regarding store count, we acquired 4 stores in several key markets in the
Carolinas and closed 9 stores in selected markets during the quarter. Year-to-
date we have acquired 45 stores, opened 2 and closed 33. Historically, the
stores we close are under performing in terms of volume and profitability and,
generally, we benefit from closing the locations by reducing direct overhead
expenses and eliminating certain fixed costs.
Given overall market conditions, we are currently being extremely prudent
and have slowed down the pace of our acquisitions. However, this does not in
any way represent a change in our long-term strategic direction. When the
environment is once again favorable, we plan to continue to sensibly acquire
premium chains located in our existing and contiguous markets.
In conclusion, we are focused mainly on the operations side of our
business, working diligently to improve the overall productivity of our
existing store base. Over the next six to twelve months, we anticipate
reducing our average outstanding borrowings through scheduled principal
payments and, where excess cash is available, allocating capital among
available opportunities including debt reduction.
Acquisition History
Our acquisition strategy focuses on acquiring convenience stores within or
contiguous to our existing market areas. We believe acquiring locations with
demonstrated operating results involves lower risk and is generally an
economically attractive alternative to traditional site selection and new
store development. We do, however, plan to develop new locations in high
growth areas within our existing markets.
16
THE PANTRY, INC.
The tables below provide information concerning the 2001 acquisitions (as
of June 28, 2001) and the 2000 acquisitions:
Fiscal 2001 Acquisitions
Date Acquired Trade Name Locations Stores
------------------------------ -------------- ------------------------ ------
Mississippi and
December 21, 2000............. Fast Lane Louisiana 26
North Carolina and
January 25, 2001.............. East Coast Virginia 11
Others (less than five North Carolina, South
stores)...................... Various Carolina and Mississippi 8
---
Total................................................................ 45
Fiscal 2000 Acquisitions
Date Acquired Trade Name Locations Stores
------------------------------ -------------- ------------------------ ------
September 14, 2000............ Food Mart Mississippi 18
July 3, 2000.................. Mini Mart South Carolina 14
June 29, 2000................. Big K Mississippi 19
April 27, 2000................ Market Express South Carolina 5
North Carolina and
January 27, 2000.............. On-The-Way Southern Virginia 12
November 11, 1999............. Kangaroo Georgia 49
November 4, 1999.............. Cel Oil South Carolina 7
October 7, 1999............... Wicker Mart North Carolina 7
Others (less than five Various Florida, North Carolina,
stores)...................... Virginia, Mississippi
and South Carolina 12
---
Total................................................................ 143
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 28, 2000 does not include the
assets and liabilities relating to those acquisitions consummated after
September 28, 2000. As a result, comparisons to prior operating results and
prior balance sheets are materially impacted. We intend to continue our
acquisition strategy and, accordingly, future results may not necessarily be
comparable to historic results.
Results of Operations
Three Months Ended June 28, 2001 Compared to the Three Months Ended June 29,
2000
Total Revenue. Total revenue for the three months ended June 28, 2001 was
$708.0 million compared to $642.9 million for the three months ended June 29,
2000, an increase of $65.0 million or 10.1%. The increase in total revenue is
primarily attributable to the revenue from stores acquired or opened since
June 29, 2000 of $83.1 million. This increase was partially offset by
comparable store volume declines in both merchandise revenue and gasoline
gallons, as well as a decline in commission income resulting from the loss of
South Carolina video poker revenue associated with the statewide ban on July
1, 2000. In the third quarter of fiscal 2001, total revenue increases were
inflated by a higher average gasoline retail price of $1.54 per gallon
compared to $1.49 per gallon for the third quarter of fiscal 2000. Our
comparable store volume declines were primarily attributed to (i) lower
consumer spending, (ii) sustained high gasoline retail prices which negatively
impacted gallon demand, (iii) volatile wholesale gasoline costs and (iv) the
impact of our efforts to manage the balance between total location specific
gross profit, gasoline gallon volume and merchandise revenue volume.
17
THE PANTRY, INC.
