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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 27, 2001
Commission File Number 33-72574
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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)
P.O. Box 1410
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
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
common stock, $.01 par value
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting common stock held by non-affiliates
of the registrant as of December 12, 2001 was $22,807,490.
As of December 12, 2001, there were issued and outstanding 18,107,597 shares
of the registrant's common stock.
Documents Incorporated by Reference
Document Where Incorporated
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1. Proxy Statement for the Annual Meeting of Stockholders Part III
to be held March 26, 2002
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THE PANTRY, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
Page
Part I ----
Item 1: Business............................................................................. 2
Item 2: Properties........................................................................... 11
Item 3: Legal Proceedings.................................................................... 12
Item 4: Submission of Matters to a Vote of Security Holders.................................. 12
Part II
Item 5: Market for Our Common Equity and Related Stockholder Matters......................... 13
Item 6: Selected Financial Data.............................................................. 14
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 7A: Quantitative and Qualitative Disclosures About Market Risk........................... 27
Item 8: Consolidated Financial Statements and Supplementary Data............................. 29
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 57
Part III
Item 10: Our Directors and Executive Officers................................................. 58
Item 11: Executive Compensation............................................................... 58
Item 12: Security Ownership of Certain Beneficial Owners and Management....................... 58
Item 13: Certain Relationships and Related Transactions....................................... 58
Part IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 59
(i)
PART I
This Annual Report on Form 10-K contains forward-looking statements. We have
tried, wherever possible, to identify forward-looking statements by using words
such as "anticipate," "believe," "estimate," "expect," "intend," and similar
expressions. The forward-looking statements contained in this report, which
have been based on our current expectations and projections about future events
and which are subject to numerous risks, uncertainties, and assumptions about
The Pantry, our industry, and related economic conditions, include without
limitation, statements about:
. Our anticipated growth strategy, which includes our strategy to increase
our store base through acquisition and new store development
. Anticipated trends in our business, our industry, wholesale gasoline
markets and general economic conditions in the Southeast
. Future expenditures for capital projects, including the cost of
environmental regulatory compliance
. Our ability to pass along gasoline, cigarette and other cost increases
to our customers without a corresponding decrease in sales and gross
profit
. Our ability to control costs, including our ability to achieve cost
savings in connection with our fiscal 2001 restructuring plan and
acquisitions
The forward-looking statements contained in this report are subject to
numerous risks and uncertainties, including without limitation, risks related
to:
. Future economic trends, including interest rate movements and general
business conditions in the Southeast
. The intense competition in the convenience store and retail gasoline
industries
. Our anticipated growth strategies, including our strategy to grow
through acquisition, new store development and strategic remodel
investments
. Our dependence on gasoline and tobacco sales
. The concentration of our stores in the southeastern United States and in
coastal and resort areas
. Our dependence on favorable weather conditions, particularly in spring
and summer months
. Our rapid growth and our related ability to control costs and achieve
cost savings in connection with our fiscal 2001 restructuring plan and
our acquisitions
. The extensive governmental regulation of our business, including various
environmental, federal, state and local regulations
. Our dependence on one principal merchandise wholesaler
. Our dependence on an uninterrupted supply of wholesale gasoline
. Control of The Pantry by one principal stockholder
. Dependence on senior management
. Other factors identified in Exhibit 99.1 to this Annual Report on Form
10-K
As a result of these and other risks, actual results may differ from the
forward-looking statements included in this Annual Report on Form 10-K.
1
Item 1. Business
General
The Pantry, Inc., founded in 1967, is the leading convenience store operator
in the southeastern United States and the second largest independently operated
convenience store chain in the country. As of September 27, 2001, we operated
1,324 stores in 10 southeastern states under approximately two dozen banners
including The Pantry(R), Handy Way, Lil Champ(R), Quick Stop(R), Zip Mart(R),
Kangaroo(R), Fast Lane(R), Big K(TM), Depot and Mini Mart. Our stores offer a
broad selection of merchandise, gasoline and ancillary services designed to
appeal to the convenience needs of our customers.
In fiscal 1996, Freeman Spogli & Co. and Chase Manhattan Capital Corporation
acquired a controlling interest in our stock through a series of transactions
which included the purchase of common stock from certain stockholders and the
purchase of newly issued common and preferred stock. The table below shows the
number, types and overall beneficial ownership percentage of our outstanding
securities owned by Freeman Spogli & Co. and Chase as of December 12, 2001:
Percentage Beneficial
Name Number and type of securities owned Ownership
---- ----------------------------------- ---------------------
Freeman Spogli & Co. 10,329,524 shares of common stock and warrants to 62.0%(1)
purchase 2,346,000 shares of common stock
Chase (and its affiliates) 2,209,427 shares of common stock 12.2%
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(1)Including shares underlying warrants.
Operations
For a discussion of our fiscal year 2001 operating results, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In fiscal year 2001, we acquired or opened 47 convenience stores located in
North Carolina, South Carolina, Mississippi, Louisiana and Virginia. In
addition, we closed or sold 36 convenience stores. The net increase in store
count and timing of these acquisitions materially impacted our results of
operations and comparisons to prior periods. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
We believe our results continue to be driven by the following 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 areas of our business;
. our research and investment in new merchandise programs and
. sensible store growth in existing and contiguous markets.
2
Merchandise Sales. In fiscal 2001, our merchandise sales were 36.6% of total
revenues. The following table highlights certain information with respect to
our merchandise sales for the last five fiscal years:
Fiscal Year Ending
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Sept. 25, Sept. 24, Sept. 30, Sept. 28, Sept. 27,
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
Merchandise sales (in millions)................... $202.4 $460.8 $731.7 $907.6 $968.6
Average merchandise sales per store (in thousands) $525.8 $533.3 $666.4 $713.8 $731.0
Comparable store merchandise sales increase....... 8.5% 5.3% 9.6% 7.5% (0.2)%
Merchandise gross margins (after purchase rebates,
markdowns, inventory spoilage, inventory shrink
and LIFO reserve)............................... 34.4% 34.0% 33.1% 33.3% 33.4%
The increase in average merchandise sales per store is primarily due to the
addition of acquired stores which on average have comparatively higher
merchandise volume, offset partially by the fiscal year 2001 comparable store
merchandise sales decline of 0.2%.
Based on merchandise purchase and sales information, we estimate category
sales as a percentage of total merchandise sales for the last five fiscal years
as follows:
Fiscal Year Ending
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Sept. 25, Sept. 24, Sept. 30, Sept. 28, Sept. 27,
1997 1998 1999 2000 2001
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Tobacco products........................... 25.9% 26.8% 33.1% 35.9% 34.6%
Beer and wine.............................. 14.7 16.7 16.1 16.2 16.3
Packaged beverages......................... 16.6 15.5 14.8 13.7 14.3
Self-service fast foods and beverages...... 6.9 6.3 5.3 5.3 6.0
General merchandise, health and beauty care 6.1 6.2 6.4 6.7 5.7
Fast food service.......................... 2.5 2.9 3.0 3.6 4.3
Salty snacks............................... 4.3 4.4 4.0 3.7 3.8
Candy...................................... 4.9 4.5 3.8 3.4 3.5
Dairy products............................. 2.8 3.4 3.5 3.0 3.0
Bread and cakes............................ 2.1 2.0 1.8 2.3 2.5
Newspapers and magazines................... 5.1 3.7 2.9 2.2 2.2
Grocery and other merchandise.............. 8.1 7.6 5.3 4.0 3.8
----- ----- ----- ----- -----
Total................................... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
As of September 27, 2001, we operated quick service restaurants or
full-service fast food locations within 203 of our locations. In 99 of these
stores, we offer products from nationally branded food franchises including
Subway(R), Taco Bell(R), Hardee's(R), Noble Roman's(R), TCBY(R), Blimpie(R),
Church's(R), Hot Stuff(R), Bullets(R), Dairy Queen(R), Pizza Hut(R), Sobicks
Subs(TM), Long John Silver's(R), Baskin-Robbins(R), Bojangles(R), and
Krystal(R). In addition, we offer a variety of proprietary food service
programs featuring breakfast biscuits, fried chicken, deli, pizza, tacos and
other hot food offerings in 104 of our locations.
We purchase over 50% of our merchandise from a single wholesale grocer,
McLane Company, Inc., a subsidiary of Walmart, Inc. We purchase the products at
McLane's cost plus an agreed upon percentage, reduced by any promotional
allowances and volume rebates offered by manufacturers and McLane. In addition,
we receive per store annual service allowances from McLane which are amortized
over the remaining term of the agreement, which is three years. We purchase the
balance of our merchandise from a variety of other distributors under contract
terms of up to four years. We do not have written contracts with a number of
these vendors.
3
Gasoline Operations. In fiscal 2001, our gasoline revenues were 62.5% of
total revenues. The following table highlights certain information regarding
our gasoline operations for the last five fiscal years:
Fiscal Year Ending
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Sept. 25, Sept. 24, Sept. 30, Sept. 28, Sept. 27,
1997 1998 1999 2000 2001
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Gasoline sales (in millions).................. $220.2 $510.0 $923.8 $1,497.7 $1,652.7
Gasoline gallons sold (in millions)........... 179.4 466.8 855.7 1,062.4 1,142.4
Average gallons sold per store (in thousands). 501.2 603.9 834.8 856.9 890.4
Comparable store gallon growth................ 7.2% 4.8% 5.9% (2.4)% (3.8)%
Average retail price per gallon............... $ 1.23 $ 1.09 $ 1.08 $ 1.41 $ 1.45
Average gross profit per gallon............... $0.128 $0.134 $0.123 $ 0.132 $ 0.125
Locations selling gasoline.................... 364 884 1,152 1,267 1,286
Company-operated branded locations............ 300 667 851 997 997
Company-operated unbranded locations.......... 35 192 279 253 277
Third-party locations (branded & unbranded)... 29 25 22 17 12
Locations with pay-at-pump credit card readers 125 379 682 945 1,009
Locations with multi-product dispensers....... 142 697 945 1,085 1,129
The increase in average gallons sold per store is primarily due to the
addition of acquired stores which on average had comparatively higher gallon
volume and our efforts to remodel and upgrade our gasoline facilities, offset
partially by the fiscal 2001 same store gallon decline of 3.8%. In fiscal 2001,
the gasoline markets were volatile with domestic crude oil hitting a low in
September 2001 of approximately $22 per barrel and highs in October 2000
exceeding $36 per barrel. Generally, we attempt to pass along wholesale
gasoline cost changes to our customers through retail price changes. However,
our ability to pass along wholesale cost changes is influenced by gasoline
market conditions and the retail prices offered by our competitors. We make no
assurances that significant volatility in gasoline wholesale prices will not
negatively affect gasoline gross margins or demand for gasoline within our
markets.
We purchase our gasoline from major oil companies and independent refiners.
We operate a mix of branded and unbranded locations and we evaluate our
gasoline offering on a local market level. Of the 1,286 stores that sold
gasoline as of September 27, 2001, 1,006 (including third-party locations
selling under these brands) or 78.2% were branded under the Amoco(R), BP(R),
Chevron(R), Citgo(R), Exxon(R), Shell(R) or Texaco(R) brand names. We purchase
our branded gasoline and diesel fuel from major oil companies under supply
agreements. The fuel is purchased at the stated rack price, or market price,
quoted at each terminal. The initial terms of these supply agreements ranged
from five to thirteen years and generally contain minimum annual purchase
requirements as well as provisions for various payments to us based on volume
of purchases and vendor allowances. We purchase the balance of our gasoline
from a variety of independent fuel distributors. There are approximately 20
gasoline terminals in our operating areas, allowing us to choose from more than
one distribution point for most of our stores. Our inventories of gasoline
(both branded and unbranded) turn approximately every seven days.
As of September 27, 2001, we owned the gasoline operations at 1,274
locations and at 12 locations had gasoline operations that were operated under
third-party arrangements. At company-operated locations, we own the gasoline
storage tanks, pumping equipment and canopies, and retain 100% of the gross
profit received from gasoline sales. In fiscal 2001, these locations accounted
for approximately 99% of total gallons sold. Under third-party arrangements, an
independent gasoline distributor owns and maintains the gasoline storage tanks
and pumping equipment at the site, prices the gasoline and pays us
approximately 50% of the gross profit. In fiscal 2001, third-party locations
accounted for approximately 1% of the total gallons we sold. We are phasing out
third-party arrangements because our company-operated locations are more
profitable.
4
Commission Revenue. In fiscal 2001, our commission revenues represented 0.8%
of our total revenue. Our commission revenue is derived from lottery ticket
sales, money orders, car wash, public telephones, amusement and video gaming
and other ancillary product and service offerings. This category is an
important aspect of our merchandise operations because we believe it attracts
new customers as well as provides additional services for existing customers.
The following table highlights certain information regarding commissions and
the sources of commissions from services for the last five fiscal years:
Fiscal Year Ending
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Sept. 25, Sept. 24, Sept. 30, Sept. 28, Sept. 27,
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
Commission revenue (in millions).................. $ 4.8 $ 14.1 $ 23.4 $ 25.9 $ 21.7
Average commission revenue per store (in
thousands)...................................... $ 12.4 $ 16.4 $ 21.3 $ 21.2 $ 16.9
Commission revenue by category (as a percentage of
total commission revenue):......................
Lottery ticket sales........................... 13.3% 39.3% 26.9% 29.1% 32.0%
Money orders................................... 22.1 14.9 13.6 12.6 15.5
Car wash....................................... -- 1.7 8.0 10.2 14.5
Public telephones.............................. 10.5 13.3 12.3 11.1 11.0
Amusement and video gaming..................... 44.6 25.1 28.9 18.6 6.6
Other.......................................... 9.5 5.7 10.3 18.4 20.4
------ ------ ------ ------ ------
Total...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
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The decrease in commission revenue is primarily due to the loss of
approximately $3.8 million in video poker revenue as a result of the July 1,
2000 ban in South Carolina and lower lottery commissions in Florida and Georgia
associated with lower consumer spending. We were able to offset this decline,
in part, with increased commission revenue from fiscal 2001 acquisitions. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Store Locations. As of September 27, 2001, we operated 1,324 convenience
stores located primarily in suburban areas of rapidly growing markets,
coastal/resort areas and smaller towns. Almost all of our stores are
freestanding structures averaging approximately 2,400 square feet and provide
ample customer parking. The following table shows the geographic distribution
by state of our stores for each of the last five fiscal years:
Number of Stores as of Year End
------------------------------------------------- Percent of
Sept. 25, Sept. 24, Sept. 30, Sept. 28, Sept. 27, total stores at
State 1997 1998 1999 2000 2001 Sept. 27, 2001
----- --------- --------- --------- --------- --------- ---------------
Florida.......... -- 439 533 517 505 38.1%
North Carolina... 155 264 336 343 341 25.8
South Carolina... 134 156 232 251 254 19.2
Georgia.......... -- -- 12 57 57 4.3
Mississippi...... -- -- -- 37 56 4.2
Kentucky......... 56 46 45 45 42 3.2
Virginia......... -- 10 18 30 31 2.3
Indiana.......... 21 20 20 18 16 1.2
Tennessee........ 24 19 19 15 14 1.1
Louisiana........ -- -- -- -- 8 0.6
--- --- ----- ----- ----- -----
Total..... 390 954 1,215 1,313 1,324 100.0%
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5
Since fiscal 1996, we have developed a limited number of new stores and
closed or sold a substantial number of under-performing stores. Beginning in
1997, we turned our attention from primarily developing new stores to growing
by selectively acquiring stores in existing and contiguous markets. The
following table summarizes these activities:
Fiscal Year Ending
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Sept. 25, Sept. 24, Sept. 30, Sept. 28, Sept. 27,
1997 1998 1999 2000 2001
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Number of stores at beginning of period 379 390 954 1,215 1,313
Acquired or opened..................... 36 653 300 145 47
Closed or sold......................... (25) (89) (39) (47) (36)
--- --- ----- ----- -----
Number of stores at end of period...... 390 954 1,215 1,313 1,324
=== === ===== ===== =====
We continually evaluate the performance of each of our stores to determine
whether any particular store should be closed or sold based on profitability
trends and our market presence in the surrounding area. Although closing or
selling under-performing stores reduces revenues, our operating results
typically improve as these stores are generally unprofitable.
Acquisitions. During fiscal 2001, we grew to 1,324 stores located primarily
in the Southeast. We focus on acquiring chains within and contiguous to our
existing market areas. In evaluating potential acquisition candidates, we
consider a number of factors, including strategic fit, desirability of
location, price, and our ability to improve the productivity and profitability
of a location through the implementation of our operating strategy.
In fiscal 2001, we acquired 45 convenience stores located in North Carolina,
South Carolina, Mississippi, Louisiana and Virginia in 9 separate transactions.
These acquisitions were funded primarily from borrowings under our senior
credit facility and cash on hand.
In fiscal 2000, we acquired 143 convenience stores located in North
Carolina, South Carolina, Florida, Georgia, Mississippi and Virginia in 18
separate transactions. These acquisitions were funded primarily from borrowings
under our senior credit facility and cash on hand.
Site Selection. In opening new stores in recent years, we have focused on
selecting store sites on highly traveled roads in coastal/resort and suburban
markets or near highway exit and entrance ramps that provide convenient access
to the store location. In selecting sites for new stores, we use an evaluation
process designed to enhance our return on investment. This process focuses on
market area demographics, population density, traffic volume, visibility,
ingress and egress and economic development in the market area. We also review
the location of competitive stores and customer activity at those stores.
Upgrading of Store Facilities and Equipment. During fiscal 2000 and fiscal
2001, we upgraded the facilities and equipment, including gasoline equipment,
at many of our existing and acquired store locations. These upgrades cost
approximately $24.5 million in fiscal 2000 and $21.7 million in fiscal 2001.
During this period, we were reimbursed $1.7 million through long-term contracts
and image reimbursement programs with gasoline suppliers. This store renovation
program is an integral part of our operating strategy. We continually evaluate
the performance of individual stores and periodically upgrade store facilities
and equipment based on sales volumes, the lease term for leased locations and
management's assessment of the potential return on investment. Typically
upgrades for stores include improvements to:
. sales floor redesign and new merchandise shelving,
. interior fixtures and updated equipment for self-service food and
beverages,
. interior lighting,
. in-store restrooms for customers and
. exterior painting, lighting and signage.
6
The upgrading program for our gasoline operations includes:
. the addition of automated gasoline dispensing and payment systems, such
as multi-product dispensers and pay-at-the-pump credit card readers,
. strategic gasoline branding and reimaging investments,
. enhancement of customer convenience and service and
. the installation of underground storage tank leak detection and other
equipment in accordance with applicable Environmental Protection Agency
(EPA) regulations.
For further discussion of the EPA and other environmental regulations, see
"Government Regulation and Environmental Matters."