Merchandise Revenue. Merchandise revenue for the third quarter of fiscal
2001 was $256.3 million compared to $238.6 million during the third quarter of
fiscal 2000, an increase of $17.7 million or 7.4%. The increase in merchandise
revenue is primarily attributable to the revenue from stores acquired or
opened since June 29, 2000 of $24.6 million offset by comparable store
merchandise sales declines and lost volume from closed stores.
Comparable store merchandise revenue for the third quarter of fiscal 2001
declined 0.6% from the comparable period of fiscal 2000. The decrease in
comparable store merchandise revenue is primarily attributable to general
economic conditions, heightened competitive activity in certain markets and
the impact higher gasoline retail prices had on customer spending and traffic.
Gasoline Revenue and Gallons. Gasoline revenue for the third quarter of
fiscal 2001 was $446.5 million compared to $397.2 million during the third
quarter of fiscal 2000, an increase of $49.3 million or 12.4%. The increase in
gasoline revenue is primarily attributable to the revenue from stores acquired
or opened since June 29, 2000 of $58.1 million and a $0.05, or 3.4%, increase
in average gasoline gallon retail prices compared to the third quarter of
fiscal 2000. These items were offset by a comparable store gasoline gallon
sales decline of 3.8%.
In the third quarter of fiscal 2001, gasoline gallons sold were 290.6
million compared to 267.2 million during the third quarter of fiscal 2000, an
increase of 23.4 million gallons or 8.8%. The increase is primarily
attributable to the gasoline gallons sold by stores acquired or opened since
June 29, 2000 of 39.2 million gallons, partially offset by a comparable store
gasoline gallon sales decline of 3.8% during the period. The comparable store
gallon decrease is primarily attributable to general economic conditions,
heightened competitive activity in certain markets and the impact higher
gasoline retail prices had on customer spending and traffic.
Commission Revenue. Commission revenue for the third quarter of fiscal 2001
was $5.2 million compared to $7.2 million during the third quarter of fiscal
2000, a decrease of $2.0 million or 27.9%. The decrease is primarily
attributable to the loss of $1.3 million in video poker income attributable to
the July 1, 2000 ban on video poker operations in South Carolina and a decline
in lottery commissions attributable to general economic conditions.
Total Gross Profit. Total gross profit for the third quarter of fiscal 2001
was $128.8 million compared to $124.2 million during the third quarter of
fiscal 2000, an increase of $4.6 million or 3.7%. The increase in gross profit
is primarily attributable to the profits from stores acquired or opened since
June 29, 2000 of $13.3 million and a 50 basis points increase in merchandise
margin. These increases were partially offset by a decline in our gasoline
gross profit per gallon and comparable store merchandise revenue and gasoline
volume declines.
Merchandise Gross Profit and Margin. Merchandise gross profit was $84.7
million for the third quarter of fiscal 2001 compared to $77.8 million for the
third quarter of fiscal 2000, an increase of $6.9 million or 8.9%. This
increase is primarily attributable to the profits from stores acquired or
opened since June 29, 2000 of $7.8 million and an increase in our merchandise
margin percentage. Merchandise margin of 33.1% for the third quarter of fiscal
2001 was 50 basis points over the merchandise margin of 32.6% reported for the
third quarter of fiscal 2000. The margin increase is primarily due to
improving raw margins, lower inventory shortages and the increasing gross
profit contribution from food service locations, which have historically
higher margins.
Gasoline Gross Profit and Per Gallon Margin. Gasoline gross profit was
$38.9 million for the third quarter of fiscal 2001 compared to $39.2 million
for the third quarter of fiscal 2000, a decrease of $0.3 million or 0.7%. This
decrease is primarily attributable to lower gasoline margins and the
comparable store gasoline gallon decline, partially offset by the profits from
stores acquired or opened since June 29, 2000 of $5.3 million. Gasoline gross
profit per gallon was $0.134 in the third quarter of fiscal 2001 compared to
$0.147 for the third quarter of fiscal 2000.
18
THE PANTRY, INC.
Operating, General and Administrative Expenses. Operating, general and
administrative expenses for the third quarter of fiscal 2001 totaled $92.5
million compared to $85.9 million for the third quarter of fiscal 2000, an
increase of $6.6 million or 7.7%. The increase in operating, general and
administrative expenses is primarily attributable to the operating and lease
expenses associated with stores acquired or opened since June 29, 2000 of
$10.2 million. As a percentage of total revenue, these expenses decreased to
13.1% in the third quarter of fiscal 2001 from 13.4% in the third quarter of
fiscal 2000.