Store Operations. Each convenience store is staffed with a manager, an
assistant manager and sales associates who work various shifts to enable most
stores to remain open 24 hours a day, seven days a week. Our field operations
organization is comprised of a network of regional, divisional and district
managers who, with our corporate management, evaluate store operations.
District managers typically oversee from eight to ten stores. We also monitor
store conditions, maintenance and customer service through a regular store
visitation program by district and regional management.
Competition
The convenience store and retail gasoline industries are highly competitive.
The performance of individual stores can be affected by changes in traffic
patterns and the type, number and location of competing stores. Major
competitive factors include, among others, location, ease of access, gasoline
brands, pricing, product and service selections, customer service, store
appearance, cleanliness and safety. In addition, factors such as inflation,
increased labor and benefit costs and the availability of experienced
management and hourly employees may adversely affect the convenience store
industry in general and our stores in particular.
We compete with numerous other convenience stores, supermarkets, drug
stores, fast food operations and other similar retail outlets. In addition, our
stores offering self-service gasoline compete with gasoline service stations
and, more recently, mass merchants, club warehouses and supermarkets. In some
of our markets, our competitors have been in existence longer and have greater
financial, marketing and other resources than we have.
Technology and Store Automation
We utilize technology-based initiatives to improve organizational
efficiency, track and influence operational performance and provide management
with enhanced decision support tools. Beginning in fiscal 1999, we initiated a
Retail Automation Project targeted to expand our technology infrastructure in
an effort to support our rapid growth and enhance our ability to transform
detailed transaction data into useful financial information.
Over the last two fiscal years, we have invested capital and resources to:
. enhance our host level mid-range hardware and application programs to
support continued growth and improve our electronic communication
platform,
. standardize the point-of-sale devices and computers used by our entire
retail network,
. implement industry-specific general ledger and retail automation
software designed to improve internal cash and inventory controls and
increase the transaction level data collected,
. build and implement an electronic price book for each store in our
network which supports item level receiving and electronic invoicing and
. manipulate the data gathered from these systems into timely and useful
retail information available to all levels of our organization.
7
During fiscal 2001, we expanded the scope of our Retail Automation Project
to invest in programs and system enhancements targeted to improve store level
gasoline pricing, gasoline and merchandise inventory management and enhance
decision support tools. These systems include:
. Gasoline Pricing System - an internally developed program designed to
capture, analyze and enhance gasoline gross profit at each of our retail
locations. On a store-by-store basis, the system compares our retail
prices to competitors and tracks trends in pricing, gasoline volume and
total retail unit gross profit.
. Telafuel(R) - a gasoline inventory management tool developed by
TelaPoint, Inc. Implemented in July 2001 and currently in the rollout
phase, this web-based system allows us to coordinate fuel inventory
management with our gasoline hauling vendors and is anticipated to
reduce average inventory levels and, thus, improve working capital.
. Quick Servant(R) - a food service inventory and margin reporting tool
supported by Pinnacle Corporation. The system is designed to enhance
inventory controls and increase gross profits in our food service
locations.
. Orion(R) - a cigarette inventory and ordering tool developed by McLane,
Inc., our primary merchandise wholesaler. This system is expected to
improve in-stock positions while reducing cigarette inventory. We tested
the system in the fourth quarter of fiscal 2001 and are currently in the
implementation phase.
. Retail Explorer(R) - an industry-specific site planning tool developed
by MPSI Systems, Inc. This system is used for competitive market
analysis, site selection, strategic planning and capital allocation
decisions.
. Maintenance Tracking System - an internally developed database program.
Implemented in June 2001, this web-based system enhances our central
maintenance dispatch capabilities and tracks service calls by store and
type. We expect this information will reduce maintenance costs through
improved coordination of maintenance and capital expenditure activity.
. Corporate Audit System - an internally developed database program.
Implemented in June 2001, this web-based system captures, reports and
tracks store audit corrections and provides field management with tools
to review performance and train store managers relative to inventory and
cash controls.
. Computer-Based Training - internally developed programs designed to
improve store level training, provide feedback and tracking of program
success and ultimately reduce training expenses and employee turnover.
We will continue to evaluate and invest in strategic technology-based
initiatives to improve our operating efficiency, strengthen internal controls
and reporting systems, enhance our financial performance and promote our
long-term strategic objectives.
Trade Names, Service Marks and Trademarks
We have registered or applied for registration of a variety of trade names,
service marks and trademarks for use in our business, including The Pantry(R),
Worth(R), Bean Street Coffee Company(R), Big Chill(R), Lil' Champ Food
Store(R), Handy Way, Quick Stop, Zip Mart, Kangaroo(R), Fast Lane(R), Big K,
Mini Mart, Depot, Food Chief(R), Express Stop, Sprint and Smokers Express(R).
We regard our intellectual property as having significant value and as being an
important factor in the marketing of our company and our convenience stores. We
are not aware of any facts which would negatively impact our continuing use of
any of the above trade names, service marks or trademarks.
Government Regulation and Environmental Matters
Many aspects of our operations are subject to regulation under federal,
state and local laws. We describe below the most significant of the regulations
that impact all aspects of our operations.
Storage and Sale of Gasoline. 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
8
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,
Virginia, South Carolina, Georgia, Tennessee, Indiana, Kentucky and Louisiana.
We also rely upon the reimbursement provisions of applicable state trust funds.
In Florida, we met 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 our
financial responsibility requirements through coverage under the state trust
fund.
Regulations enacted by the EPA in 1988 established requirements for:
. installing underground storage tank systems;
. upgrading underground storage tank systems;
. 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 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.
9
The trust funds generally require us to pay deductibles ranging from $5
thousand to $150 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 obtained
private insurance 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. During the next five
years, we may spend up to $1.8 million 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 $10.4 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 cleaned up by
third parties who have indemnified us as to responsibility for cleanup 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.
Sale of Alcoholic Beverages. In certain areas where stores are located,
state or local laws limit the hours of operation for the sale of alcoholic
beverages. State and local regulatory agencies have the authority to approve,
revoke, suspend or deny applications for and renewals of permits and licenses
relating to the sale of alcoholic beverages. These agencies may also impose
various restrictions and sanctions. In many states, retailers of alcoholic
beverages have been held responsible for damages caused by intoxicated
individuals who purchased alcoholic beverages from them. While the potential
exposure for damage claims as a seller of alcoholic beverages is substantial,
we have adopted procedures intended to minimize such exposure. In addition, we
maintain general liability insurance which may mitigate the effect of any
liability.
Store Operations. Our stores are subject to regulation by federal agencies
and to licensing and regulations by state and local health, sanitation, safety,
fire and other departments relating to the development and operation of
convenience stores, including regulations relating to zoning and building
requirements and the preparation and sale of food. Difficulties in obtaining or
failures to obtain the required licenses or approvals could delay or prevent
the development of a new store in a particular area.
Our operations are also subject to federal and state laws governing such
matters as wage rates, overtime, working conditions and citizenship
requirements. At the federal level, there are proposals under consideration
from time to time to increase minimum wage rates and to introduce a system of
mandated health insurance which could affect our results of operations.
Employees
As of September 27, 2001, we employed approximately 8,169 full-time and
1,614 part-time employees. Fewer part-time employees are employed during the
winter months than during the peak spring and summer seasons. Approximately
7,594 of our employees are employed in our stores and 2,189 are corporate and
field management personnel. We have not been adversely impacted by recent
increases in the minimum wage because nearly all of our employees are paid more
than the minimum wage. None of our employees are represented by unions. We
consider our employee relations to be good.
10
Executive Officers
The following table provides information on our executive officers. There
are no family relationships between any of our executive officers or directors:
Name Age Position with our company
---- --- -------------------------
Peter J. Sodini....... 60 President, Chief Executive Officer and Director
William T. Flyg....... 59 Vice President, Finance and Chief Financial Officer
Steven J. Ferreira.... 45 Vice President, Strategic Planning
Douglas M. Sweeney.... 63 Vice President, Operations
Joseph A. Krol........ 53 Vice President, Operations
Daniel J. McCormack... 59 Vice President, Marketing
Peter J. Sodini has served as our President and Chief Executive Officer
since June 1996 and served as our Chief Operating Officer from February 1996
until June 1996. Mr. Sodini has served as a director since November 1995. Mr.
Sodini is a director of Transamerica Income Shares, Inc.
William T. Flyg has served as our Vice President, Finance and Chief
Financial Officer since January 1997. Mr. Flyg was employed by Purity Supreme,
Inc. as Chief Financial Officer from January 1992 until that company was sold
in November 1995, at which time he continued as an employee of Purity Supreme
Inc. until December 1996.
Steven J. Ferreira has served as our Vice President, Strategic Planning,
since May 1997. Prior to joining The Pantry he was with The Store 24 Companies,
Inc. for nearly 20 years where he held various executive positions including
Vice President Operations, Vice President Marketing and finally Chief Operating
Officer for the company.
Douglas M. Sweeney has served as our Vice President, Operations since March
1996. From December 1991 to December 1995, Mr. Sweeney was Senior Vice
President, Operations of Purity Supreme, Inc.
Joseph A. Krol has served as our Vice President, Operations since October
1998 and served as our Region Vice President, Operations from August 1996 to
October 1998.
Daniel J. McCormack has served as our Vice President, Marketing since March
1996. From 1989 to February 1996, Mr. McCormack was Director of Purchasing of
Purity Supreme, Inc. Effective November 30, 2001, Mr. McCormack retired from
his position with our company.
Item 2. Properties
We own the real property at 248 of our stores and lease the real property at
1,076 of our stores. Management believes that none of these leases is
individually material. Most of these leases are net leases requiring us to pay
taxes, insurance and maintenance costs. The aggregate rent paid for fiscal 2001
was $53.2 million. The following table lists the expiration dates of our
leases, including renewal options:
Number of
Lease Expiration Stores
- ---------------- ---------
2002-2005.......... 87
2006-2010.......... 154
2011-2015.......... 138
2016-2020.......... 84
2021-2025.......... 114
2026-2030.......... 92
2031 and thereafter 407
11
Management anticipates that it will be able to negotiate acceptable
extensions of the leases that expire for those locations that we intend to
continue operating. Beyond payment of our contractual lease obligations through
the end of the term, early termination of these leases would result in minimal
penalty to us.
When appropriate, we have chosen to sell and then lease back properties.
Factors leading to this decision include alternative desires for use of cash,
beneficial taxation, minimization of the risks associated with owning the
property (especially changes in valuation due to population shifts,
urbanization, and/or proximity to high volume streets) and the economic terms
of such sale-leaseback transactions.
We own our corporate headquarters, a three-story, 51,000 square foot office
building in Sanford, North Carolina and lease our corporate annex buildings in
Jacksonville, Florida and Sanford, North Carolina. In connection with our 2001
restructuring plan, we closed a leased facility in Jacksonville, Florida which
housed certain administrative staff. Management believes that our headquarters
are adequate for our present and foreseeable needs.
Item 3. Legal Proceedings
We are party to various legal actions in the ordinary course of our
business. We believe these actions are routine in nature and incidental to the
operation of our business. While the outcome of these actions cannot be
predicted with certainty, we believe that the ultimate resolution of these
matters will not have a material adverse impact on our business, financial
condition or prospects.
We make routine applications to state trust funds for the sharing,
recovering and reimbursement of certain cleanup costs and liabilities incurred
as a result of releases from underground storage tank systems. For more
information about these cleanup costs and liabilities, see "Item 1.
Business--Government Regulation and Environmental Matters" and "Item 7.
Management Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Environmental Considerations."
Item 4. Submission of Matters to a Vote of Security Holders
None.
12
PART II
Item 5. Market for Our Common Equity and Related Stockholder Matters
(a) Market Information--We have only one class of common equity, our common
stock, $.01 par value per share. Our common stock represents our only voting
securities. There are 18,107,597 shares of common stock issued and outstanding
as of December 12, 2001. Our common stock is traded on the NASDAQ National
Market under the symbol "PTRY." The following table sets forth for each fiscal
quarter the high and low sale prices per share of our common stock over the
last two fiscal years as reported on the NASDAQ National Market through
September 27, 2001.
2001 2000
------------ ------------
Quarter High Low High Low
- ------- ------ ----- ------ -----
First.. 13.500 7.875 15.125 7.125
Second. 11.500 8.375 16.313 7.000
Third.. 9.375 6.000 11.500 7.125
Fourth. 10.250 6.550 13.063 9.000
(b) Holders--As of December 12, 2001, there were 59 holders of record of our
common stock.
(c) Dividends--During the last two fiscal years, we have not paid any cash
dividends on our common stock. We intend to retain earnings to support
operations, to reduce debt and to finance expansion and do not intend to pay
cash dividends on our common stock for the foreseeable future. The payment of
cash dividends in the future will depend upon our ability to remove certain
loan restrictions and other factors such as our earnings, operations, capital
requirements, financial condition and other factors deemed relevant by our
Board of Directors. The payment of any cash dividends is prohibited under
restrictions contained in the indentures relating to the senior subordinated
notes and our senior credit facility. See "Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Item 8. Consolidated Financial Statements and
Supplementary Data--Notes to Consolidated Financial Statements--Note
5--Long-Term Debt."
.
13
Item 6. Selected Financial Data
The following table sets forth historical consolidated financial data and
store operating data for the periods indicated. The selected historical annual
consolidated financial data is derived from, and is qualified in its entirety
by, our Consolidated Financial Statements, including those contained elsewhere
in this report. The information should be read in conjunction with "Item 1.
Business," "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements and related
notes thereto included elsewhere in this report. In the table, dollars are in
millions, except per store and per gallon data.
September 25, September 24, September 30, September 28, September 27,
1997 1998 1999 2000 2001
------------- ------------- ------------- ------------- -------------
Statement of Operations Data:
Revenues:
Merchandise sales.............................. $ 202.4 $ 460.8 $ 731.7 $ 907.6 $ 968.6
Gasoline sales................................. 220.2 510.0 923.8 1,497.7 1,652.7
Commissions.................................... 4.8 14.1 23.4 25.9 21.7
------- ------- -------- -------- --------
Total revenues.............................. 427.4 984.9 1,678.9 2,431.2 2,643.0
Cost of Sales:
Merchandise.................................... 132.8 304.0 489.3 605.1 645.0
Gasoline....................................... 197.3 447.6 818.8 1,357.8 1,510.4
------- ------- -------- -------- --------
Gross profit................................ 97.3 233.3 370.8 468.4 487.6
Operating, general and administrative expenses.... 77.0 172.9 262.9 337.1 364.1
Unusual charges................................... -- 1.0(e) -- -- 4.8(i)
Depreciation and amortization..................... 9.5 27.6 42.8 56.1 63.5
------- ------- -------- -------- --------
Income from operations............................ 10.8 31.8 65.2 75.2 55.2
Interest expense.................................. (13.0) (28.9) (41.3) (52.3) (58.7)
Income (loss) before other items.................. (1.0) 4.7 24.8 24.8 (1.8)
Extraordinary loss................................ -- (8.0)(f) (3.6)(g) -- --
Net income (loss)................................. $ (1.0) $ (3.3) $ 10.4 $ 14.0 $ (1.8)
Net income (loss) applicable to common
shareholders..................................... $ (6.3) $ (6.3) $ 6.2 $ 14.0 $ (2.7)
Earnings (loss) per share before extraordinary
loss:
Basic.......................................... $ (1.08) $ (0.18) $ 0.71 $ 0.77 $ (0.15)
Diluted........................................ $ (1.08) $ (0.16) $ 0.65 $ 0.74 $ (0.15)
Weighted-average shares outstanding:
Basic.......................................... 5,815 9,732 13,768 18,111 18,113
Diluted........................................ 5,815 11,012 15,076 18,932 18,113
Dividends paid on common stock.................... -- -- -- -- --
Other Financial Data:
EBITDA (a)........................................ $ 20.3 $ 60.5 $ 108.0 $ 131.2 $ 123.5
Net cash provided by (used in):
Operating activities........................... $ 7.3 $ 48.0 $ 68.6 $ 88.2 $ 76.7
Investing activities........................... (25.1) (285.4) (228.9) (148.7) (93.9)
Financing activities........................... 15.8 268.4 157.1(h) 82.7 14.5
Capital expenditures (b).......................... 14.7 42.1 47.4 56.4 43.6
Ratio of earnings to fixed charges (c)............ -- 1.1 1.4 1.4 --
Store Operating Data:
Number of stores (end of period).................. 390 954 1,215 1,313 1,324
Average sales per store:
Merchandise sales (in thousands)............... $ 525.8 $ 533.3 $ 666.4 $ 713.8 $ 731.0
Gasoline gallons (in thousands)................ 501.2 603.9 834.8 856.9 890.4
Comparable store sales growth (d):
Merchandise.................................... 8.5% 5.3% 9.6% 7.5% (0.2)%
Gasoline gallons............................... 7.2% 4.8% 5.9% (2.4)% (3.8)%
Operating Data:
Merchandise gross margin.......................... 34.4% 34.0% 33.1% 33.3% 33.4%
Gasoline gallons sold (in millions)............... 179.4 466.8 855.7 1,062.4 1,142.4
Average retail gasoline price per gallon.......... $ 1.23 $ 1.09 $ 1.08 $ 1.41 $ 1.45
Average gasoline gross profit per gallon.......... $ 0.128 $ 0.134 $ 0.123 $ 0.132 $ 0.125
Operating, general and administrative expenses
as a percentage of total revenues................ 18.0% 17.6% 15.7% 13.9% 13.8%
Operating income as a percentage of total revenues 2.5% 3.2% 3.9% 3.1% 2.1%
Balance Sheet Data (end of period):
Working capital deficiency........................ $ (8.2) $ (9.0) $ (20.4) $ (4.9) $ (29.8)
Total assets...................................... 142.8 554.8 793.7 930.9 950.0
Total debt and capital lease obligations.......... 101.3 340.7 455.6 541.4 559.6
Shareholders' equity (deficit).................... (17.9) 39.3 104.2(h) 118.0 111.1
14
NOTES TO SELECTED FINANCIAL DATA
(a) "EBITDA" represents income from operations before depreciation and
amortization, restructuring and other charges and impairment of long-lived
assets. EBITDA is not a measure of performance under accounting principles
generally accepted in the United States of America, 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
accounting principles generally accepted in the United States of America or as
a measure of profitability or liquidity. We have included information
concerning EBITDA as one measure of our ability to service debt and thus we
believe investors find this information useful. EBITDA as defined herein may
not be comparable to similarly titled measures reported by other companies.
(b) Purchases of assets to be held for sale are excluded from these amounts.
(c) For purposes of determining the ratio of earnings to fixed charges: (i)
earnings consist of income (loss) before income tax benefit (expense) and
extraordinary item plus fixed charges and (ii) fixed charges consist of
interest expense, amortization of deferred financing costs, preferred stock
dividends and the portion of rental expense representative of interest (deemed
to be one-third of rental expense). Our earnings were inadequate to cover fixed
charges by $1.8 million and $6.3 million for fiscal years 2001 and 1997,
respectively.
(d) The stores included in calculating comparable store sales growth are
existing or replacement stores which were in operation for both fiscal years of
the comparable period.
(e) During fiscal 1998, we recorded an integration charge of approximately
$1.0 million for costs of combining our existing business with the acquired
business of Lil' Champ.
(f) On October 23, 1997 in connection with the Lil' Champ acquisition, we
completed the offering of our senior subordinated notes and, in a related
transaction completed a tender offer and consent solicitation with respect to
our senior notes. The tender offer resulted in our purchasing $51.0 million in
principal amount of the senior notes at a purchase price of 110% of the
aggregate principal amount plus accrued and unpaid interest and other related
fees. In connection with this repurchase, we incurred an extraordinary loss of
approximately $8.0 million related to cost of the tender offer and consent
solicitation and write-off of deferred financing costs.
(g) On January 28, 1999, we redeemed $49.0 million in principal amount of
our senior notes and paid accrued and unpaid interest up to, but not including,
the date of purchase and a 4% call premium. We recognized an extraordinary loss
of approximately $3.6 million in connection with the repurchase of the senior
notes including the payment of the 4% call premium of $2.0 million, fees paid
in connection with the amendments and commitments under our bank credit
facility, and the write-off of deferred financing costs related to our
repayment of our former bank credit facility.
(h) On June 8, 1999, we offered and sold 6,250,000 shares of our common
stock in our initial public offering. The initial offering price was $13.00 per
share and we received $75.6 million in net proceeds, before expenses.
(i) During fiscal 2001, we recorded restructuring and other charges of $4.8
million pursuant to a formal plan to centralize administrative functions.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis is provided to increase understanding
of, and should be read in conjunction with, the Consolidated Financial
Statements and accompanying notes. Additional discussion and analysis related
to fiscal year 2001 is contained in our Quarterly Reports on Form 10-Q and our
Current Reports on Form 8-K.
Introduction
By any measure, fiscal 2001 was a challenging time for our industry and
American business in general. Our operating results were impacted by several
factors including an economic downturn, which was particularly hard felt in the
Southeast, greater volatility in wholesale gasoline markets and increased
competition in selected markets. Throughout fiscal 2001, we focused our
attention on those aspects of our business we could influence in the face of
these difficult economic and market conditions. We are committed to taking the
necessary steps to best position The Pantry for when the business climate
improves and to sensibly invest capital to maintain short term liquidity and
improve long-term performance.
In fiscal 2001, our net income before unusual charges was $2.9 million, or
16 cents per share (our net loss after these charges was $2.7 million or 15
cents per share), compared to 74 cents per share in fiscal 2000. During the
year, we recognized $9.0 million in restructuring and other unusual charges
related to (i) our restructuring plan announced in January 2001 and discussed
in "Item 8. Consolidated Financial Statements and Supplementary Data--Notes to
Consolidated Financial Statements--Note 7--Restructuring and Other Charges" and
(ii) the impact of fair market value changes in non-qualifying derivatives
relating to the adoption of SFAS No. 133 discussed in "Item 8. Consolidated
Financial Statements and Supplementary Data--Notes to Consolidated Financial
Statements--Note 8--Interest Expense" (together the "unusual charges"). The
decrease in our earnings before the unusual charges is primarily attributable
to softening consumer spending, tighter gasoline margins and the loss of South
Carolina video gaming income. As a result of these factors, fiscal 2001 EBITDA
declined 5.9% to $123.5 million and income from operations before the unusual
charges declined 20.2% percent to $60.0 million.
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 reduced a number of
administrative positions, eliminated our primary Florida administrative
facility located in Jacksonville and reduced duplicative expenses. We expect
these activities to generate approximately $5.0 million in annualized savings
beginning in fiscal 2002. In conjunction with these actions, we recorded $4.8
million in restructuring and other charges in fiscal 2001. We believe the
integration provides a more efficient and cost effective administrative support
structure and, more importantly, enhances the level of service our support
functions provide to our field staff and extensive retail network.
Fiscal 2001 revenues increased 8.7% to $2.6 billion. The increase is
primarily attributable to the contribution from acquired stores and a 2.8%
increase in our average retail gasoline price per gallon. Comparable store
gasoline gallon volume declined 3.8% and comparable store merchandise sales
declined 0.2%. We believe these declines are indicative of the short-term
impact that sustained economic weakness and higher gasoline retail prices have
had on the disposable income and spending habits 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.
16
When economic conditions improve, we believe our extensive 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 will continue to invest in retail and gasoline information
technology to enhance decision support tools, improve inventory management and
reduce overhead costs.
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 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.
In fiscal 2001 we acquired 45 stores, opened two and closed 36 stores.
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
represent a change in our long-term strategic direction. When the economic
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 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.
The tables below provide information concerning the acquisitions we have
completed during the last three fiscal years:
Fiscal 2001 Acquisitions
Trade
Date Acquired Name Locations Stores
- ------------------------------ ---------- ---------------------------------------------- ------
January 25, 2001.............. East Coast North Carolina and Virginia 11
December 21, 2000............. Fast Lane Mississippi and Louisiana 26
Others (less than five stores) Various North Carolina, South Carolina and Mississippi 8
--
Total................................................................................... 45
17
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
January 27, 2000.............. On-The-Way North Carolina and Southern Virginia 12
November 11, 1999............. Kangaroo Georgia 49
November 4, 1999.............. Cel Oil Charleston, 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
Fiscal 1999 Acquisitions
Date Acquired Trade Name Locations Stores
- ------------------------------ -------------- --------------------------------------------------- ------
July 22, 1999................. Depot Food South Carolina and Northern Georgia 53
July 8, 1999.................. Food Chief Eastern South Carolina 29
February 25, 1999............. ETNA North Carolina and 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
Others (less than five stores) Various North Carolina and South Carolina 2
---
Total............................................................................................ 297
We seek to improve the productivity and profitability of acquired stores by
implementing our merchandising and gasoline initiatives, eliminating
duplicative costs, reducing overhead and centralizing functions such as
purchasing and information technology. In normal economic and market condition
environments, we believe it takes six to twelve months to fully integrate and
achieve operational and financial improvements at acquired locations. There can
be no assurance, however, that we can achieve revenue increases or cost savings
with respect to any acquisition.
Impact of Acquisitions. These acquisitions and the related transactions have
had a significant impact on our financial condition and results of operations
since each of their respective transaction dates. Due to the method of
accounting for these acquisitions, the Consolidated Statements of Operations
for the fiscal years presented include results of operations for each of the
acquisitions from the date of each acquisition only. For fiscal 2001
acquisitions, the Consolidated Balance Sheets as of September 28, 2000 and the
Consolidated Statements of Operations for fiscal years September 28, 2000 and
September 30, 1999 do not include the assets, liabilities, and results of
operations relating to these acquisitions. As a result, comparisons of fiscal
2001 results to prior fiscal years are impacted materially and the underlying
performance of same store results is obscured.
Results of Operations
Fiscal 2001 Compared To Fiscal 2000
Total Revenue. Total revenue for fiscal 2001 was $2.6 billion compared to
$2.4 billion for fiscal 2000, an increase of $211.9 million or 8.7%. The
increase in total revenue is primarily due to (i) the revenue from stores
acquired in fiscal 2001 of $121.2 million, (ii) the effect of a full year of
revenue from fiscal 2000 acquisitions of $149.0 million and (iii) a 2.8%
increase in our average retail price of gasoline gallons sold. These increases
were partially offset by comparable store declines in merchandise sales and
gasoline gallons of 0.2% and 3.8%,
18
respectively, as well as lower commission revenue. The comparable store volume
declines were primarily due to (i) the lower consumer spending associated with
the economic downturn, (ii) greater volatility in wholesale gasoline costs and
higher gasoline retail prices and (iii) increased competition in selected
markets.
Merchandise Revenue. Total merchandise revenue for fiscal 2001 was $968.6
million compared to $907.6 million for fiscal 2000, an increase of $61.1
million or 6.7%. The increase in merchandise revenue is primarily due to the
revenue from stores acquired in fiscal 2001 of $34.0 million, the effect of a
full year of merchandise revenue from fiscal 2000 acquisitions of $46.6
million, partially offset by a comparable store merchandise sales decline of
0.2%.
Gasoline Revenue and Gallons. Total gasoline revenue for fiscal 2001 was
$1.7 billion compared to $1.5 billion for fiscal 2000, an increase of $155.0
million or 10.4%. The increase in gasoline revenue is primarily due to the
revenue from stores acquired in fiscal 2001 of $86.9 million, the effect of a
full year of gasoline revenue from fiscal 2000 acquisitions of $101.5 million,
and the impact of raising gasoline retail prices. In fiscal 2001, our average
retail price of gasoline was $1.45 per gallon, which represents a $0.04 per
gallon or 2.8% increase in average retail price from fiscal 2000. These
increases were partially offset by a gasoline gallon comparable store volume
decline of 3.8%.
In fiscal 2001, total gasoline gallons were 1.1 billion gallons, an increase
of 80.0 million gallons or 7.5% over fiscal 2000. The increase in gasoline
gallons is primarily due to gallon volume of 61.2 million from stores acquired
in fiscal 2001 and the effect of a full year of gasoline volume from 2000
acquisitions of 71.3 million partially offset by comparable store gasoline
volume decreases of 3.8% or a decrease of approximately 34.7 million gallons.
The fiscal 2001 same store gallon decline was primarily due to lower demand
coupled with heightened competitive factors. Demand has been influenced by a
slowing economy which has resulted in lower consumer spending and less travel,
higher gasoline retail prices as a result of wholesale gasoline cost increases
and our efforts to manage the balance between gasoline gross profit and gallon
volume.
Commission Revenue. Total commission revenue for fiscal 2001 was $21.7
million compared to $25.9 million for fiscal 2000, a decrease of $4.2 million
or 16.3%. The decrease in commission revenue is primarily due to the loss of
approximately $3.9 million in video poker revenue as a result of the July 1,
2000 ban in South Carolina and lower lottery commissions in Florida and Georgia
associated with lower consumer spending. These declines were partially offset
by revenue from stores acquired in fiscal 2001 of $351 thousand and the effect
of a full year of commission revenue from 2000 acquisitions of $869 thousand.
Total Gross Profit. Total gross profit for fiscal 2001 was $487.6 million
compared to $468.4 million for fiscal 2000, an increase of $19.3 million or
4.1%. The increase in gross profit is primarily due to the gross profit from
stores acquired in fiscal 2001 of $17.1 million, the effect of a full year of
operations from stores acquired in 2000 of $26.4 million, partially offset by
comparable store volume declines, lower gasoline margins and the decline in
commission revenue.
Merchandise Gross Margin. Fiscal 2001 merchandise gross margin was 33.4%, a
10 basis point increase over fiscal 2000. The increase was primarily due to
margin improvements in selected categories and an increase in food service
sales, which earn higher gross margin percentages.
Gasoline Gross Profit Per Gallon. Gasoline gross profit per gallon decreased
to $0.125 in fiscal 2001 from $0.132 in fiscal 2000 primarily due to increased
volatility in wholesale gasoline markets. We believe such markets were volatile
due to many factors, including world crude supply and demand fundamentals,
domestic fuel inventories and domestic refining capacity. Due to this
volatility, our margin per gallon sold on a quarterly basis ranged from a low
of $0.114 in our second quarter to a high of $0.134 in our third quarter of
fiscal 2001.
19
Operating, General and Administrative Expenses. Operating expenses for
fiscal 2001 were $364.1 million compared to $337.1 million for fiscal 2000, an
increase of $27.0 million or 8.0%. The increase in operating expenses is
primarily due to the operating and lease expenses associated with the stores
acquired in fiscal 2001 of $13.4 million and the effect of a full year of
expenses for stores acquired in fiscal 2000 of $20.2 million.
Restructuring and Other Charges. During fiscal 2001, we recorded $4.8
million in restructuring and other non-recurring charges related to a formal
plan designed to strengthen our organizational structure and reduce operating
costs by centralizing corporate administrative functions. The plan included
closing an administrative facility located in Jacksonville, Florida, and
integrating key marketing, finance and administrative activities into our
corporate headquarters located in Sanford, North Carolina. The restructuring
charge consisted of $1.7 million of employee termination benefits, $1.7 million
of lease obligations and $490 thousand of legal and other professional
consultant fees. During fiscal 2001 we also incurred and expended $844 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.
Income from Operations. Income from operations for fiscal 2001 was $55.2
million compared to $75.2 million for fiscal 2000, a decrease of $20.0 million
or 26.6%. The decrease is primarily due to the items discussed above and a $7.5
million increase in depreciation and amortization expense associated with
acquisition activity and capital expenditures.
EBITDA. EBITDA represents income from operations before depreciation and
amortization, restructuring and other charges, and extraordinary loss. EBITDA
for fiscal 2001 was $123.5 million compared to $131.2 million for fiscal 2000,
a decrease of $7.7 million or 5.9%. The decrease is primarily due to the items
discussed above.
EBITDA is not a measure of performance under accounting principles generally
accepted in the United States of America, 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 accounting
principles generally accepted in the United States of America, 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 and thus
we believe investors find this information useful. EBITDA as defined herein may
not be comparable to similarly titled measures reported by other companies.
Interest Expense (see--"Liquidity and Capital Resources--Long-Term Debt").
Interest expense in fiscal 2001 was $58.7 million compared to $52.3 million for
fiscal 2000, an increase of $6.4 million or 12.2%. In fiscal 2001, interest
expense was primarily related to interest costs of $20.5 million on our senior
subordinated notes and approximately $30.2 million on our senior credit
facility. The increase in interest expense was primarily due to a $4.2 million
decline in the fair market value of certain non-qualifying derivative
instruments and increased borrowings associated with our acquisition activity.
These increases were partially offset by a general decline in interest rates.
Income Tax Expense. In spite of our loss before income taxes of $1.8 million
we recorded income tax expense of $871 thousand in fiscal 2001. Our effective
tax rate is negatively impacted by non-deductible goodwill related to certain
acquisitions and other permanent book-tax differences.
Net Loss/Income. Net loss for fiscal 2001 was $2.7 million compared to net
income of $14.0 million for fiscal 2000, a decrease of $16.7 million or 119.0%.
The decrease is primarily due to lower gasoline margin per gallon, lower
comparable store volume and lower commission revenue, as well as $9.0 million
in pre-tax charges related to our restructuring plan and fair market value
adjustments related to certain non-qualifying derivative instruments. Fiscal
2001 net income before unusual charges was $2.9 million, or 16 cents per share,
compared to 74 cents per share in fiscal 2000.
20
Fiscal 2000 Compared To Fiscal 1999
We operate on a 52 or 53-week fiscal year. Our operations for fiscal 2000
contained 52 weeks while fiscal 1999 contained 53 weeks. When we make reference
to fiscal 1999 adjusted for the number of weeks, we have simply adjusted fiscal
1999 fourth quarter results to approximate a 13-week period.
Total Revenue. Total revenue for fiscal 2000 was $2.4 billion compared to
$1.7 billion for fiscal 1999, an increase of $752.3 million or 44.8%. The
increase in total revenue is primarily due to the revenue from stores acquired
in fiscal 2000 of $217.6 million, the effect of a full year of revenue from
fiscal 1999 acquisitions of $290.9 million, and comparable store merchandise
sales growth of 7.5%. Comparable store merchandise sales increases at our
locations are primarily due to increased customer counts and average
transaction size resulting from more competitive gasoline pricing, enhanced
store appearance and store merchandising, and increased in-store promotional
activity. Adjusting for the number of weeks in fiscal 1999, the increase in
total revenues was 48.3%.
Merchandise Revenue. Total merchandise revenue for fiscal 2000 was $907.6
million compared to $731.7 million for fiscal 1999, an increase of $175.9
million or 24.0%. The increase in merchandise revenue is primarily due to the
revenue from stores acquired in fiscal 2000 of $68.6 million, the effect of a
full year of merchandise revenue from fiscal 1999 acquisitions of $90.1
million, and comparable store merchandise sales growth of 7.5% or an increase
of approximately $42.3 million. Adjusting for the number of weeks in fiscal
1999, the increase in merchandise revenues was 26.9%.
Gasoline Revenue and Gallons. Total gasoline revenue for fiscal 2000 was
$1.5 billion compared to $923.8 million for fiscal 1999, an increase of $573.9
million or 62.1%. The increase in gasoline revenue is primarily due to the
revenue from stores acquired in fiscal 2000 of $146.4 million, the effect of a
full year of gasoline revenue from fiscal 1999 acquisitions of $197.2 million,
and the impact of raising gasoline retail prices. In fiscal 2000, our average
retail price of gasoline was $1.41 per gallon, which represents a $0.33 per
gallon increase from fiscal 1999. These increases were partially offset by a
gasoline gallon comparable store volume decline of 2.4%.
In fiscal 2000, total gasoline gallons were 1.1 billion gallons compared to
855.7 million gallons in fiscal 1999, an increase of 206.7 million gallons or
24.2%. The increase in gasoline gallons is primarily due to gallon volume of
106.1 million from stores acquired in fiscal 2000, the effect of a full year of
gasoline volume from 1999 acquisitions of 151.3 million offset by comparable
store gasoline volume decreases of 2.4% or a decrease of approximately 14.9
million gallons. The fiscal 2000 same store gallon decline was primarily due to
lower demand coupled with heightened competitive factors in selected markets
such as Tampa and Orlando. Demand has been influenced by higher gasoline retail
prices as a result of wholesale gasoline cost increases and our efforts to
manage the balance between gasoline gross profit and gallon volume.
Commission Revenue. Total commission revenue for fiscal 2000 was $25.9
million compared to $23.4 million for fiscal 1999, an increase of $2.5 million
or 10.8%. The increase in commission revenue is primarily due to revenue from
stores acquired in fiscal 2000 of $2.6 million, the effect of a full year of
commission revenue from 1999 acquisitions of $3.6 million and comparable store
commission revenue growth. These increases were partially offset by the loss of
video poker revenue in the State of South Carolina as of July 1, 2000. As a
result, video poker commission in fiscal 2000 decreased 38.8% to $3.8 million
from $6.2 million in fiscal 1999.
Total Gross Profit. Total gross profit for fiscal 2000 was $468.4 million
compared to $370.8 million for fiscal 1999, an increase of $97.5 million or
26.3%. The increase in gross profit is primarily due to the gross profit from
stores acquired in fiscal 2000 of $37.4 million, the effect of a full year of
operations from stores acquired in 1999 of $51.9 million and higher merchandise
and gasoline margins. Adjusting for the number of weeks in fiscal 1999, the
increase in total gross profit was 30.1%.
21
Merchandise Gross Margin. Fiscal 2000 merchandise gross margin was 33.3%, a
20 basis point increase over fiscal 1999. The increase was primarily due to
margin improvements in selected categories and an increase in food service
sales, which earn higher gross margin percentages.