Restructuring and Other Non-Recurring Charges. As a result of our
restructuring plan announced in January, we recorded non-recurring charges of
$254.0 thousand during the third quarter of fiscal 2001. These charges
consisted mainly of relocation, staffing, travel and other miscellaneous
costs.
Income from Operations. Income from operations totaled $20.1 million for
the third quarter of fiscal 2001 compared to $23.9 million during the third
quarter of fiscal 2000, a decrease of $3.8 million or 16.0%. The decrease is
primarily attributable to the variances discussed above and a $1.6 million
increase in depreciation and amortization.
EBITDA. EBITDA represents income before interest expense, income taxes,
depreciation and amortization, impairment of long-lived assets, restructuring
and other non-recurring charges and extraordinary losses. EBITDA for the third
quarter of fiscal 2001 totaled $36.3 million compared to EBITDA of $38.3
million during the third quarter of fiscal 2000, a decrease of $2.0 million or
5.1%. The decrease 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.
EBITDA as defined may not be comparable to similarly titled measures reported
by other companies. We have included information concerning EBITDA as one
measure of our cash flow and historical ability to service debt and because we
believe investors find this information useful.
Interest Expense. Interest expense is primarily interest on our borrowings
under our bank credit facility and senior subordinated notes. Interest expense
for the third quarter of fiscal 2001 totaled $13.9 million compared to $13.6
million for the third quarter of fiscal 2000, an increase of $0.3 million or
2.0%. In accordance with SFAS No. 133, we incurred a $524 thousand charge
relating to the change in fair market value of our non-qualifying interest
rate swap agreements and the amortization of our cumulative transition
adjustments. The remaining $244 thousand decrease in interest expense is
primarily attributable to a general decline in interest rates.
Income Tax Expense. We recorded income tax expense totaling $3.0 million
for the third quarter of fiscal 2001 compared to income tax expense of $4.9
million for the third quarter of fiscal 2000. The decrease in income tax
expense was primarily attributable to the decrease in income before income
taxes. Our effective tax rate was 45.1% for the quarter ending June 28, 2001
compared to 44.0% for the quarter ending June 29, 2000.
Net Income. Net income for the third quarter of fiscal 2001 was $3.6
million compared to net income of $6.2 million for the third quarter of fiscal
2000. Our net income before the unusual charges was $4.0 million. The net
income decrease is attributable to the items discussed above.
Nine Months Ended June 28, 2001 Compared to the Nine Months Ended June 29,
2000
Total Revenue. Total revenue for the nine months ended June 28, 2001 was
$2.0 billion compared to $1.8 billion for the nine months ended June 29, 2000,
an increase of $211.0 million or 11.9%. The increase in total revenue is
primarily attributable to the revenue from stores acquired or opened since
June 29, 2000 of $195.6 million, and an increase in retail gasoline prices.
For the nine months ended June 28, 2001, total revenue increases were inflated
by a higher average gasoline retail price of $1.48 per gallon compared to
$1.38 per gallon for the nine months ended June 29, 2000.
19
THE PANTRY, INC.
Merchandise Revenue. Merchandise revenue for the nine months ended June 28,
2001 was $714.5 million compared to $663.2 million during the nine months
ended June 29, 2000, an increase of $51.3 million or 7.7%. The increase in
merchandise revenue is primarily attributable to the revenue from stores
acquired or opened since June 29, 2000 of $58.6 million offset by comparable
store merchandise sales declines and lost volume from closed stores.
Comparable store merchandise revenue for the nine months ended June 28, 2001
decreased 0.6% over the comparable period fiscal 2000.
Gasoline Revenue and Gallons. Gasoline revenue for the nine months ended
June 28, 2001 was $1.2 billion compared to $1.1 billion during the nine months
ended June 29, 2000, an increase of $164.1 million or 15.2%. The increase in
gasoline revenue is primarily attributable to the revenue from stores acquired
or opened since June 29, 2000 of $136.2 million and a $0.10, or 7.2%, increase
in average gasoline gallon retail prices compared to the nine months ended
June 29, 2000.