Gasoline Gross Profit Per Gallon. Gasoline gross profit per gallon increased
to $0.132 in fiscal 2000 from $0.123 in fiscal 1999 primarily due to our
efforts to manage the balance between gasoline gallon volume and gasoline gross
profit per gallon. During fiscal 2000, we experienced a volatile wholesale
gasoline market due to many factors, including world crude supply and demand
fundamentals, domestic fuel inventories, and domestic refining capacity. Due to
this volatility, our margin per gallon sold on a quarterly basis ranged from a
low of $0.101 in our second quarter to a high of $0.153 in our fourth quarter
of fiscal 2000.
Operating, General and Administrative Expenses. Operating expenses for
fiscal 2000 were $337.1 million compared to $262.9 million for fiscal 1999, an
increase of $74.3 million or 28.3%. The increase in operating expenses is
primarily due to the operating and lease expenses associated with the stores
acquired in fiscal 2000 of $26.1 million, the effect of a full year of expenses
for stores acquired in fiscal 1999 of $38.3 million, as well as an increase in
general corporate expenses associated with our store growth initiatives. As a
percentage of total revenue, operating, general and administrative expenses
decreased to 13.9% in fiscal 2000 from 15.7% in fiscal 1999.
Income from Operations. Income from operations for fiscal 2000 was $75.2
million compared to $65.2 million for fiscal 1999, an increase of $10.0 million
or 15.4%. The increase is primarily due to the items discussed above. As a
percentage of total revenue, income from operations decreased to 3.1% in fiscal
2000 from 3.9% in fiscal 1999.
EBITDA. EBITDA represents income from operations before depreciation and
amortization, restructuring and other charges and extraordinary loss. EBITDA
for fiscal 2000 was $131.2 million compared to $108.0 million for fiscal 1999,
an increase of $23.3 million or 21.6%. The increase is primarily due to the
items discussed above.
EBITDA is not a measure of performance under accounting principles generally
accepted in the United States of America, 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 accounting
principles generally accepted in the United States of America, 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 and thus
we believe investors find this information useful. EBITDA as defined herein may
not be comparable to similarly titled measures reported by other companies.
Interest Expense (see--"Liquidity and Capital Resources--Long-Term Debt").
Interest expense in fiscal 2000 was $52.3 million compared to $41.3 million for
fiscal 1999, an increase of $11.0 million or 26.8%. In fiscal 2000, interest
expense was primarily related to interest costs of $20.5 million on our senior
subordinated notes and approximately $30.4 million on our senior credit
facility. The increase in interest expense was primarily due to increased
borrowings associated with our acquisition activity and a general rise in
interest rates.
Income Tax Expense. Our effective income tax rate for fiscal 2000 was 43.5%.
Our effective tax rate is negatively impacted by non-deductible goodwill
related to certain acquisitions and other permanent book-tax differences.
Net Income. Net income for fiscal 2000 was $14.0 million compared to net
income of $10.4 million for fiscal 1999, an increase of $3.6 million or 34.4%.
The increase is primarily due to the absence of any extraordinary charges in
fiscal 2000 as compared to fiscal 1999, which had an extraordinary loss of $3.6
million associated with certain debt restructuring activity. Adjusting for the
number of weeks in fiscal 1999 and excluding the fiscal 1999 extraordinary
loss, the increase in net income in fiscal 2000 was 4.0%.
22
Liquidity and Capital Resources
Cash Flows from Operations. Due to the nature of our business, substantially
all sales are for cash. Cash provided by operations is our primary source of
liquidity. We rely primarily upon cash provided by operating activities,
supplemented as necessary from time to time by borrowings under our senior
credit facility, 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 for fiscal
1999 totaled $68.6 million, for fiscal 2000 totaled $88.2 million, and for
fiscal 2001 totaled $76.7 million. We had $50.6 million of cash and cash
equivalents on hand at September 27, 2001.
Senior Credit Facility. On January 28, 1999, we entered into our senior
credit facility. The senior credit facility consisted of a $45.0 million
revolving credit facility, a $50.0 million acquisition facility and a $240.0
million term loan facility. The revolving credit facility is available to fund
working capital financing, general corporate purposes and for the issuance of
standby letters of credit. The acquisition facility is available to fund future
acquisitions of related businesses. As of September 27, 2001, there were $45.5
million outstanding under the acquisition facility and no borrowings
outstanding under the revolving credit facility, except for approximately $12.9
million of letters of credit issued thereunder. As of September 27, 2001, we
have approximately $32.1 million in available borrowing capacity.
During fiscal 2000, we entered into amendments to our senior credit facility
to include an additional $100.0 million under our term loan facility. Proceeds
from the term loans were used to prepay amounts outstanding under our
acquisition facility and to fund acquisitions closed during fiscal 2000.
For the twelve-month period ending September 27, 2001, we did not satisfy
two financial covenants required by our senior credit facility. We have since
received a waiver from our senior credit group and executed an amendment to the
senior credit facility that includes, among other things, a modification to
financial covenants and increases the floating interest rate spread by 50 basis
points as long as its debt ratio is greater than 4.5:1 reducing to 25 basis
points when the debt ratio is less than 4.5:1. The changes to financial
covenants, among other things, loosened our coverage and debt ratios and
imposed tighter limits on capital expenditures and expenditures to acquire
related businesses. Our net capital expenditures are limited to $27.5 million
in fiscal 2002, $30.0 million in fiscal 2003, $32.5 million in 2004 and
increases to $35.0 million thereafter. The amendment limits acquisition
expenditures to $3.0 million in fiscal 2002 and $15.0 million in fiscal 2003.
Our senior credit facility contains covenants restricting our ability and
the ability of any of our subsidiaries to, among other things: (i) incur
additional indebtedness; (ii) declare dividends or redeem or repurchase capital
stock; (iii) prepay, redeem or purchase debt; (iv) incur liens; (v) make loans
and investments; (vi) make capital expenditures; (vii) engage in mergers,
acquisitions or asset sales; and (viii) engage in transactions with affiliates.
Our senior credit facility also contains financial ratios and tests which must
be met with respect to minimum coverage and leverage ratios, pro forma cash
flow, maximum business acquisition expenditures and maximum capital
expenditures. Restrictive covenants in our debt agreements may restrict our
ability to implement our acquisition strategy.
2001 Acquisitions. In fiscal 2001, we acquired a total of 45 convenience
stores in 9 transactions for approximately $56.0 million, net of cash acquired.
These acquisitions were funded with borrowings under our senior credit facility
and cash on hand.
Capital Expenditures. Capital expenditures (excluding all acquisitions) for
fiscal 2001 were $45.2 million. 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 substantially all
capital expenditures and new store development through cash flow from
operations, a sale-leaseback program or similar lease activity, vendor
reimbursements and asset dispositions.
23
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. The senior credit
facility limits or caps the proceeds of sale-leasebacks that we can use to fund
our operations or capital expenditures. Under this sale-leaseback program, we
received $3.5 million in fiscal 2001 and $9.5 million during fiscal 2000.
In fiscal 2001, we received approximately $13.6 million in sale-leaseback
proceeds, vendor reimbursements for capital improvements and proceeds from
asset dispositions; therefore, net capital expenditures, excluding all
acquisitions, for fiscal 2001 were $31.6 million. We anticipate that net
capital expenditures for fiscal 2002 will be approximately $25.5 million.
Long-Term Debt. At September 27, 2001, our long-term debt consisted
primarily of $200.0 million of the senior subordinated notes and $343.4 million
in loans under our senior credit facility. See "--Senior 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. 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, except in amounts not in excess of a
percentage of our net income or proceeds of debt or equity issuances and in
amounts not in excess of $5.0 million, (ii) issue stock of subsidiaries, (iii)
make investments in non-affiliated entities, except employee loans of up to
$3.0 million, (iv) repurchase stock, except stock owned by employees in amounts
not in excess of $2.0 million with the proceeds from debt or equity issuances,
(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.
We can incur debt under the senior subordinated notes if the ratio of our
pro forma EBITDA to fixed charges, after giving effect to such incurrence, is
at least 2 to 1. Even if we do not meet this ratio we can incur: (i) bank
credit facility acquisition debt of up to $50.0 million and other debt in an
amount equal to the greater of $45.0 million or 4.0% times our annualized
revenues, (ii) capital leases or acquisition debt in amounts not to exceed in
the aggregate 10% of our tangible assets at time of incurrence, (iii)
intercompany debt, (iv) pre-existing debt, (v) up to $15.0 million in any type
of debt or (vi) debt for refinancing of the above described debt.
The senior subordinated notes also place conditions on the terms of asset
sales or transfers and require us either to reinvest the proceeds of an asset
sale or transfer, or, if we do not reinvest those proceeds, to pay down our
senior credit facility or other senior debt or to offer to redeem our senior
subordinated notes with any asset sale proceeds not so used. All of the senior
subordinated notes may be redeemed after October 15, 2002 at a redemption price
which begins at 105.125% and decreases to 100.0% after October 2005.
Cash Flows From Financing Activities. We used proceeds from our senior
credit facility and cash on hand to finance fiscal 2001 acquisitions and
long-term debt principal requirements.
Cash Requirements. We believe that cash on hand, together with cash flow
anticipated to be generated from operations, short-term borrowing for seasonal
working capital 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.
Shareholders' Equity. As of September 27, 2001, our shareholders' equity
totaled $111.1 million. The decrease of $6.8 million in shareholders' equity is
attributed to fiscal year 2001 net loss of $2.7 million and a decrease of $4.3
million in accumulated comprehensive income related to the fair value changes
in our qualifying derivative financial instruments.
24
Additional paid in capital is impacted by the accounting treatment applied
to a 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 in
us by our shareholders.
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 the applicable
requirements, we maintain surety bonds in the aggregate amount of approximately
$2.0 million in favor of state environmental enforcement 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 meet such financial responsibility
requirements through private commercial liability insurance. In Mississippi, we
meet our financial responsibility requirements through coverage under the state
trust fund.
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 programs and we have filed claims and received
reimbursement in North Carolina, South Carolina, Kentucky, Indiana, Georgia,
Florida and Tennessee. We have also filed claims and received credit toward 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.
Environmental reserves of $12.2 million as of September 27, 2001, represent
estimates for future expenditures for remediation, tank removal and litigation
associated with 535 known contaminated sites as a result of releases and are
based on current regulations, historical results and certain 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 September 27, 2001, amounts which are probable of
reimbursement (based on our experience) from those sources total $10.4 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 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 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.
Several of the locations identified as contaminated are being cleaned up by
third parties who have indemnified us as to responsibility for 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
25
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 $461 thousand (net of taxes of $289 thousand). The initial
adoption of SFAS No. 133 did not have a material impact on our results of
operations or financial condition. Our derivative liabilities were $11.3
million as of September 27, 2001.
Effective September 29, 2000, we also 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 sheets in the financial
statements. The adoption of SAB No. 101 did not have a material impact on our
results of operations and financial condition.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations 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. The adoption of
SFAS No. 141 did not have a material impact on our results of operations and
financial condition.
Recently Issued Accounting Standards Not Yet Adopted
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, 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 principal. Subsequently, any impairment losses will be
recognized as a component of income from operations. As of September 27, 2001,
we have net goodwill of $277.7 million and have incurred $9.7 million in
goodwill amortization in the statement of operations during fiscal 2001. 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. As permitted, we early adopted SFAS No. 142 effective
September 28, 2001.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. Adoption of SFAS No. 143 is required for fiscal
years beginning after June 15, 2002, which would be our first quarter of fiscal
2003. We do not anticipate the adoption of SFAS No. 143 will have a material
impact on our results of operations and financial condition.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121,
Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to
be Disposed of. This statement addresses financial accounting and reporting for
the
26
impairment or disposal of long-lived assets. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001, with earlier application
encouraged. We do not anticipate that the adoption of SFAS No. 144 will have a
material impact on our results of operations and financial condition.
Inflation
During fiscal 2001, wholesale gasoline fuel prices remained volatile,
hitting a high of $36 per barrel in October 2000 and a low of $21 per barrel in
September 2001. Generally, we pass along wholesale gasoline cost changes to our
customers through retail price changes. Gasoline price volatility has had an
impact on total revenue, gross profit dollars and gross profit percentage.
General CPI, excluding energy, increased 2.7% during 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 can make no assurances that continued inflation
will not have a material adverse effect on our sales and gross profit dollars.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk
Quantitative Disclosures:
We are exposed to certain 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 senior credit facility.
The following table 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 December
12, 2001.
EXPECTED MATURITY DATE
(Dollars in Thousands)
As of September 27, 2001
---------------------------------------------------------------------------
FY FY FY FY FY Fair
2002 2003 2004 2005 2006 Thereafter Total Value
------- ------- ------- ------- -------- ---------- -------- --------
Long-Term Debt................ $40,000 $43,255 $52,912 $88,654 $119,354 $200,000 $544,175 $539,096
Weighted-Average Interest Rate 9.20% 9.05% 8.62% 8.87% 9.57% 10.25% 9.14%
As of September 28, 2000
---------------------------------------------------------------------------
FY FY FY FY FY Fair
2001 2002 2003 2004 2005 Thereafter Total Value
------- ------- ------- ------- -------- ---------- -------- --------
Long-Term Debt................ $20,650 $25,319 $28,573 $45,073 $ 88,654 $319,354 $527,623 $503,472
Weighted-Average Interest Rate 10.14% 10.22% 10.23% 10.22% 10.24% 10.26% 10.22%
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 September 27, 2001, the
interest rate on 70.0% of our debt was fixed by either the nature of the
obligation or through the interest rate swap arrangements compared to 70.6% at
September 28, 2000.
27
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)
September 28, September 27,
2000 2001
------------- -------------
Notional principal amount......... $170,000 $180,000
Weighted-average pay rate......... 6.41% 6.12%
Weighted-average receive rate..... 6.83% 2.92%
Weighted-average years to maturity 2.11 1.86
Effective February 1, 2001, we 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 September 27, 2001, the fair value of our swap and
collar agreements represented a liability of $11.1 million.
Qualitative Disclosures:
Our primary exposure relates to:
. interest rate risk on long-term and short-term borrowings,
. our ability to refinance our senior subordinated notes 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.
We manage interest rate risk on our outstanding long-term and short-term
debt through our use of fixed and variable rate debt. 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 continues to evaluate our
financial position on an ongoing basis.
28
Item 8. Consolidated Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
------------
Financial Statements:
Independent Auditors' Report............................................................ 30
Consolidated Balance Sheets as of September 28, 2000 and September 27, 2001............. 31
Consolidated Statements of Operations for the years ended September 30, 1999,
September 28, 2000, and September 27, 2001............................................ 33
Consolidated Statements of Shareholders' Equity for the years ended September 30, 1999,
September 28, 2000, and September 27, 2001............................................ 34
Consolidated Statements of Cash Flows for the years ended September 30, 1999,
September 28, 2000, and September 27, 2001............................................ 35
Notes to Consolidated Financial Statements.............................................. 37
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts and Reserves............................. S-1
Financial Statement Exhibit:
Exhibit 12.1--Computation of Ratio of Earnings to Fixed Charges......................... Exhibit 12.1
29
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders of
The Pantry, Inc.