For the nine months ended June 28, 2001, gasoline gallons sold were 841.8
million compared to 785.4 million during the nine months ended June 29, 2000,
an increase of 56.4 million gallons or 7.2%. The increase is primarily
attributable to the gasoline gallons sold by stores acquired or opened since
June 29, 2000 of 94.2 million gallons, partially offset by a comparable store
gasoline gallon sales decline of 5.8% during the period. The comparable store
gallon decrease is primarily attributable to the increased average retail
price per gallon associated with increasing wholesale fuel costs.
Commission Revenue. Commission revenue for the nine months ended June 28,
2001 was $16.3 million compared to $20.7 million during the nine months ended
June 29, 2000, a decrease of $4.4 million or 21.2%. The decrease is primarily
attributable to the loss of $3.8 million in video poker income as a result of
the July 1, 2000 ban on video poker operations in South Carolina.
Total Gross Profit. Total gross profit for the nine months ended June 28,
2001 was $364.0 million compared to $336.9 million during the nine months
ended June 29, 2000, an increase of $27.1 million or 8.0%. The increase in
gross profit is primarily attributable to the profits from stores acquired or
opened since June 29, 2000 of $32.0 million and a 70 basis points increase in
merchandise gross profit, offset by comparable store merchandise revenue and
gasoline gallon declines.
Merchandise Gross Profit and Margin. Merchandise gross profit was $241.1
million for the nine months ended June 28, 2001 compared to $218.5 million for
the nine months ended June 29, 2000, an increase of $22.6 million or 10.3%.
This increase is primarily attributable to the profits from stores acquired or
opened since June 29, 2000 of $19.3 million and comparable store profit
increases.
Merchandise margin of 33.7% for the nine months ended June 28, 2001 was 70
basis points over the merchandise margin of 33.0% reported for the nine months
ended June 29, 2000. The margin increase is primarily due to improving raw
margins, lower inventory shortages and the increasing gross profit
contribution from food service locations, which have historically higher
margins.
Gasoline Gross Profit and Per Gallon Margin. Gasoline gross profit was
$106.5 million for the nine months ended June 28, 2001 compared to $97.7
million for the nine months ended June 29, 2000, an increase of $8.9 million
or 9.1%. This increase is primarily attributable to the profits from stores
acquired or opened since June 29, 2000 of $11.9 million and higher gasoline
margins, partially offset by the comparable store gasoline gallon decline of
5.8%. Gasoline gross profit per gallon was $0.127 for the nine months ended
June 28, 2001 compared to $0.124 for the nine months ended June 29, 2000.
Operating, General and Administrative Expenses. Operating, general and
administrative expenses for the nine months ended June 28, 2001 totaled $270.9
million compared to $247.7 million for the nine months ended June 29, 2000, an
increase of $23.2 million or 9.4%. The increase in operating, general and
administrative expenses is primarily attributable to the operating and lease
expenses associated with stores acquired or opened since June 29, 2000 of
$25.2 million. As a percentage of total revenue, these expenses decreased to
13.7% for the nine months ended June 28, 2001 from 14.0% for the nine months
ended June 29, 2000.
20
THE PANTRY, INC.
Restructuring and Other Non-Recurring Charges. As a result of our
restructuring plan announced in January, we recorded pre-tax restructuring and
other charges of $3.7 million during the nine months ended June 28, 2001.
These charges consisted mainly of employee termination benefits, lease
obligations, professional fees and other costs.
Income from Operations. Income from operations totaled $42.5 million for
the nine months ended June 28, 2001 compared to $47.6 million for the nine
months ended June 29, 2000, a decrease of $5.1 million or 10.8%. The decrease
is attributable to the factors discussed as well as a $5.3 million increase in
depreciation and amortization.
EBITDA. EBITDA represents income before interest expense, income taxes,
depreciation and amortization, impairment of long-lived assets, restructuring
and other non-recurring charges, and extraordinary loss. EBITDA for the nine
months ended June 28, 2001 totaled $93.1 million compared to EBITDA of $89.2
million for the nine months ended June 29, 2000, an increase of $3.8 million
or 4.3%. The increase is attributable to the items discussed above.