Sanford, North Carolina
We have audited the accompanying consolidated balance sheets of The Pantry,
Inc. ("The Pantry") and subsidiaries as of September 28, 2000 and September 27,
2001, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
September 27, 2001. Our audits also included the financial statement schedule
listed in the Index at Item 14. These financial statements and financial
statement schedule are the responsibility of The Pantry's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Pantry, Inc. and
subsidiaries as of September 28, 2000 and September 27, 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended September 27, 2001 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
Raleigh, North Carolina
November 13, 2001
30
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 28, September 27,
2000 2001
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 53,354 $ 50,611
Receivables (net of allowance for doubtful accounts of $1,205 at
September 28, 2000 and $146 at September 27, 2001)....................... 23,163 30,424
Inventories (Note 3)....................................................... 87,962 81,687
Prepaid expenses........................................................... 5,318 3,521
Property held for sale..................................................... 2,324 1,644
Deferred income taxes (Note 9)............................................. 2,070 2,591
-------- --------
Total current assets................................................... 174,191 170,478
-------- --------
Property and equipment, net (Notes 4 and 10).................................. 466,967 470,678
-------- --------
Other assets:
Goodwill (net of accumulated amortization of $24,352 at September 28, 2000
and $34,096 at September 27, 2001) (Note 2).............................. 250,977 277,665
Deferred financing costs (net of accumulated amortization of $4,513 at
September 28, 2000 and $6,584 at September 27, 2001) (Note 5)............ 12,317 10,299
Environmental receivables (Note 11)........................................ 12,818 10,428
Other...................................................................... 13,650 10,444
-------- --------
Total other assets..................................................... 289,762 308,836
-------- --------
Total assets.................................................................. $930,920 $949,992
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
31
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS--(Continued)
(Dollars in Thousands)
September 28, September 27,
2000 2001
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
- -------------------------------------
Current liabilities:
Current maturities of long-term debt (Note 5)............................... $ 20,650 $ 40,000
Current maturities of capital lease obligations (Note 10)................... 1,151 1,363
Accounts payable............................................................ 101,931 94,169
Accrued interest (Note 5)................................................... 12,050 11,163
Accrued compensation and related taxes...................................... 13,889 12,514
Income taxes payable (Note 9)............................................... 1,250 --
Other accrued taxes......................................................... 13,396 14,515
Accrued insurance........................................................... 5,678 6,161
Other accrued liabilities (Notes 6, 7 and 11)............................... 9,116 20,423
-------- --------
Total current liabilities............................................... 179,111 200,308
-------- --------
Long-term debt (Note 5)........................................................ 506,975 504,175
-------- --------
Other noncurrent liabilities:
Environmental costs (Note 11)............................................... 14,066 12,207
Deferred income taxes (Note 9).............................................. 34,508 33,488
Deferred revenue (Note 11).................................................. 54,802 57,560
Capital lease obligations (Note 10)......................................... 12,648 14,020
Other (Note 6).............................................................. 10,830 17,093
-------- --------
Total other noncurrent liabilities...................................... 126,854 134,368
-------- --------
Commitments and contingencies (Notes 5, 10, 11 and 16)
Shareholders' Equity:
Common stock, $.01 par value, 50,000,000 shares authorized; 18,111,474 and
18,114,737 issued and outstanding at September 28, 2000, and
September 27, 2001, respectively (Note 13)................................ 182 182
Additional paid-in capital (Note 13)........................................ 128,018 128,043
Shareholder loans........................................................... (912) (837)
Accumulated other comprehensive deficit (net of deferred taxes of $2,781 at
September 27, 2001) (Note 6).............................................. -- (4,283)
Accumulated deficit......................................................... (9,308) (11,964)
-------- --------
Total shareholders' equity.............................................. 117,980 111,141
-------- --------
Total liabilities and shareholders' equity..................................... $930,920 $949,992
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
32
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, except per share amounts)
September 30, September 28, September 27,
1999 2000 2001
------------- ------------- -------------
(53 weeks) (52 weeks) (52 weeks)
Revenues:
Merchandise sales......................................... $ 731,681 $ 907,550 $ 968,614
Gasoline sales............................................ 923,786 1,497,696 1,652,725
Commissions............................................... 23,403 25,938 21,705
---------- ---------- ----------
Total revenues........................................ 1,678,870 2,431,184 2,643,044
---------- ---------- ----------
Cost of sales:
Merchandise............................................... 489,258 605,054 645,012
Gasoline.................................................. 818,784 1,357,766 1,510,389
---------- ---------- ----------
Total cost of sales................................... 1,308,042 1,962,820 2,155,401
---------- ---------- ----------
Gross profit................................................. 370,828 468,364 487,643
---------- ---------- ----------
Operating expenses:
Operating, general and administrative expenses............ 262,852 337,116 364,134
Restructuring and other charges (Note 7).................. -- -- 4,771
Depreciation and amortization............................. 42,798 56,062 63,545
---------- ---------- ----------
Total operating expenses.............................. 305,650 393,178 432,450
---------- ---------- ----------
Income from operations....................................... 65,178 75,186 55,193
---------- ---------- ----------
Other income (expense):
Interest expense (Note 8)................................. (41,280) (52,329) (58,731)
Miscellaneous............................................. 852 1,915 1,753
---------- ---------- ----------
Total other expense................................... (40,428) (50,414) (56,978)
---------- ---------- ----------
Income (loss) before income taxes and extraordinary loss..... 24,750 24,772 (1,785)
Income tax expense (Note 9).................................. (10,750) (10,776) (871)
---------- ---------- ----------
Net income (loss) before extraordinary loss.................. 14,000 13,996 (2,656)
Extraordinary loss (Note 5).................................. (3,584) -- --
---------- ---------- ----------
Net income (loss)............................................ $ 10,416 $ 13,996 $ (2,656)
========== ========== ==========
Net income (loss) applicable to common shareholders (Note 14) $ 6,233 $ 13,996 $ (2,656)
========== ========== ==========
Earnings per share (Note 17):
Basic:
Income (loss) before extraordinary loss............... $ 0.71 $ 0.77 $ (0.15)
Extraordinary loss.................................... (0.26) -- --
---------- ---------- ----------
Net income (loss)..................................... $ 0.45 $ 0.77 $ (0.15)
========== ========== ==========
Diluted:
Income (loss) before extraordinary loss............... $ 0.65 $ 0.74 $ (0.15)
Extraordinary loss.................................... (0.24) -- --
---------- ---------- ----------
Net income (loss)..................................... $ 0.41 $ 0.74 $ (0.15)
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
33
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
(Shares and Dollars in Thousands)
Total
Preferred Stock Common Stock Additional Additional
---------------- ---------------- Paid-in Paid-in Shareholder
Shares Par Value Shares Par Value Capital Other(1) Capital Loans
------ --------- ------ --------- ---------- -------- ---------- -----------
Balance at September 24, 1998.............. 18 -- 11,705 $117 $ 86,048 $(17,109) $ 68,939 $(215)
Net income................................. -- -- -- -- -- -- -- --
Issuances of common stock.................. -- -- 157 2 1,788 -- 1,788 (722)
Public sale of common stock at $13.00 per
share, net of expenses.................... -- -- 6,250 63 72,916 -- 72,916 --
Redemption of Series B preferred stock..... (18) -- -- -- (15,387) -- (15,387) --
Dividends on preferred stock............... -- -- -- -- -- -- -- --
---- ----- ------ ---- -------- -------- -------- -----
Balance at September 30, 1999.............. -- -- 18,111 182 145,365 (17,109) 128,256 (937)
Net income................................. -- -- -- -- -- -- -- --
Repayment of shareholder loans............. -- -- -- -- -- -- -- 25
Stock issue costs.......................... -- -- -- -- (238) -- (238) --
---- ----- ------ ---- -------- -------- -------- -----
Balance at September 28, 2000.............. -- -- 18,111 182 145,127 (17,109) 128,018 (912)
Other comprehensive loss, net of tax:
Net loss............................... -- -- -- -- -- -- -- --
Amortization of cumulative effect
adjustment............................ -- -- -- -- -- -- -- --
Unrealized losses on qualifying cash
flow hedges........................... -- -- -- -- -- -- -- --
---- ----- ------ ---- -------- -------- -------- -----
Other comprehensive loss...............
Cumulative effect of change in accounting
principal................................. -- -- -- -- -- -- -- --
Repayment of shareholder loans............. -- -- -- -- -- -- -- 75
Share repurchase........................... -- -- (4) (1) (43) -- (43) --
Exercise of stock options.................. -- -- 8 1 68 -- 68 --
---- ----- ------ ---- -------- -------- -------- -----
Balance, September 27, 2001................ $ -- $ -- 18,115 $182 $145,152 $(17,109) $128,043 $(837)
==== ===== ====== ==== ======== ======== ======== =====
Accumulated
Comprehensive Accumulated
Deficit Deficit Total
------------- ----------- --------
Balance at September 24, 1998.............. -- $(29,537) $ 39,304
Net income................................. -- 10,416 10,416
Issuances of common stock.................. -- -- 1,068
Public sale of common stock at $13.00 per
share, net of expenses.................... -- -- 72,979
Redemption of Series B preferred stock..... -- (2,113) (17,500)
Dividends on preferred stock............... -- (2,070) (2,070)
-------- -------- --------
Balance at September 30, 1999.............. -- (23,304) 104,197
Net income................................. -- 13,996 13,996
Repayment of shareholder loans............. -- -- 25
Stock issue costs.......................... -- -- (238)
-------- -------- --------
Balance at September 28, 2000.............. -- (9,308) 117,980
Other comprehensive loss, net of tax:
Net loss............................... -- (2,656) (2,656)
Amortization of cumulative effect
adjustment............................ 98 -- 98
Unrealized losses on qualifying cash
flow hedges........................... (3,920) -- (3,920)
-------- -------- --------
Other comprehensive loss............... (6,478)
Cumulative effect of change in accounting
principal................................. (461) (461)
Repayment of shareholder loans............. -- -- 75
Share repurchase........................... -- -- (43)
Exercise of stock options.................. -- -- 68
-------- -------- --------
Balance, September 27, 2001................ $(4,283) $(11,964) $111,141
======== ======== ========
(1)Represents excess of amount paid in 1987 leveraged buy-out over net book
value for "carry over" shareholders. See Note 1.
The accompanying notes are an integral part of these consolidated financial
statements.
34
THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Year Ended
----------------------------------------
September 30, September 28, September 27,
1999 2000 2001
------------- ------------- -------------
(53 weeks) (52 weeks) (52 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................... $ 10,416 $ 13,996 $ (2,656)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Extraordinary loss...................................................... 3,406 -- --
Depreciation and amortization........................................... 42,798 56,062 63,545
Provision for deferred income taxes..................................... 530 8,168 871
Loss on sale of property and equipment.................................. 4,484 1,995 131
Provision for environmental expenses.................................... (1,735) (1,336) (1,859)
Impairment of long-lived assets......................................... -- -- 2,298
Fair market value change in non-qualifying derivatives.................. -- -- 4,244
Provision for closed stores............................................. -- 430 1,919
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables............................................................. 8,741 1,217 (4,860)
Inventories............................................................. (11,138) (2,447) 9,469
Prepaid expenses........................................................ (34) 834 2,121
Other noncurrent assets................................................. (830) (1,968) 3,048
Accounts payable........................................................ 22,556 2,328 (7,762)
Other current liabilities and accrued expenses.......................... (27,310) (2,352) 1,194
Employment obligations.................................................. (448) (496) --
Other noncurrent liabilities............................................ 17,131 11,728 4,999
--------- --------- --------
Net cash provided by operating activities................................... 68,567 88,159 76,702
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale......................................... (178) (2,094) (1,637)
Additions to property and equipment......................................... (47,416) (56,414) (43,582)
Proceeds from sale lease-back transactions.................................. 10,724 9,470 3,504
Proceeds from sale of property and equipment................................ 2,366 7,033 3,761
Acquisitions of related businesses, net of cash acquired.................... (194,414) (106,686) (55,993)
--------- --------- --------
Net cash used in investing activities....................................... (228,918) (148,691) (93,947)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases................................... (1,495) (1,703) (2,070)
Principal repayments of long-term debt...................................... (184,888) (71,284) (23,487)
Proceeds from issuance of long-term debt.................................... 297,000 158,000 40,037
Redemption of Series B preferred stock...................................... (17,500) -- --
Net proceeds from initial public offering................................... 72,979 -- --
Net proceeds from other equity issues....................................... 1,068 -- --
Accrued dividends paid on preferred stock................................... (6,461) -- --
Stock issue costs........................................................... -- (238) --
Proceeds from exercise of stock options, net of repurchases................. -- -- 25
Repayment of shareholder loans.............................................. -- 25 75
Other financing costs....................................................... (3,599) (2,071) (78)
--------- --------- --------
Net cash provided by financing activities................................... 157,104 82,729 14,502
--------- --------- --------
Net increase (decrease)..................................................... (3,247) 22,197 (2,743)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............................. 34,404 31,157 53,354
--------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................................... $ 31,157 $ 53,354 $ 50,611
========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
35
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
Year Ended
-----------------------------------------
September 30, September 28, September 27,
1999 2000 2001
------------- ------------- -------------
Cash paid during the year:
Interest............. $43,064 $50,207 $55,374
======= ======= =======
Taxes................ $ 34 $ 1,600 $ 1,066
======= ======= =======
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During 1999, 2000 and 2001, The Pantry financed certain capital expenditures
totaling $2.8 million, $825 thousand, and $3.5 million, respectively, through
the issuance of capital leases.
36
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--HISTORY OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Pantry
The consolidated financial statements include the accounts of The Pantry,
Inc. (the "Company" or "The Pantry") and its wholly-owned subsidiaries.
Transactions and balances of each of these wholly-owned subsidiaries are also
immaterial to the consolidated financial statements. All intercompany
transactions and balances have been eliminated in consolidation. The Pantry
owns and operates 1,324 convenience stores in Florida (505), North Carolina
(341), South Carolina (254), Georgia (57), Kentucky (42), Mississippi (56),
Virginia (31), Indiana (16), Tennessee (14), and Louisiana (8).
During fiscal 1996, Freeman Spogli & Co. ("Freeman Spogli") and Chase
Manhattan Capital Corporation ("Chase") acquired a controlling interest in the
Company through a series of transactions which included the purchase of common
stock from certain stockholders and the purchase of newly issued common and
preferred stock. During fiscal years 1997 and 1998, the Company issued
additional shares of common and preferred stock to existing stockholders and
certain directors and executives of the Company. As of September 27, 2001,
Freeman Spogli owns 10,329,524 shares of common stock and warrants to purchase
2,346,000 shares of common stock, which represents beneficial ownership of
approximately 62.0% of our outstanding shares, including shares underlying
warrants. Chase and its affiliates own 2,209,427 shares of common stock, or
12.2% of our outstanding shares.
On June 8, 1999, we offered and sold 6,250,000 shares of our common stock in
our 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 the senior 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 during the fourth quarter of fiscal 1999 and $2.4 million
was reserved to pay fees and expenses associated with the IPO.
Accounting Period
The Pantry operates on a 52 or 53 week fiscal year ending on the last
Thursday in September. For 2000 and 2001, The Pantry's fiscal years contained
52 weeks and for 1999 The Pantry's fiscal year contained 53 weeks.
Acquisition Accounting
Generally, our acquisitions are accounted for under the purchase method of
accounting whereby purchase price is allocated to assets acquired and
liabilities assumed based on fair value. Excess of purchase price over fair
value of net assets acquired is recorded as goodwill. Accordingly, the
Consolidated Statement of Operations for the fiscal years presented includes
the results of operations for each of the acquisitions from the date of
acquisition only.
On August 13, 1987, Montrose Pantry Acquisition Corporation acquired all of
our common stock in a leveraged buy-out. Certain individuals and entities which
held an ownership interest retained approximately 45% ownership after the
leveraged buy-out and a new basis of accounting was established which resulted
in a partial step-up in basis. In accordance with EITF 88-16 and to the extent
that certain individuals and entities maintained their equity interests, the
excess amount paid over net book value was recorded as a debit in shareholders'
equity ($17.1) million.
37
Cash and Cash Equivalents
For purposes of the consolidated financial statements, cash and cash
equivalents include cash on hand, demand deposits and short-term investments
with original maturities of three months or less.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out method for merchandise inventories and using the
first-in, first-out method for gasoline inventories.
Property Held for Sale
Property is classified as current assets when management's intent is to sell
these assets in the ensuing fiscal year and is recorded at the lower of cost or
fair value less cost to sell.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization is provided primarily by the
straight-line method over the estimated useful lives of the assets for
financial statement purposes and by accelerated methods for income tax purposes.
Estimated useful lives for financial statement purposes are as follows:
Buildings........................ 20 to 33 1/2 years
Equipment, furniture and fixtures 3 to 10 years
Automobiles...................... 3 to 5 years
Upon sale or retirement of depreciable assets, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is
recognized. Leased buildings capitalized in accordance with SFAS No. 13,
Accounting for Leases, are recorded at the lesser of fair value or the
discounted present value of future lease payments at the inception of the
leases. Amounts capitalized are amortized over the estimated useful lives of
the assets or terms of the leases (generally 5 to 20 years) using the
straight-line method.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over periods of 20
to 40 years (weighted-average useful life of 30 years). The Pantry considers
legal, contractual, regulatory, obsolescence and competitive factors in
determining the useful life and amortization period of this intangible asset.
Additions to goodwill and increases in goodwill amortization expense primarily
relate to our acquisition of the stock or assets of convenience store operators.
The Pantry assesses the recoverability of this intangible asset by
determining whether amortization of the goodwill balance over its remaining
life can be recovered through estimated undiscounted future operating results.
Estimated future results are based on a trend of historical results for the
trailing three fiscal years and management's estimate of future results which
indicate that the goodwill balances will be recovered over the various periods
remaining to be benefited.
38
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When an evaluation is required, the projected future undiscounted
cash flows due to each store are compared to the carrying value of the
long-lived assets, including an allocation of goodwill if appropriate, of that
store to determine if a write-down to fair value is required. The Company
recorded a provision of approximately $1.2 million in fiscal 2001 for asset
impairments for certain real estate, leasehold improvements and store and
gasoline equipment at certain underperforming stores.
Deferred Financing Cost
Deferred financing cost represents expenses related to issuing The Pantry's
long-term debt, obtaining its lines of credit and obtaining lease financing.
See Note 5--Long-Term Debt and Note 10--Leases. Such amounts are being
amortized over the remaining term of the respective financing.
Vendor Allowances, Rebates and Other Vendor Payments
The Pantry receives payments for vendor allowances, volume rebates and other
supply arrangements in connection with various programs. The Pantry records
these payments as a reduction to cost of sales or expenses to which the
particular vendor payment relates. For unearned payments, The Pantry records
deferred income and amortizes the balance, as earned, over the term of the
respective agreement. The amounts recorded against cost of sales were $54.7
million, $78.6 million and $81.2 million for fiscal years 1999, 2000 and 2001,
respectively.
Environmental Costs
The Pantry accounts for the cost incurred to comply with federal and state
environmental regulations as follows:
. The environmental reserve reflected in the financial statements is based
on internal and external estimates of the costs to remediate sites
relating to the operation of underground storage tanks. Factors
considered in the estimates of the reserve are the expected cost to
remediate each contaminated site and the estimated length of time to
remediate 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. All other
environmental costs are provided for on an undiscounted basis.
. Amounts which are probable of reimbursement under state trust fund
programs or third party insurers, based on The Pantry's experience, are
recognized as receivables and are expected to be collected within a
period of twelve to eighteen months after the reimbursement claim has
been submitted. These receivables exclude all deductibles and an
estimate for uncollectible reimbursements. The Pantry's reimbursement
experience exceeds a 95% collection rate. The adequacy of the liability
and uncollectible receivable reserve is evaluated quarterly and
adjustments are made based on updated experience at existing sites,
newly identified sites and changes in governmental policy.
. Annual fees for tank registration and environmental compliance testing
are expensed as incurred.
. Expenditures for upgrading tank systems including corrosion protection,
installation of leak detectors and overfill/spill devices are
capitalized and depreciated over the remaining useful life of the asset
or the respective lease term, whichever is less.
. The tank removal costs associated with locations which The Pantry plans
to sell or dispose of in the near future are estimated annually and a
liability is established through a charge to expense. The costs to
remove tanks at active locations are expensed as incurred.
39
Income Taxes
All operations of The Pantry and its subsidiaries are included in a
consolidated Federal income tax return. Pursuant to SFAS No. 109, Accounting
for Income Taxes, The Pantry recognizes deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between financial
statement carrying amounts and the related tax basis.
Excise and Use Taxes
The Pantry collects and remits various federal and state excise taxes on
petroleum products. Gasoline sales and cost of sales included excise taxes of
approximately $303.5 million, $419.3 million, and $450.2 million for 1999,
2000, and 2001, respectively.
Advertising costs
Advertising costs are expensed as incurred. Advertising expense was
approximately $1.7 million, $2.3 million and $2.0 million for fiscal 1999, 2000
and 2001, respectively.
Stock Based Compensation
The Pantry's stock option plan is accounted for in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. The Pantry follows the disclosure requirements of SFAS No. 123,
Accounting for Stock Based Compensation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
these estimates.
Segment Reporting
In 1999, The Pantry adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
The Pantry operates in one operating segment.
Reclassifications
Certain amounts in the fiscal 1999 and 2000 consolidated financial
statements have been reclassified to conform to the fiscal 2001 presentation.
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.
40
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 $461 thousand (net of taxes of $289 thousand). The initial
adoption of SFAS No. 133 did not have a material impact on our results of
operations or financial condition.
Effective September 29, 2000, we also 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 sheets in the financial
statements. The adoption of SAB No. 101 did not have a material impact on our
results of operations and financial condition.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, Business Combinations 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. The adoption of
SFAS No. 141 did not have a material impact on our results of operations and
financial condition.
Recently Issued Accounting Standards Not Yet Adopted
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, 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 principal. Subsequently, any impairment losses will be
recognized as a component of income from operations. As of September 27, 2001,
we have net goodwill of $277.7 million and have incurred $9.7 million in
goodwill amortization in the statement of operations during fiscal 2001. 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. As permitted, the Company early adopted SFAS No. 142
effective September 28, 2001.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. Adoption of SFAS No. 143 is required for fiscal
years beginning after June 15, 2002, which would be our first quarter of fiscal
2003. We do not anticipate the adoption of SFAS No. 143 will have a material
impact on our results of operations and financial condition.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement supercedes SFAS No. 121,
Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to
be Disposed of. This statement addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001, with earlier application
encouraged. We do not anticipate that the adoption of SFAS No. 144 will have a
material impact on our results of operations and financial condition.
41
NOTE 2--BUSINESS ACQUISITIONS:
During fiscal 2001, The Pantry acquired 45 convenience stores located in
North Carolina, South Carolina, Louisiana, Mississippi and Virginia in 9
separate transactions. The transactions were accounted for by the purchase
method of accounting. The 2001 acquisitions were funded from borrowings under
the senior credit facility and cash on hand.
During fiscal 2000, The Pantry acquired 143 convenience stores located in
North Carolina, South Carolina, Florida, Georgia, Mississippi and Virginia in
18 separate transactions. The transactions were accounted for by the purchase
method of accounting. The 2000 acquisitions were funded from borrowings under
the senior credit facility and cash on hand.
The purchase prices have been allocated to the assets purchased and the
liabilities assumed based upon the fair values on the dates of the
acquisitions, as follows (amounts in thousands):
2000 2001
-------- -------
ASSETS ACQUIRED:
Receivables, net...................................................... $ 1,464 $ 11
Inventories........................................................... 9,275 3,195
Prepaid expenses and other current assets............................. 441 323
Property and equipment................................................ 52,750 17,931
Other noncurrent assets............................................... 5,203 643
-------- -------
Total assets acquired................................................. 69,133 22,103
-------- -------
LIABILITIES ASSUMED:
Accounts payable--trade............................................... 6,998 --
Other liabilities and accrued expenses................................ 2,039 667
Environmental remediation liabilities................................. 25 --
Other noncurrent liabilities.......................................... 7,325 1,087
-------- -------
Total liabilities assumed............................................. 16,387 1,754
-------- -------
Net tangible assets acquired.......................................... 52,746 20,349
Excess of purchase price over fair value of net assets acquired....... 53,940 35,644
-------- -------
Total consideration paid, including direct costs, net of cash acquired $106,686 $55,993
======== =======
The purchase price allocations for certain of the 2001 acquisitions are
preliminary estimates, based on available information, internal estimates and
certain assumptions management believes are reasonable. Accordingly, the
purchase price allocations are subject to finalization pending the completion
of appraisals of assets acquired. The excess of the purchase prices over fair
values of the net assets acquired for all acquisitions has been recorded as
goodwill, which is being amortized on a straight-line basis over 30 years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of The Pantry and acquired businesses as if
the 2001 transactions occurred at the beginning of the fiscal year for each of
the periods presented (amounts in thousands, except per share data):
2000 2001
---------- ----------
Total revenues..... $2,540,850 $2,674,283
Net income (loss).. $ 14,880 $ (2,245)
Earnings per share:
Basic:.......... $ 0.82 $ (0.12)
========== ==========
Diluted:........ $ 0.79 $ (0.12)
========== ==========
42
NOTE 3--INVENTORIES:
At September 28, 2000 and September 27, 2001, inventories consisted of the
following (in thousands):
2000 2001
-------- --------
Inventories at FIFO cost:
Merchandise............... $ 70,461 $ 73,861
Gasoline.................. 28,806 21,765
-------- --------
99,267 95,626
Less adjustment to LIFO cost:
Merchandise............... (11,305) (13,939)
-------- --------
Inventories at LIFO cost..... $ 87,962 $ 81,687
======== ========
The positive effect on cost of sales of LIFO inventory liquidations was $53
thousand, $4 thousand and $2.2 million for fiscal years 1999, 2000 and 2001,
respectively.
NOTE 4--PROPERTY AND EQUIPMENT:
At September 28, 2000 and September 27, 2001, property and equipment
consisted of the following (in thousands):
2000 2001
--------- ---------
Land........................................... $ 86,568 $ 85,222
Buildings...................................... 129,643 138,425
Equipment...................................... 345,240 368,602
Leasehold improvements......................... 57,811 66,156
Construction in progress....................... 9,749 9,307
--------- ---------
629,011 667,712
Less--accumulated depreciation and amortization (162,044) (197,034)
--------- ---------
Property and equipment, net.................... $ 466,967 $ 470,678
========= =========
43
NOTE 5--LONG-TERM DEBT:
At September 28, 2000 and September 27, 2001, long-term debt consisted of
the following (in thousands):
2000 2001
-------- --------
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 plus 3.0%; principal
due in quarterly installments through January 31, 2004............................... 61,906 45,906
Term loan facility-Tranche B; interest payable monthly at LIBOR plus 3.5%; principal
due in quarterly installments through January 31, 2006............................... 179,973 178,079
Term loan facility-Tranche C; interest payable monthly at LIBOR plus 3.75%; principal
due in quarterly installments through January 31, 2006............................... 74,625 73,875
Acquisition facility; interest payable monthly at LIBOR plus 3.0%; principal due in
quarterly installments beginning April 30, 2001 through January 31, 2004............. 10,000 45,500
Note payable; zero (0.0%) interest, with principal due in annual installments through
February 26, 2003.................................................................... 891 593
Other notes payable; various interest rates and maturity dates......................... 230 222
-------- --------
527,625 544,175
Less--current maturities............................................................... (20,650) (40,000)
-------- --------
Long-term debt, net of current maturities.............................................. $506,975 $504,175
======== ========
The senior subordinated notes contain covenants that, among other things,
restrict the ability of The Pantry and any restricted subsidiary to (i) incur
additional debt, (ii) pay dividends or make distributions, (iii) issue stock of
subsidiaries, (iv) make certain investments or repurchase stock, (v) create
liens, (vi) enter into transactions with affiliates or sale-leaseback
transactions and (vii) merge or consolidate The Pantry or any of its
subsidiaries or sell or transfer assets. The senior subordinated notes also
contain financial ratios and tests which must be met with respect to minimum
coverage and leverage ratios, pro forma cash flow and capital expenditures.
At September 27, 2001, The Pantry has a senior credit facility which
consists of a $45.0 million revolving credit facility available for working
capital financing, general corporate purposes and issuing commercial and
standby letters of credit and $390 million in term loans. The LIBOR associated
with our senior credit facility resets monthly and as of September 27, 2001,
was 2.61%.
In connection with entering into the senior credit facility in fiscal 1999,
The Pantry redeemed $49.0 million in principal amount of senior notes and paid
accrued and unpaid interest up to, but not including, the date of purchase and
a 4% call premium. The Pantry recognized an extraordinary loss of approximately
$3.6 million in connection with the repurchase of the senior notes including
the payment of the 4% call premium of $2.0 million, fees paid in connection
with the amendments and commitments under the senior credit facility, and the
write-off of deferred financing costs related to the repayment of The Company's
former bank credit facility.
As of September 27, 2001, there were outstanding letters of credit of $12.9
million issued under the revolving credit facility and $32.1 million in
available credit.
The senior credit facility contains covenants restricting the ability of The
Pantry and any of its subsidiaries to, among other things, (i) incur additional
indebtedness, (ii) declare dividends or redeem or repurchase capital stock,
(iii) prepay, redeem or purchase debt, (iv) incur liens, (v) make loans and
investments, (vi) make capital expenditures, (vii) engage in mergers,
acquisitions or asset sales and (viii) engage in transactions with affiliates.
The senior credit facility also contains financial ratios and tests which must
be met with respect to minimum
44
coverage and leverage ratios, pro forma cash flow, maximum business acquisition
expenditures and maximum capital expenditures.
For the twelve month period ending September 27, 2001, The Pantry did not
satisfy two financial covenants required by our senior credit facility. The
Pantry has since received a waiver from its senior credit group and on November
7, 2001, entered into an amendment to the senior credit facility that includes,
among other things, a modification to financial covenants and increases the
floating interest rate spread by 50 basis points as long as its debt ratio is
greater than 4.5:1 reducing to 25 basis points when the debt ratio is less than
4.5:1.
As of September 27, 2001, substantially all of The Pantry's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
The Pantry's long-term debt maturities for each of the five years following
September 27, 2001 and thereafter are: $40.0 million in 2002; $43.2 million in
2003; $52.9 million in 2004; $88.7 million in 2005; $119.2 million in 2006 and
$200.2 million thereafter.
The fair value of the Company's indebtness approximated $539.1 million at
September 27, 2001.
NOTE 6--DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER COMPREHENSIVE LOSS:
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 $461 thousand (net of taxes of $289
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 using the
hypothetical derivative method. To the extent the instruments are considered to
be effective, changes in fair value are recorded as a component of other
comprehensive income. 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 $4.2 million was recorded in 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. At September
27, 2001, other accrued liabilities and other noncurrent liabilities include
$4.8 million and $6.5 million, respectively, of derivative liabilities.
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 $289............ $ (461)
Amortization reclassified into other comprehensive deficit, net of taxes of $61 98
Unrealized losses on qualifying cash flow hedges, net of taxes of $2,553....... (3,920)
-------
Accumulated other comprehensive deficit........................................ $(4,283)
=======
45
The components of comprehensive loss, net of related taxes, for fiscal 2001,
the first year The Company incurred any items of comprehensive income (loss),
are as follows (amounts in thousands):
2001
-------
Net loss applicable to common shareholders...... $(2,656)
Amortization of cumulative effect............... 98
Unrealized losses on qualifying cash flow hedges (3,920)
-------
Comprehensive loss.............................. $(6,478)
=======
NOTE 7--RESTRUCTURING AND OTHER CHARGES:
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 included 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 was completed during the fourth quarter of fiscal
2001, will reduce pre-tax operating expenses beginning in fiscal 2002.
Effective June 28, 2001, the Company completed the merger of Lil' Champ Food
Stores, Inc., a wholly-owned subsidiary, into The Pantry. The Company
anticipates this merger will provide for more efficient and streamlined
operations.
As a result of this plan, the Company recorded a pre-tax restructuring
charge of $2.9 million during fiscal 2001. The restructuring charge consisted
of $1.7 million of employee termination benefits, $650 thousand of lease
obligations, and $490 thousand of legal and other professional consultant fees.
During fiscal 2001, the Company has also incurred and expended $1.9 million 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, (iv) impairments related to
property and equipment and (v) other miscellaneous costs. Employee termination
benefits represent severance and outplacement benefits for 100 employees, 49 of
which are in administrative positions and 51 of which 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 charges was as follows (amounts in thousands):
Total
2001 Cash Non-cash
Expense Outlays Write-offs Reserve
------- ------- ---------- -------
Employee termination..................... $1,736 $ 943 $ -- $ 793
Lease termination........................ 650 47 -- 603
Legal and other professional............. 490 341 -- 149
------ ------ ------ ------
Total restructuring reserve........... $2,876 $1,331 $ -- $1,545
Other non-recurring charges.............. 1,895 845 1,050 --
------ ------ ------ ------
Total restructuring and other charges. $4,771 $2,176 $1,050 $1,545
====== ====== ====== ======
NOTE 8--INTEREST EXPENSE:
The components of interest expense are as follows (amounts in thousands):
1999 2000 2001
------- ------- -------
Interest on long-term debt............................ $39,565 $50,968 $50,652
Fair market value change in non-qualifying derivatives -- -- 4,244
Interest on capital lease obligations................. 1,596 1,631 1,936
Interest rate swap settlements........................ -- (318) 1,822
Miscellaneous......................................... 119 48 77
------- ------- -------
$41,280 $52,329 $58,731
======= ======= =======
46
NOTE 9--INCOME TAXES:
The components of income tax expense are summarized below (in thousands):
1999 2000 2001
------- ------- -------
Current:
Federal. $ 7,093 $ 2,444 $ --
State... 800 164 --
------- ------- -------
7,893 2,608 $ --
======= ======= =======
Deferred:
Federal. 2,488 7,279 776
State... 369 889 95
------- ------- -------
2,857 8,168 871
------- ------- -------
$10,750 $10,776 $ 871
======= ======= =======
As of September 28, 2000 and September 27, 2001, deferred tax liabilities
(assets) are comprised of the following (in thousands):
2000 2001
------- --------
Depreciation.................... $50,565 $ 58,833
Inventories..................... 3,640 3,500
Amortization.................... 954 3,333
Miscellaneous expenses.......... 2,323 2,653
Environmental expenses.......... 27 906
Other........................... 517 109
------- --------
Gross deferred tax liabilities.. 58,026 69,334
------- --------
Capital lease obligations....... (1,609) (2,050)
Allowance for doubtful accounts. (464) (56)
Accrued insurance............... (3,716) (3,331)
Accrued compensation............ (156) (557)
Derivative liabilities.......... -- (2,781)
Deferred income................. (1,212) (4,600)
Accrued vacation................ (439) (787)
Reserve for closed stores....... (1,722) (1,730)
Restructuring reserve........... -- (782)
Other........................... (531) (767)
------- --------
Gross deferred tax assets....... (9,849) (17,441)
Net operating loss carryforwards (7,992) (13,458)
General business credits........ (1,833) (1,833)
AMT credits..................... (5,914) (5,705)
------- --------
$32,438 $ 30,897
======= ========
As of September 28, 2000 and September 27, 2001, net current deferred income
tax assets totaled $2.1 million and $2.6 million, respectively, and net
noncurrent deferred income tax liabilities totaled $34.5 million and $33.5
million, respectively.
47
Reconciliations of income taxes at the Federal statutory rate (34%) to
actual taxes provided are as follows (in thousands):
1999 2000 2001
------- ------- ------
Tax expense (benefit) at Federal statutory rate..... $ 8,415 $ 8,422 $ (607)
Tax expense at state rate, net of Federal income tax
expense........................................... 1,188 1,013 --
Permanent differences:..............................
Amortization of goodwill......................... 1,081 1,161 1,320
Other............................................ 66 180 158
------- ------- ------
Net income tax expense.............................. $10,750 $10,776 $ 871
======= ======= ======
As of September 27, 2001, The Pantry had net operating loss carryforwards,
general business credits and AMT credits which can be used to offset future
Federal income taxes. The benefit of these carryforwards is recognized as
deferred tax assets. The Pantry believes that it is more likely than not that
these future tax benefits will be utilized before their expiration through
future reversal of existing taxable differences and future earnings. Loss
carryforwards as of September 27, 2001 have the following expiration dates (in
thousands):
Federal State
------- -------
2009.................... $ -- $ 3,158
2010.................... -- 2,974
2011.................... -- 10,919
2012.................... 1,264 5,101
2013.................... -- 13,274
2014.................... -- 5,162
2015.................... -- 5,841
2016.................... -- 13,928
2017.................... 9,374 --
2018.................... 5,662 --
2020.................... 13,928 --
------- -------
Total loss carryforwards $30,228 $60,357
======= =======
NOTE 10--LEASES:
The Pantry leases store buildings, office facilities and store equipment
under both capital and operating leases. The asset balances related to capital
leases at September 28, 2000, and September 27, 2001 are as follows (in
thousands):
2000 2001
------- -------
Buildings..................... $12,965 $18,138
Less--accumulated amortization (1,976) (4,882)
------- -------
$10,989 $13,256
======= =======
Amortization expense related to capitalized leased assets approximated $1.3
million in each of fiscal 1999, 2000 and 2001.
48
Future minimum lease payments as of September 27, 2001, for capital leases
and operating leases that have initial or remaining terms in excess of one year
are as follows (in thousands):
Capital Operating
Fiscal Year Leases Leases
- ----------- ------- ---------
2002....................................... $ 3,086 $ 49,994
2003....................................... 3,013 48,929
2004....................................... 2,840 47,390
2005....................................... 2,515 45,139
2006....................................... 2,284 42,590
Thereafter................................. 18,186 366,129
------- --------
Net minimum lease payments................. $31,924 $600,171
======= ========
Amount representing interest (8% to 20%)... 16,541
-------
Present value of net minimum lease payments 15,383
Less--current maturities................... 1,363
-------
$14,020
=======
Rental expense for operating leases was approximately $40.6 million, $50.9
million and $53.2 million for fiscal years 1999, 2000 and 2001, respectively.
Some of The Pantry's leases require contingent rental payments; such amounts
are not material for the fiscal years presented.
During fiscal 1999, 2000 and 2001, The Pantry entered into sale-leaseback
transactions with unrelated parties with net proceeds of $10.7 million, $9.5
million and $3.5 million, respectively. The assets sold in these transactions
consisted of newly constructed or acquired convenience stores. The Pantry
retained ownership of all personal property and gasoline marketing equipment at
these locations. The net proceeds from these transactions approximated the
carrying value of the assets at the time of sale; accordingly, any gains or
losses recognized on these transactions were insignificant for all periods
presented. Generally, the leases are operating leases at market rates with
terms of twenty years with four five-year renewal options.
NOTE 11--COMMITMENTS AND CONTINGENCIES:
As of September 27, 2001, The Pantry was contingently liable for outstanding
letters of credit in the amount of $12.9 million related primarily to several
areas in which The Pantry is self-insured. The letters of credit are not to be
drawn against unless The Pantry defaults on the timely payment of related
liabilities.
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.
Unamortized Liabilities Associated with Vendor Payments
In accordance with the terms of each service or supply agreement and in
accordance with accounting principles generally accepted in the United States
of America, service and supply allowances are amortized over the life of each
agreement in accordance with the specific terms. The unamortized liabilities
associated with these payments as of September 28, 2000 and September 27, 2001,
were $58.9 million and $63.9 million, respectively.
McLane Company, Inc. ("McLane")--The Pantry purchases over 50% of its
general merchandise from a single wholesaler, McLane, a subsidiary of Wal-Mart,
Inc. The Pantry's arrangement with McLane is governed by a five-year
distribution service agreement. The Pantry receives annual service allowances
based on the
49
number of stores operating on each contract anniversary date. If The Pantry
were to default under the contract or terminate the distribution service
agreement prior to March 28, 2003, The Pantry must reimburse McLane the
unearned, unamortized portion of the service allowance payments received to
date. In accordance with the terms of the distribution service agreement and in
accordance with generally accepted accounting principles, the original service
allowances received and all future service allowances are amortized to cost of
goods sold on a straight-line method over the life of the agreement.
Major Oil Companies--The Pantry has entered into product purchase agreements
with numerous oil companies to buy specified quantities of gasoline at market
prices. The length of these contracts range from five to thirteen years and in
some cases include minimum annual purchase requirements. In connection with
these agreements, The Pantry may receive upfront vendor allowances, volume
incentive payments and other vendor assistance payments. If The Pantry were to
default under the terms of any contract or terminate the supply agreement prior
to the end of the initial term, The Pantry must reimburse the respective oil
company for the unearned, unamortized portion of the payments received to date.
In accordance with accounting principles generally accepted in the United
States of America, these payments are amortized using the specific amortization
periods in accordance with the terms of each agreement, either using the
straight-line method or based on gasoline volume purchased.