Interest Expense. Interest expense is primarily interest on our senior
subordinated notes and borrowings under our bank credit facility. Interest
expense for the nine months ended June 28, 2001 totaled $42.6 million compared
to $38.7 million for the nine months ended June 29, 2000, an increase of $3.8
million or 9.9%. The increase in interest expense is primarily attributable to
increased borrowings under our bank credit facility associated with
acquisition activity. In accordance with SFAS No. 133, we incurred $1.4
million in charges relating to the change in fair market value of our non-
qualifying interest rate swap agreements and the amortization of our
cumulative transition adjustment.
Income Tax Expense. We recorded income tax expense totaling $0.7 million
for the nine months ended June 28, 2001 compared to income tax expense of $4.7
million for the nine months ended June 29, 2000. The change in income tax
benefit was primarily attributable to the decrease in income before income
taxes. Our effective tax rate was 51.5% for the nine months ending June 28,
2001 compared to 44.0% for the nine months ending June 29, 2000.
Net Income. Net income for the nine months ending June 28, 2001 was $0.6
million compared to net income of $5.9 million for the nine months ended June
29, 2000. Our net income before the unusual charges was $3.1 million for the
nine months ended June 28, 2001. The decrease is attributable to the items
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, sale-leaseback transactions and asset
dispositions to finance our operations, pay interest, and fund capital
expenditures. We rely on excess cash, supplemented as necessary from time to
time by borrowings under our bank facilities, to finance acquisitions. Cash
provided by operating activities declined from $61.0 million for the nine
months ended June 29, 2000 to $43.6 million for the nine months ended June 28,
2001. We had $48.6 million of cash and cash equivalents on hand at June 28,
2001.
Fiscal 2001 Acquisitions. For the nine months ended June 28, 2001, we
acquired a total of 45 convenience stores in nine transactions for
approximately $56.1 million, net of cash acquired. These acquisitions were
funded with borrowings under our bank credit facility and cash on hand.
21
THE PANTRY, INC.
Capital Expenditures. Capital expenditures (excluding all acquisitions)
were approximately $24.5 million for the nine months ended June 28, 2001.
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.
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 lease
the property back to us 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 applied to
the cost of each respective property. We retain ownership of all personal
property and gasoline marketing equipment. Under our sale-leaseback program,
we received $3.5 million for the nine months ended June 28, 2001. Our bank
credit facility caps the proceeds of sale-leasebacks that we can use to fund
our 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.
For the nine months ended June 28, 2001, we received approximately $9.7
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 28, 2001 were $14.8 million.
We anticipate capital expenditures for fiscal 2001 will be approximately $42.0
million.
Long-Term Debt. Our long-term debt consisted primarily of $200.0 million of
senior subordinated notes and $353.0 million outstanding under our bank credit
facility.
We 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.
Our 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 $50.0 million
acquisition facility available to finance acquisitions of related businesses
with outstanding borrowings of $50.0 million, and (iii) term loan facilities
with outstanding borrowings of $303.0 million as of June 28, 2001. As of
August 6, 2001, we had $29.5 million available for borrowing or additional
letters of credit under the credit facility.
The Tranche A term loan matures in January 2004 and the Tranche B and
Tranche C term loans mature in January 2006. On January 31, 2001, all amounts
then outstanding under the acquisition facility converted into a three-year
term loan. All term loan facilities require quarterly principal payments with
annual principal payments totaling approximately $9.7 million in the remainder
of fiscal 2001, $39.6 million in fiscal 2002, $42.9 million in fiscal 2003,
$52.9 million in fiscal 2004, $88.6 million in fiscal 2005, and $119.3 million
in fiscal 2006.
Cash Flows from Financing Activities. For the nine months ended June 28,
2001, we used proceeds from our bank credit facility and cash on hand to
finance the 2001 acquisitions, make principal repayments and pay related fees
and expenses.
Cash Requirements. We believe that cash on hand, cash flow anticipated to
be generated from operations, short-term borrowings 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 months. In order to continue our acquisition strategy, we
anticipate that we will need to obtain additional debt or equity financing.