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 of 1976, 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:
. installing underground storage tank systems
. upgrading underground storage tank systems
. taking corrective action in response to releases
. closing underground storage tank systems
. keeping appropriate records
. maintaining evidence of financial responsibility for taking corrective
action and compensating third parties for bodily injury and property
damage resulting from releases
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 $2.0 million in favor of state environmental agencies in the
states of North Carolina, Virginia, South Carolina, Georgia, Tennessee,
Indiana, Kentucky and Louisiana. The Pantry also relies on reimbursements from
applicable state trust funds. In Florida and Georgia, The Pantry meets such
financial responsibility requirements by state trust fund coverage through
December 31, 1998 and met such requirements thereafter through private
commercial liability insurance. In Mississippi we meet our financial
responsibility requirements through coverage under the state trust fund.
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 an
underground storage tank registration fee and a tax on the wholesale purchase
of motor
50
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 up to $1.0 million per site or occurrence for the cleanup of
environmental contamination, and most provide coverage for third party
liabilities.
In addition to immaterial amounts to be spent by The Pantry, a substantial
amount will be expended for remediation on behalf of 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 $14.1 million and $12.2 million as of September
28, 2000, September 27, 2001, respectively, represent estimates for future
expenditures for remediation, tank removal and litigation associated with 535
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
September 27, 2001 the current average remediation cost per site is
approximately $70 thousand. 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 undiscounted
amount of future estimated payments for which The Pantry does not expect to be
reimbursed for each of the five years and thereafter at September 27, 2001 are
as follows (in thousands):
Expected
Fiscal Year Payments
- ----------- --------
2002................................................... $ 1,023
2003................................................... 286
2004................................................... 256
2005................................................... 153
2006................................................... 34
Thereafter............................................. 63
-------
Total undiscounted amounts not covered by a third party 1,815
Other current cost amounts............................. 14,996
Amount representing interest (10%)..................... (2,789)
-------
Environmental reserve.................................. $12,207
=======
The Pantry anticipates that it will be reimbursed for a portion of these
expenditures from state trust funds and private insurance. As of September 27,
2001, anticipated reimbursements of $10.4 million 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 co-pay 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.
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
51
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 our environmental reserve until a final closure
notice is received.
NOTE 12--BENEFIT PLANS:
The Pantry sponsors a 401(k) Employee Retirement Savings Plan for eligible
employees. Employees must be at least nineteen years of age and have one year
of service with at least 1,000 hours worked to be eligible to participate in
the plan. Employees may contribute up to 15% of their annual compensation, and
contributions are matched by The Pantry on the basis of 50% of the first 5%
contributed. Matching contribution expense was $573 thousand, $687 thousand and
$718 thousand for fiscal years 1999, 2000 and 2001, respectively.
NOTE 13--COMMON STOCK:
On June 4, 1999, the Company effected a 51 for 1 stock split of its common
stock. In connection with the stock split, the number of authorized shares of
common stock was increased to 50 million (300 thousand shares previously). The
accompanying financial statements give effect to the stock split, retroactively
applied to all periods presented. There was no change in par values of the
common stock as a result of the stock split.
On June 8, 1999, the Company completed an initial public offering of
6,250,000 shares of its common stock at a public offering price of $13.00 per
share (the "IPO"). The net proceeds from the IPO of $75.6 million, before
expenses, were used (i) to repay $19.0 million in indebtedness under the 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 during the fourth quarter of fiscal 1999 and $2.4 million
was reserved to pay fees and expenses associated with the IPO.
Upon completion of the IPO, Freeman Spogli owned approximately 9,349,524
shares and owned warrants for the purchase of an additional 2,346,000 shares
giving Freeman Spogli beneficial ownership of approximately 57.2% of the
outstanding common stock (including shares underlying warrants). During fiscal
2000, Freeman Spogli purchased an additional 980,000 shares giving them
beneficial ownership of approximately 62.0% of the outstanding common stock
(including shares underlying warrants).
NOTE 14--PREFERRED STOCK:
Issued and outstanding shares of preferred stock at September 24, 1998
included 17,500 shares designated as Series B, all of which were held by the
Freeman Spogli entities. On June 8, 1999, in conjunction with the IPO, The
Pantry redeemed the outstanding preferred stock for $17.5 million and paid
accrued dividends on the preferred stock of $6.5 million. As of September 27,
2001, the Company has no preferred stock issued or outstanding.
Upon the redemption of its Series B preferred stock, The Pantry recorded a
one-time dividend of $613 thousand which represents the difference between the
gross proceeds ($16.9 million) from the initial sale of Series B preferred
stock and the consideration paid upon redemption ($17.5 million). In accordance
with Emerging Issues Task Force Topic No. ("EITF") D-42, The Pantry was also
required to recognize a one-time deduction to net income applicable to common
stockholders (and a related reclassification to accumulated deficit) in the
amount of $1.5 million associated with original issue costs incurred in
connection with the issuance of the Series B preferred stock in December 1996.
At that time, the original issue costs were netted against the gross proceeds
and, thus, charged to additional paid in capital. EITF D-42 requires that the
excess of fair value of the consideration transferred to the preferred
stockholders over the carrying amount of the preferred stock be subtracted from
net income applicable to common stockholders in the calculation of earnings per
share.
52
NOTE 15--STOCK OPTIONS AND OTHER EQUITY INSTRUMENTS:
On January 1, 1998, The Pantry adopted an incentive and non-qualified stock
option plan. Pursuant to the provisions of the plan, options may be granted to
officers, key employees and consultants of The Pantry or any of its
subsidiaries and certain members of the board of directors to purchase up to
1,275,000 shares of The Pantry's common stock. The plan is administered by the
board of directors or a committee of the board of directors. Options are
granted at prices determined by the board of directors and may be exercisable
in one or more installments. Additionally, the terms and conditions of awards
under the plan may differ from one grant to another. Under the plan, incentive
stock options may only be granted to employees with an exercise price at least
equal to the fair market value of the related common stock on the date the
option is granted. Fair values are based on the most recent common stock sales.
During 1998, options to acquire 576,861 shares of common stock were granted
under the plan with exercise prices ranging from $8.82-$11.27 per share
(weighted-average exercise price of $9.39 per share).
On June 3, 1999, The Pantry adopted a new 1999 stock option plan providing
for the grant of incentive stock options and non-qualified stock options to
officers, directors, employees and consultants, with provisions similar to the
1998 stock option plan. During 1999, options to acquire 240,000 shares of
common stock were granted under the 1999 plan with exercise prices of $13.00
per share. These options vest over three years and have contractual lives of
seven years. No options were granted during the year ended September 28, 2000.
During 2001, options to acquire 328,000 shares of common stock were granted
under the 1999 plan with exercise prices of $10.00 per share. Subsequent to
September 27, 2001, The Pantry granted options to acquire 200,000 shares of
common stock under the 1999 plan with exercise prices of $5.12 per share. These
options vest over three years and have contractual lives of seven years.
The following table summarizes information about stock options outstanding
at September 27, 2001:
Number
Outstanding at Weighted-Average Number of
September 27, Remaining Options Weighted-Average
Exercise Prices Date Issued 2001 Contractual Life Exercisable Exercise Price
- --------------- --------------- -------------- ---------------- ----------- ----------------
$8.82....... 1/1/98 396,423 6 years 396,423 $ 8.82
$11.27...... 8/25/98 120,360 6 years 120,360 $11.27
$13.00...... 6/8/99, 9/30/99 207,000 5 years 138,000 $13.00
$10.00...... 12/29/00 297,500 7 years 0 $10.00
--------- -------
Total...... 1,021,283 654,783
All options granted in 1999 and 2000 vest over a three-year period, with
one-third of each grant vesting on the anniversary of the initial grant. There
were no exercises, forfeitures, or expirations of options in 1999. There were
4,000 options forfeited and none exercised or expired during fiscal 2000. There
were 328,000 options granted, 7,700 options exercised, 111,878 options
forfeited, and none that expired during fiscal 2001. All stock options are
granted at estimated fair market value of the common stock at the grant date.
Had compensation cost for the plan been determined consistent with SFAS No.
123, Accounting for Stock-Based Compensation, The Pantry's pro-forma net income
(loss) for fiscal 1999, 2000 and 2001 would have been approximately $10.3
million, $13.8 million, and $(2.9 million) respectively. Pro forma basic
earnings (loss) per share for fiscal 1999, 2000 and 2001 would have been $0.44,
$0.76 and $(0.16), respectively. Pro forma diluted earnings (loss) per share
for fiscal 1999, 2000 and 2001 would have been $0.40, $0.73 and $(0.16),
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:
53
1999 2001
--------------- -------
Weighted-average grant date fair value............................ $ 2.07 $ 3.93
Weighted-average expected lives (years)........................... 2.00 2.00
Weighted-average grant date fair value-exercise price equals
market price..................................................... $ 2.24 $ 3.93
Weighted-average grant date fair value-exercise price greater than
market price.................................................... $ 1.18 --
Risk-free interest rate........................................... 5.5% 4.94%
Expected volatility............................................... 0.00% - 21.0% 66.36%
Dividend yield.................................................... 0.00% 0.00%
On August 31, 1998, The Pantry adopted a stock subscription plan. The
subscription plan allows The Pantry 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. A purchaser may not sell, transfer or pledge
their shares
. prior to the first anniversary of the date on which the purchaser acquires
the shares, or
. after the first anniversary, except in compliance with the provisions of
the subscription agreement and a pledge agreement if part of the
consideration for such shares includes a secured promissory note
In the event that the purchaser's employment with The Pantry and all of its
subsidiaries terminates for any reason, The Pantry has the option to repurchase
from the purchaser all or any portion of the shares acquired by the purchaser
under the subscription agreement for a period of six months after the effective
date of such termination. The repurchase option terminates upon the later to
occur of
. the first anniversary of the date the shares were originally acquired, or
. an initial public offering of common stock by The Pantry registered under
the Securities Act (other than an offering registered on Form S-4 or Form
S-8) resulting in gross proceeds to The Pantry in excess of $25 million
After the first anniversary of the date the shares were originally acquired
by the purchaser, the purchaser may transfer the shares for cash (only) to a
third party, subject to The Pantry's right of first refusal with respect to
such sale. Finally, under certain circumstances, a purchaser of shares under
the stock subscription plan may be forced to sell all or part of the shares
purchased under such plan if Freeman Spogli finds a third-party buyer for all
or part of the shares of common stock held by Freeman Spogli. No issuances of
shares under the stock subscription plan had been made at September 24, 1998.
On September 25, 1998 and November 30, 1999, 134,436 shares, net of subsequent
repurchases of 6,273 shares, were sold 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 thousand of secured promissory notes receivable, bearing an
interest rate of 8.5%, due August 31, 2003.
In December 1996, in connection with its purchase of 17,500 shares of Series
B preferred stock, Freeman Spogli acquired warrants to purchase 2,346,000
shares of common stock. The warrants are exercisable at $7.45 per share until
December 30, 2006, and contain adjustment provisions in the event The Pantry
declares dividends or distributions, makes stock splits, or engages in mergers,
reorganizations or reclassifications. The fair value of the warrants at date of
issuance approximated $600 thousand and is included in additional paid-in
capital. None of these warrants had been exercised at September 27, 2001.
54
NOTE 16--RELATED PARTIES:
Transactions With Affiliates
Stock Issuances
In December 1996, Freeman Spogli purchased 17,500 shares of Series B
preferred stock and warrants to purchase 2,346,000 shares of common stock for
approximately $17.5 million. The purchase price for the Series B preferred
stock was $1,000.00 per share and the purchase price for each of the two
warrants was $1.00. The warrants are exercisable at $7.45 per share until
December 30, 2006 and contain adjustment provisions in the event The Pantry
declares dividends or distributions, makes stock splits or engages in mergers,
reorganizations or reclassifications. In connection with the IPO, The Pantry
repurchased the Series B preferred stock from Freeman Spogli for $17.5 million,
plus approximately $6.5 million in accrued dividends. See also Note
14--Preferred Stock.
In October 1997, in connection with the Lil' Champ acquisition, Freeman
Spogli purchased 3,030,471 shares of common stock and Chase purchased 596,190
shares of common stock for an aggregate purchase price of approximately $32.0
million. Peter J. Sodini, The Pantry's Chief Executive Officer, purchased
45,339 shares of common stock for an aggregate purchase price of $400 thousand,
payable $185 thousand in cash and $215 thousand in the form of a secured
promissory note. The purchase price for the common stock was $8.82 per share.
At that time, all of the outstanding Series A preferred stock was contributed
back to The Pantry and cancelled.
In July 1998, in connection with the acquisition of Quick Stop and the
acquisition of Stallings, Freeman Spogli purchased 1,845,690 shares of common
stock and Chase purchased 371,688 shares of common stock for an aggregate
purchase price of $25.0 million. The purchase price for the common stock was
$11.27 per share.
In November 1998, Peter Starrett, a director of The Pantry, purchased 22,185
shares of common stock for a purchase price of $250 thousand. Freeman Spogli
has the right to require the sale of Mr. Starrett's shares in the event it
sells all of its holdings of common stock.
Stockholders' Agreement
The Pantry has a stockholders' agreement, as amended July 1998, with Freeman
Spogli, Chase and Peter J. Sodini in which:
. Freeman Spogli has a right of first offer enabling it to purchase shares
held by Chase or Mr. Sodini prior to transfers of shares of common stock
to non-affiliates, other than transfers pursuant to a registration
statement or under Rule 144
. Freeman Spogli has the right to require Chase and Mr. Sodini to sell
their shares of common stock to a third party buyer on the same terms as
Freeman Spogli if Freeman Spogli is selling all of its shares
. Freeman Spogli, Chase and Mr. Sodini have rights to be included in sales
of common stock by the other stockholders
. Freeman Spogli has agreed, as long as Chase holds 10% of The Pantry's
common stock, to vote for a director nominated by Chase
. Transactions with affiliates will be on terms no less favorable to The
Pantry than would be obtained in an arms length transaction
55
NOTE 17--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 (see also Note 14--Preferred Stock) (dollars in thousands, except per
share amounts):
1999 2000 2001
------- ------- -------
Net income (loss) applicable to common shareholders:
Net income (loss) before extraordinary loss................ $14,000 $13,996 $(2,656)
Preferred stock dividend requirement....................... (2,070) -- --
Redemption of preferred stock in excess of carrying amount. (2,113) -- --
------- ------- -------
Net income (loss) applicable to common shareholders before
extraordinary loss....................................... 9,817 13,996 (2,656)
Extraordinary loss......................................... (3,584) -- --
------- ------- -------
Net income (loss) applicable to common shareholders........ $ 6,233 $13,996 (2,656)
======= ======= =======
Earnings per share--basic:
Weighted-average shares outstanding........................ 13,768 18,111 18,113
======= ======= =======
Income (loss) before extraordinary loss per share--basic... $ 0.71 $ 0.77 $ (0.15)
Extraordinary loss per share--basic........................ (0.26) -- --
------- ------- -------
Net income (loss) per share--basic......................... $ 0.45 $ 0.77 $ (0.15)
======= ======= =======
Earnings per share--diluted:
Weighted-average shares outstanding........................ 13,768 18,111 18,113
Dilutive impact of options and warrants outstanding........ 1,308 821 --
------- ------- -------
Weighted-average shares and potential dilutive shares
Outstanding.............................................. 15,076 18,932 18,113
======= ======= =======
Income (loss) before extraordinary loss per share--diluted. $ 0.65 $ 0.74 $ (0.15)
Extraordinary loss per share--diluted...................... (0.24) -- --
------- ------- -------
Net income (loss) per share--diluted....................... $ 0.41 $ 0.74 $ (0.15)
======= ======= =======
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 372,363 and 3,367,283 for 2000 and
2001, respectively.
56
NOTE 18--QUARTERLY FINANCIAL DATA (unaudited):
Summary quarterly financial data for fiscal 2000 and 2001, respectively, is
as follows (dollars in thousands, except per share amounts):
Year Ended September 28, 2000 Year Ended September 27, 2001
----------------------------------------------- ------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Year Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- ---------- -------- -------- -------- -------- ----------
Total revenue....... $540,191 $583,819 $642,935 $664,239 $2,431,184 $634,243 $635,703 $707,957 $665,141 $2,643,044
Gross profit........ $108,157 $104,624 $124,166 $131,417 $ 468,364 $118,945 $116,260 $128,796 $123,642 $ 487,643
Income (loss) before
income taxes and
extraordinary loss: $ 4,063 $ (4,514) $ 11,046 $ 14,177 $ 24,772 $ 3,374 $ (8,651) $ 6,584 $ (3,092) $ (1,785)
Net income (loss)... $ 2,275 $ (2,528) $ 6,186 $ 8,063 $ 13,996 $ 1,907 $ (4,889) $ 3,616 $ (3,290) $ (2,656)
Earnings per share:
Basic............ $ 0.13 $ (0.14) $ 0.34 $ 0.45 $ 0.77 $ 0.11 $ (0.27) $ 0.20 $ (0.18) $ (0.15)
Diluted.......... $ 0.12 $ (0.14) $ 0.33 $ 0.42 $ 0.74 $ 0.10 $ (0.27) $ 0.20 $ (0.18) $ (0.15)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
57
PART III
Item 10. Our Directors and Executive Officers
Information on our directors is incorporated by reference from the section
entitled "Proposal 1: Election of Directors" in our definitive proxy statement
to be filed with respect to the Annual Meeting of Stockholders to be held March
26, 2002. Information on our executive officers is included in the section
entitled "Executive Officers" on page 10 of this report.
Item 11. Executive Compensation
This information is incorporated by reference from the section entitled
"Executive Compensation" in our definitive proxy statement to be filed with
respect to the Annual Meeting of Stockholders to be held March 26, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This information is incorporated by reference from the section entitled
"Principal Stockholders" in our definitive proxy statement to be filed with
respect to the Annual Meeting of Stockholders to be held March 26, 2002.
Item 13. Certain Relationships and Related Transactions
This information is incorporated by reference from the sections entitled
"Principal Stockholders" and "Transactions with Affiliates" in our definitive
proxy statement to be filed with respect to the Annual Meeting of Stockholders
to be held March 26, 2002.
58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits--The
following documents are filed as part of this Annual Report on Form 10-K.
(i) Consolidated Financial Statements--See index on page 28.
(ii) Financial Statement Schedule--See index on page 28.
(iii) Exhibits:
Exhibit
Number Description of Document
------ -----------------------
3.1(1) Amended and Restated Certificate of Incorporation of The Pantry.
3.2(1) Amended and Restated Bylaws of The Pantry.
4.1(2) Indenture dated as of October 23, 1997 among The Pantry, Sandhills, Lil' Champ and United
States Trust Company of New York, as Trustee, with respect to the 10 1/4% Senior Subordinated
Notes due 2007 (including the form of 10 1/4% Senior Subordinated Notes due 2007).
4.2(1) Amended and Restated Registration Rights Agreement dated July 2, 1998 among The Pantry, FS
Equity Partners III, L.P. ("FSEP III"), FS Equity Partners IV, L.P. ("FSEP IV") FS Equity
Partners International, L.P. ("FSEP International"), Peter J. Sodini, Chase Manhattan Capital,
L.P., CB Capital Investors, L.P., and Baseball Partners.