There can be no assurance that such financing will be available on favorable
terms, or at all.
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THE PANTRY, INC.
Shareholders' Equity. As of June 28, 2001, our shareholders' equity totaled
$116.2 million. The $1.8 million decrease from September 28, 2000 is
attributable to the net income for the period offset by the accumulated other
comprehensive deficit related to the adoption of SFAS No. 133.
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 6, 2001, we maintain
surety bonds in the aggregate amount of approximately $2.0 million in favor of
state environmental agencies in the states of North Carolina, South Carolina,
Georgia, Virginia, Tennessee, Indiana, Kentucky and Louisiana. We also rely on
reimbursements from applicable state trust funds. In Florida and Georgia 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. We also have filed claims and received credit toward our trust fund
deductibles in Virginia. The coverage afforded by each state fund varies but
generally provides from up 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 (i) the per-site deductible; (ii) costs incurred in connection with
releases occurring or reported to trust funds prior to their inception;
(iii) removal and disposal of underground storage tank systems; and (iv) costs
incurred in connection with sites otherwise ineligible for reimbursement from
the trust funds. The trust funds generally require us to pay deductibles
ranging from $5.0 thousand to $150.0 thousand 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 private commercial liability insurance. In Georgia,
we meet our financial responsibility requirements by state trust fund coverage
through December 29, 1999, and meet such requirements thereafter through
private commercial liability insurance and a surety bond.
Environmental reserves of $13.6 million as of June 28, 2001 represent
estimates for future expenditures for remediation, tank removal and litigation
associated with 437 known contaminated sites as a result of 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 trust funds and private insurance. As
of June 28, 2001, amounts that are probable of reimbursement (based on our
experience) from those sources total $13.2 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 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. 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
23
THE PANTRY, INC.
solvency of the various funds. Although we are not aware of releases or
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 $500.0 thousand 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.
Recently Adopted Accounting Standards
Effective September 29, 2000, we adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities
("SFAS No. 133"). SFAS No. 133, as amended, establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
statement 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.
As a result of our financing activities, we are exposed to changes in
interest rates, which may adversely affect our results of operations and
financial condition. In seeking to minimize the risk associated with these
activities we have entered into interest rate swap arrangements, which
effectively convert a portion of our variable rate debt to a fixed rate. The
adoption of SFAS No.133 resulted in a cumulative transition adjustment of
approximately $364.0 thousand (net of taxes of $386.0 thousand). Our
derivative liabilities were $5.8 million as of June 28, 2001.
Effective September 29, 2000, we adopted the provisions of the Securities
and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101, Revenue
Recognition in Financial Statements. SAB No. 101 clarifies certain existing
accounting principles for the timing of revenue recognition and the
classification of certain income, expense and balance sheet amounts in the
financial statements. The adoption of SAB No. 101 did not have a material
impact on our results of operations and financial condition.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations ("SFAS No. 141") which establishes accounting
and reporting standards for all business combinations initiated after June 30,
2001 and establishes specific criteria for the recognition of intangible
assets separately from goodwill. SFAS No. 141 eliminates the pooling-of-
interest method of accounting and requires all acquisitions consummated
subsequent to June 30, 2001 to be accounted for under the purchase method. All
of our previous acquisitions have been accounted for under the purchase method
and therefore the adoption of SFAS No. 141 will not have a material impact on
our results of operations and financial condition.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, ("SFAS No 142") which addresses financial accounting and reporting for
acquired goodwill and other intangible assets. SFAS No. 142 eliminates
amortization of goodwill and other intangible assets that are determined to
have an indefinite useful life and instead requires an impairment only
approach. At adoption, any goodwill impairment loss will be recognized as the
cumulative effect of a change in accounting principle. Subsequently, any
impairment losses will be recognized as a component of income from operations.
As of June 28, 2001, we have net goodwill of
24
THE PANTRY, INC.
$282.2 million and have incurred $7.2 million in goodwill amortization in the
statement of operations for the nine months then ended. The adoption of SFAS
No. 142 will result in our discontinuation of goodwill amortization. We will
be required to test goodwill using an impairment method under the new standard
at adoption and at least annually thereafter, which could have an adverse
effect on our future results of operations if an impairment occurs.