4.3(3) Amendment No. 1 to the Amended and Restated Registration Rights Agreement dated as of June
1, 1999 among The Pantry, FSEP III, FSEP IV, FSEP International, Chase Manhattan Capital,
L.P., CB Capital Investors, L.P., Baseball Partners and Peter J. Sodini.
4.4(1) Amended and Restated Stockholders' Agreement dated July 2, 1998 among The Pantry, FSEP III,
FSEP IV, FSEP International, Chase Manhattan Capital, L.P., CB Capital Investors, L.P.,
Baseball Partners and Peter J. Sodini.
4.5(3) Amendment No. 1 to the Amended and Restated Stockholder's Agreement dated as of June 1,
1999 among The Pantry, FSEP III, FSEP IV, FSEP International, Chase Manhattan Capital, L.P.,
CB Capital Investors, L.P., Baseball Partners and Peter J. Sodini.
10.1(4)(5) The Pantry, Inc. 1998 Stock Option Plan.
10.2(1) Form of Incentive Stock Option Agreement.
10.3(2) Stock Purchase Agreement dated October 23, 1997 among The Pantry, FSEP III, FSEP
International, CB Capital Investors, L.P. and Peter J. Sodini.
10.4(2) Contribution to Capital Agreement dated October 23, 1997 among The Pantry, FSEP III, FSEP
International, Chase Manhattan Capital, L.P., and Baseball Partners.
10.5(2) Stock Pledge Agreement dated October 23, 1997 between Peter J. Sodini and The Pantry.
10.6(2) Secured Promissory Note dated October 23, 1997 between Peter J. Sodini and The Pantry.
10.7(6) Amended and Restated Credit Agreement dated as of January 28, 1999 among The Pantry, the
financial institutions listed therein (collectively, "Lenders"), First Union National Bank ("First
Union"), as administrative agent, and Canadian Imperial Bank of Commerce ("CIBC"), as
syndication agent for Lenders.
10.8(3) First Amendment to Amended Credit Agreement dated as of April 30, 1999 among the Pantry, the
Lenders listed therein, First Union, CIBC and NationsBank, N.A.
10.9(7) Second Amendment to Credit Agreement dated as of October 27, 1999 among The Pantry, the
Lenders listed therein, First Union, CIBC and Bank of America, N.A. (formerly known as
NationsBank, N.A.).
10.10(7) Third Amendment to Credit Agreement dated as of November 30, 1999 among The Pantry, the
Lenders listed therein, First Union, CIBC and Bank of America, N.A. (formerly known as
NationsBank, N.A.).
59
Exhibit
Number Description of Document
------ -----------------------
10.11 Fourth Amendment to Credit Agreement dated as of November 30, 1999 among The Pantry, the
Lenders listed therein, First Union, CIBC and Bank of America, N.A. (formerly known as
NationsBank, N.A.).
10.12(2) Company Security Agreement dated as of October 23, 1997 between The Pantry and First
Union, as administrative agent.
10.13(2) Company Pledge Agreement dated as of October 23, 1997 between The Pantry and First Union,
as administrative agent.
10.14(2) Company Trademark Security Agreement dated as of October 23, 1997 between The Pantry and
First Union, as administrative agent.
10.15(2) Form of Amended and Restated Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing (North Carolina) dated October 23, 1997 among The Pantry, David R.
Cannon, as Trustee, and First Union as Agent.
10.16(2)(5) Employment Agreement dated June 3, 1996 between Dennis R. Crook and The Pantry
10.17(2)(5) Employment Agreement dated October 1, 1997 between Peter J. Sodini and The Pantry.
10.18(3)(5) Amendment No. 1 to Employment Agreement between The Pantry and Peter J. Sodini.
10.19(5) Amendment No. 2 to Employment Agreement between The Pantry and Peter J. Sodini.
10.20(5) Employment Agreement dated April 30, 2001 between Steven J. Ferriera and The Pantry.
10.21(5) Employment Agreement dated April 30, 2001 between William T. Flyg and The Pantry.
10.22(5) Employment Agreement dated August 10, 2001 between Joseph Krol and The Pantry.
10.23(5) Employment Agreement dated July 27, 2001 between Dan McCormack and The Pantry.
10.24(5) Employment Agreement dated July 28, 2001 between David Zaborsky and The Pantry.
10.25(5) Employment Agreement dated July 27, 2001 between Douglas Sweeney and The Pantry.
10.26(2) Form of Amended and Restated Mortgage, Security Agreement, Assignment of Rents and
Leases And Fixture Filing (South Carolina) dated October 23, 1997 between The Pantry and
First Union, as Agent.
10.27(2) Form of Amended and Restated Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing (Tennessee) dated October 23, 1997 among The Pantry, David R.
Cannon, as Trustee, and First Union, as Agent.
10.28(2) Form of Amended and Restated Mortgage, Security Agreement, Assignment of Rents and
Leases (Kentucky) dated October 23, 1997 between The Pantry and First Union, as Agent.
10.29(2) Form of Amended and Restated Mortgage, Security Agreement, Assignment of Rents and
Leases And Fixture Filing (Indiana) dated as of October 23, 1997 between The Pantry and First
Union, as Agent.
10.30(2) Form of Mortgage, Security Agreement, Assignment of Rents and Leases and Fixture Filing
(Florida) dated October 23, 1997 between Lil' Champ and First Union, as Agent.
10.31(2) Form of Deed to Secure Debt, Security Agreement, and Assignment of Rents (Georgia) dated
October 23, 1997 between Lil' Champ and First Union, as Agent.
10.32(1) Form of Subsidiary Guaranty.
10.33(1) Form of Subsidiary Security Agreement.
10.34(1) Form of Subsidiary Pledge Agreement.
10.35(1) Form of Subsidiary Trademark Security Agreement.
10.36(6) The Pantry Inc. 1998 Stock Subscription Plan.
10.37(1) Form of Stock Subscription Agreement.
10.38(1) Stock Purchase Agreement dated July 2, 1998 among The Pantry, FSEP IV and CB Capital
Investors, L.P.
10.39(1) Distribution Service Agreement dated as of March 29, 1998 among The Pantry, Lil' Champ and
McLane Company, Inc., as amended (asterisks located within the exhibit denote information
which has been deleted pursuant to a confidential treatment filing with the Securities and
Exchange Commission).
60
Exhibit
Number Description of Document
------ -----------------------
10.40(1) Form of Indemnification Agreement.
10.41(1) Common Stock Purchase Warrant dated December 30, 1996.
10.42(1) Common Stock Purchase Warrant dated December 30, 1996.
10.43(1) Form of 1999 Stock Option Plan.
12.1 Statement re Computation of Earnings to Fixed Charges Ratio.
21.1 Subsidiaries of The Pantry.
23.1 Consent of Deloitte & Touche LLP.
99.1 Risk Factors.
- --------
(1)Incorporated by reference from The Pantry's Registration Statement on Form
S-1, as amended (Registration No. 333-74221)
(2)Incorporated by reference from The Pantry's Registration Statement on Form
S-4 (Registration No. 333-42811)
(3)Incorporated by reference from The Pantry's Quarterly Report on Form 10-Q
for the quarterly period ended June 24, 1999.
(4)Incorporated by reference from The Pantry's Quarterly Report on Form 10-Q
for the quarterly period ended December 25, 1997.
(5)Represents a management contract or compensation plan arrangement.
(6)Incorporated by reference from The Pantry's Current Report on Form 8-K dated
February 8, 1999.
(7)Incorporated by reference from Amendment No. 1 to The Pantry's Quarterly
Report on Form 10-Q for the quarterly period ended December 30, 1999.
(b)Reports on Form 8-K.
None
(c)See (a)(iii) above.
(d)See (a)(ii) above.
61
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
THE PANTRY, INC.
By: /s/ Peter J. Sodini
------------------------------
Peter J. Sodini
President and Chief Executive
Officer
Date: December 26, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934 this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Peter J. Sodini President, Chief Executive Officer December 26, 2001
- ----------------------------- and Director (Principal Executive
Peter J. Sodini Officer)
/s/ William T. Flyg Senior Vice President and Chief December 26, 2001
- ----------------------------- Financial Officer (Principal
William T. Flyg Financial Officer)
/s/ Joseph J. Duncan Vice President and Corporate December 26, 2001
- ----------------------------- Controller (Principal Accounting
Joseph J. Duncan Officer)
/s/ Todd W. Halloran Director December 26, 2001
- -----------------------------
Todd W. Halloran
/s/ Jon D. Ralph Director December 26, 2001
- -----------------------------
Jon D. Ralph
/s/ Charles P. Rullman Director December 26, 2001
- -----------------------------
Charles P. Rullman
/s/ Edfred L. Shannon, Jr. Director December 26, 2001
- -----------------------------
Edfred L. Shannon, Jr.
/s/ Peter M. Starrett Director December 26, 2001
- -----------------------------
Peter M. Starrett
/s/ William M. Webster, III Director December 26, 2001
- -----------------------------
William M. Webster, III
/s/ Hubert E. Yarborough, III Director December 26, 2001
- -----------------------------
Hubert E. Yarborough, III
62
THE PANTRY, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Dollars in thousands)
Additions Deductions
Balance at charged to Additions for Balance
beginning costs and charged to payments or at end of
of period expenses Goodwill write-offs period
---------- ---------- ---------- ----------- ---------
Year ended September 30, 1999
Allowance for doubtful accounts. $ 280 $ 486 $ -- $ -- $ 766
Reserve for environmental issues 17,137 5,546 -- (7,281) 15,402
Reserve for closed stores....... 1,603 505 1,302 (606) 2,804
------- ------ ------ ------- -------
$19,020 $6,537 $1,302 $(7,887) $18,972
======= ====== ====== ======= =======
Year ended September 28, 2000
Allowance for doubtful accounts. $ 766 $ 439 $ -- $ -- $ 1,205
Reserve for environmental issues 15,402 4,126 -- (5,462) 14,066
Reserve for closed stores....... 2,804 430 4,222 (766) 6,690
------- ------ ------ ------- -------
$18,972 $4,995 $4,222 $(6,228) $21,961
======= ====== ====== ======= =======
Year ended September 27, 2001
Allowance for doubtful accounts. $ 1,205 $ 240 $ -- $(1,299) $ 146
Reserve for environmental issues 14,066 2,224 -- (4,083) 12,207
Reserve for closed stores....... 6,690 1,919 -- (1,596) 7,013
------- ------ ------ ------- -------
$21,961 $4,383 $ -- $(6,978) $19,366
======= ====== ====== ======= =======
S-1
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------ -----------------------
3.1(1) Amended and Restated Certificate of Incorporation of The Pantry.
3.2(1) Amended and Restated Bylaws of The Pantry.
4.1(2) Indenture dated as of October 23, 1997 among The Pantry, Sandhills, Lil' Champ and United
States Trust Company of New York, as Trustee, with respect to the 10 1/4% Senior Subordinated
Notes due 2007 (including the form of 10 1/4% Senior Subordinated Notes due 2007).
4.2(1) Amended and Restated Registration Rights Agreement dated July 2, 1998 among The Pantry, FS
Equity Partners III, L.P. ("FSEP III"), FS Equity Partners IV, L.P. ("FSEP IV") FS Equity
Partners International, L.P. ("FSEP International"), Peter J. Sodini, Chase Manhattan Capital,
L.P., CB Capital Investors, L.P., and Baseball Partners.
4.3(3) Amendment No. 1 to the Amended and Restated Registration Rights Agreement dated as of
June 1, 1999 among The Pantry, FSEP III, FSEP IV, FSEP International, Chase Manhattan
Capital, L.P., CB Capital Investors, L.P., Baseball Partners and Peter J. Sodini.
4.4(1) Amended and Restated Stockholders' Agreement dated July 2, 1998 among The Pantry,
FSEP III, FSEP IV, FSEP International, Chase Manhattan Capital, L.P., CB Capital Investors,
L.P., Baseball Partners and Peter J. Sodini.
4.5(3) Amendment No. 1 to the Amended and Restated Stockholder's Agreement dated as of June 1,
1999 among The Pantry, FSEP III, FSEP IV, FSEP International, Chase Manhattan Capital, L.P.,
CB Capital Investors, L.P., Baseball Partners and Peter J. Sodini.
10.1(4)(5) The Pantry, Inc. 1998 Stock Option Plan.
10.2(1) Form of Incentive Stock Option Agreement.
10.3(2) Stock Purchase Agreement dated October 23, 1997 among The Pantry, FSEP III, FSEP
International, CB Capital Investors, L.P. and Peter J. Sodini.
10.4(2) Contribution to Capital Agreement dated October 23, 1997 among The Pantry, FSEP III, FSEP
International, Chase Manhattan Capital, L.P., and Baseball Partners.
10.5(2) Stock Pledge Agreement dated October 23, 1997 between Peter J. Sodini and The Pantry.
10.6(2) Secured Promissory Note dated October 23, 1997 between Peter J. Sodini and The Pantry.
10.7(6) Amended and Restated Credit Agreement dated as of January 28, 1999 among The Pantry, the
financial institutions listed therein (collectively, "Lenders"), First Union National Bank ("First
Union"), as administrative agent, and Canadian Imperial Bank of Commerce ("CIBC"), as
syndication agent for Lenders.
10.8(3) First Amendment to Amended Credit Agreement dated as of April 30, 1999 among the Pantry,
the Lenders listed therein, First Union, CIBC and NationsBank, N.A.
10.9(7) Second Amendment to Credit Agreement dated as of October 27, 1999 among The Pantry, the
Lenders listed therein, First Union, CIBC and Bank of America, N.A. (formerly known as
NationsBank, N.A.).
10.10(7) Third Amendment to Credit Agreement dated as of November 30, 1999 among The Pantry, the
Lenders listed therein, First Union, CIBC and Bank of America, N.A. (formerly known as
NationsBank, N.A.).
10.11 Fourth Amendment to Credit Agreement dated as of November 30, 1999 among The Pantry, the
Lenders listed therein, First Union, CIBC and Bank of America, N.A. (formerly known as
NationsBank, N.A.).
Exhibit
Number Description of Document
- ------ -----------------------
10.12(2) Company Security Agreement dated as of October 23, 1997 between The Pantry and First Union,
as administrative agent.
10.13(2) Company Pledge Agreement dated as of October 23, 1997 between The Pantry and First Union,
as administrative agent.
10.14(2) Company Trademark Security Agreement dated as of October 23, 1997 between The Pantry and
First Union, as administrative agent.
10.15(2) Form of Amended and Restated Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing (North Carolina) dated October 23, 1997 among The Pantry, David R.
Cannon, as Trustee, and First Union as Agent.
10.16(2)(5) Employment Agreement dated June 3, 1996 between Dennis R. Crook and The Pantry
10.17(2)(5) Employment Agreement dated October 1, 1997 between Peter J. Sodini and The Pantry.
10.18(3)(5) Amendment No. 1 to Employment Agreement between The Pantry and Peter J. Sodini.
10.19(5) Amendment No. 2 to Employment Agreement between The Pantry and Peter J. Sodini
10.20(5) Employment Agreement dated April 30, 2001 between Steven J. Ferriera and The Pantry.
10.21(5) Employment Agreement dated April 30, 2001 between William T. Flyg and The Pantry.
10.22(5) Employment Agreement dated August 10, 2001 between Joseph Krol and The Pantry.
10.23(5) Employment Agreement dated July 27, 2001 between Dan McCormack and The Pantry.
10.24(5) Employment Agreement dated July 28, 2001 between David Zaborsky and The Pantry.
10.25(5) Employment Agreement dated July 27, 2001 between Douglas Sweeney and The Pantry.
10.26(2) Form of Amended and Restated Mortgage, Security Agreement, Assignment of Rents and Leases
And Fixture Filing (South Carolina) dated October 23, 1997 between The Pantry and First Union,
as Agent.
10.27(2) Form of Amended and Restated Deed of Trust, Security Agreement, Assignment of Rents and
Leases and Fixture Filing (Tennessee) dated October 23, 1997 among The Pantry, David R.
Cannon, as Trustee, and First Union, as Agent.
10.28(2) Form of Amended and Restated Mortgage, Security Agreement, Assignment of Rents and Leases
(Kentucky) dated October 23, 1997 between The Pantry and First Union, as Agent.
10.29(2) Form of Amended and Restated Mortgage, Security Agreement, Assignment of Rents and Leases
And Fixture Filing (Indiana) dated as of October 23, 1997 between The Pantry and First Union,
as Agent.
10.30(2) Form of Mortgage, Security Agreement, Assignment of Rents and Leases and Fixture Filing
(Florida) dated October 23, 1997 between Lil' Champ and First Union, as Agent.
10.31(2) Form of Deed to Secure Debt, Security Agreement, and Assignment of Rents (Georgia) dated
October 23, 1997 between Lil' Champ and First Union, as Agent.
10.32(1) Form of Subsidiary Guaranty.
10.33(1) Form of Subsidiary Security Agreement.
10.34(1) Form of Subsidiary Pledge Agreement.
10.35(1) Form of Subsidiary Trademark Security Agreement.
10.36(6) The Pantry Inc. 1998 Stock Subscription Plan.
10.37(1) Form of Stock Subscription Agreement.
10.38(1) Stock Purchase Agreement dated July 2, 1998 among The Pantry, FSEP IV and CB Capital
Investors, L.P.
10.39(1) Distribution Service Agreement dated as of March 29, 1998 among The Pantry, Lil' Champ and
McLane Company, Inc., as amended (asterisks located within the exhibit denote information
which has been deleted pursuant to a confidential treatment filing with the Securities and
Exchange Commission).
Exhibit
Number Description of Document
------ -----------------------
10.40(1) Form of Indemnification Agreement.
10.41(1) Common Stock Purchase Warrant dated December 30, 1996.
10.42(1) Common Stock Purchase Warrant dated December 30, 1996.
10.43(1) Form of 1999 Stock Option Plan.
12.1 Statement re Computation of Earnings to Fixed Charges Ratio.
21.1 Subsidiaries of The Pantry.
23.1 Consent of Deloitte & Touche LLP.
99.1 Risk Factors.
- --------
(1)Incorporated by reference from The Pantry's Registration Statement on Form
S-1, as amended (Registration No. 333-74221).
(2)Incorporated by reference from The Pantry's Registration Statement on Form
S-4 (Registration No. 333-42811).
(3)Incorporated by reference from The Pantry's Quarterly Report on Form 10-Q
for the quarterly period ended June 24, 1999.
(4)Incorporated by reference from The Pantry's Quarterly Report on Form 10-Q
for the quarterly period ended December 25, 1997.
(5)Represents a management contract or compensation plan arrangement.
(6)Incorporated by reference from The Pantry's Current Report on Form 8-K dated
February 8, 1999.
(7)Incorporated by reference from Amendment No. 1 to The Pantry's Quarterly
Report on Form 10-Q for the quarterly period ended December 30, 1999.