Adoption of SFAS No. 142 is required in fiscal years beginning after
December 15, 2001 which would be our first quarter of fiscal 2003. Early
application is permitted for entities with fiscal years beginning after
March 15, 2001, which would be our first quarter of fiscal 2002.
Inflation
During the first nine months of fiscal 2001, wholesale gasoline fuel prices
continued to increase. Average cost per barrel for the period was $30 compared
to $27 per barrel for the first nine months of fiscal 2000. Generally, we pass
along wholesale gasoline cost changes to our customers through retail price
changes. Gasoline price inflation has had an impact on total revenue, gross
profit dollars and gross profit percentage.
General CPI, excluding energy, increased 0.30% during the third quarter of
fiscal 2001 and food at home, which is most indicative of our merchandise
inventory, increased similarly. While we have generally been able to pass
along these price increases to our customers, we make no assurances that
continued inflation will not have a material adverse effect on our sales and
gross profit dollars.
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THE PANTRY, INC.
Item 3. 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 our
bank credit facility.
The following table presents the future principal cash flows and weighted-
average interest rates based on rates in effect at June 28, 2001, on our
existing long-term debt instruments. Fair values have been determined based on
quoted market prices as of August 6, 2001.
Expected Maturity Date
as of June 28, 2001
(Dollars in thousands)
Fiscal Fiscal Fiscal Fiscal Fiscal Fair
2001 2002 2003 2004 2005 Thereafter Total Value
------ ------- ------- ------- ------- ---------- -------- --------
Long-term debt.......... $9,675 $40,000 $43,254 $52,912 $88,654 $319,354 $553,849 $551,772
Weighted-average
interest rate.......... 9.15% 9.05% 9.01% 8.82% 9.09% 10.03% 9.26%
In order to reduce our exposure to interest rate fluctuations, we have
entered into interest rate swap arrangements in which we agree to exchange, at
specified intervals, the difference between fixed and variable interest
amounts calculated by reference to an agreed upon notional amount. The
interest rate differential is reflected as an adjustment to interest expense
over the life of the swaps. Fixed rate swaps are used to reduce our risk of
increased interest costs during periods of rising interest rates. At June 28,
2001, the interest rate on 68.8% of our debt was fixed by either the nature of
the obligation or through the interest rate swap arrangements compared to
70.6% at June 29, 2000.
The following table presents the notional principal amount, weighted
average pay rate, weighted average receive rate and weighted average years to
maturity on the company's interest rate swap contracts:
Interest Rate Swap Contracts
(Dollars in thousands)
June 29, June 28,
2000 2001
-------- --------
Notional principal amount................................... $170,000 $180,000
Weighted average pay rate................................... 6.41% 6.12%
Weighted average receive rate............................... 6.68% 4.19%
Weighted average years to maturity.......................... 2.36 2.11
Effective February 1, 2001 the Company entered into an interest rate collar
arrangement covering a notional amount of $55.0 million. The interest rate
collar agreement expires in February 2003, and has a cap rate of 5.70% and a
floor rate of 5.03%. As of June 28, 2001, the fair value of our swap and
collar agreements represented a liability of $5.8 million.
Qualitative Disclosures. Our primary exposure relates to:
. interest rate risk on long-term and short-term borrowings;
. our ability to pay or refinance long-term borrowings at maturity at
market rates;
. the impact of interest rate movements on our ability to meet interest
expense requirements and exceed financial covenants; and
. the impact of interest rate movements on our ability to obtain adequate
financing to fund future acquisitions.
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THE PANTRY, INC.
We manage interest rate risk on our outstanding long-term and short-term
debt through our use of fixed and variable rate debt. We expect the interest
rate swaps 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.
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THE PANTRY, INC.
PART II--OTHER INFORMATION.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Risk Factors
(b) Reports on Form 8-K
None
28
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.
/s/ William T. Flyg
By: _________________________________
William T. Flyg
Senior Vice President Finance and
Secretary
(Authorized Officer and
Principal Financial Officer)
Date: August 13, 2001
29
EXHIBIT INDEX
Exhibit
No. Description of Document
--------------- -----------------------
99.1 Risk Factors.
30