Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
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 24, 1998
COMMISSION FILE NUMBER 33-72574
THE PANTRY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1574463
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. BOX 1410
1801 DOUGLAS DRIVE
SANFORD, NC
27331-1410
(Address of principal executive offices)
Registrant's telephone number, including area code: (919) 774-6700
---------------
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: NONE
---------------
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 the 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. [X]
As of December 21, 1998, there were issued and outstanding 232,701 shares
of the registrant's Common Stock. The registrant's Common Stock is not traded
in a public market.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE PANTRY, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE
-----
PART I
Item 1: Business .................................................................................. 1
Item 2: Properties ................................................................................ 8
Item 3: Legal Proceedings ......................................................................... 8
Item 4: Submission of Matters to a Vote of Security Holders ....................................... 8
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters ................. 9
Item 6: Selected Financial Data ................................................................... 10
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 12
Item 7A: Quantitative and Qualitative Disclosures About Market Risk ................................ 21
Item 8: Consolidated Financial Statements and Supplementary Data .................................. 22
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 55
PART III
Item 10: Directors and Executive Officers of the Registrant ........................................ 55
Item 11: Executive Compensation .................................................................... 56
Item 12: Security Ownership of Certain Beneficial Owners and Management ............................ 57
Item 13: Certain Relationships and Related Transactions ............................................ 59
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................... 60
Signatures ................................................................................ 63
PART I
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements other than statements of historical fact included in
this Annual Report on Form 10-K, including without limitation, certain
statements under "Item 1. Business," "Item 2. Properties," "Item 3. Legal
Proceedings" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation" include forward-looking information and may
reflect certain judgements by management. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable,
it can give no assurances that such expectations will prove to be correct.
Actual results could differ materially from those projected in such
forward-looking statements and are subject to risks including, but not limited
to, those identified in the Company's Registration Statement on Form S-4, as
amended, effective January 8, 1998.
ITEM 1. BUSINESS
GENERAL
The Pantry, Inc. (the "Company" or "The Pantry"), a privately held company
incorporated in the State of Delaware, is a leading operator of convenience
stores in the Southeast and the largest operator of traditional convenience
stores in North and South Carolina. As of September 24, 1998, the Company
operated 953 convenience stores under the names "The Pantry(R)", "Lil'Champ,"
"Quick StopTM," "QS," "Express StopTM," "Dash NTM," "Smokers Express" and
"SprintTM" located throughout North and South Carolina, Florida, western
Kentucky, Tennessee, Virginia and southern Indiana. The Company's stores offer
a broad selection of merchandise and services designed to appeal to the
convenience needs of its customers, including tobacco products, beer, soft
drinks, self-service fast food and beverages, publications, dairy products,
groceries, health and beauty aids, video games and money orders. In its
Kentucky, Virginia and Indiana stores, the Company also sells lottery products.
In addition, self-service gasoline is sold at 884 Pantry stores, 667 of which
sell gasoline under brand names including Amoco, British Petroleum ("BP"),
Chevron, Exxon, Shell and Texaco. Since fiscal 1994, merchandise sales
(including commissions from services) and gasoline sales have each averaged
approximately 50% of total revenues.
Prior to November 2, 1993, The Pantry was a wholly-owned subsidiary of
Montrose Pantry Acquisition Corporation ("MPAC"), an entity formed to effect
the 1987 leveraged buy-out of The Pantry. On November 2, 1993, The Pantry was
merged into MPAC and MPAC's name was changed to The Pantry. MPAC had no assets
or operations other than its investment in The Pantry.
On November 30, 1995, Freeman Spogli & Co. Incorporated, through its
affiliates, FS Equity Partners III, L.P., a Delaware limited partnership ("FSEP
III") and FS Equity Partners International, L.P., a Delaware limited
partnership ("FSEP International," collectively with FSEP III, "the FS Group")
acquired a 39.9% interest in the Company and Chase Manhattan Capital
Corporation ("Chase") acquired a 12.0% interest in the Company through a series
of transactions which included the purchase of Common Stock from certain
shareholders and the purchase of newly issued Common and Preferred Stock. The
FS Group and Chase subsequently acquired an additional 37.0% and 11.1%
interest, respectively, on August 19, 1996 through the purchase of Common and
Preferred Stock from certain other shareholders. During fiscal years 1997 and
1998, the Company issued additional shares of Common and Preferred Stock to
existing shareholders and certain directors and executives of the Company. As
of September 24, 1998, the FS Group and Chase and its affiliates owned
approximately 78.8% and 14.1%, respectively, of the outstanding shares of the
Company's equity securities. The remaining 7.1% is owned by certain of the
Company's directors and executive management.
For a further discussion of the ownership change see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," "Item 8. Consolidated Financial Statements
and Supplementary Data -- Notes to Consolidated Financial Statements -- Note
13. Preferred Stock" and "Item 12. Security Ownership of Certain Beneficial
Owners and Management."
THE LIL' CHAMP ACQUISITION
On October 23, 1997, The Pantry acquired all of the outstanding common
stock of Lil' Champ Food Stores, Inc. ("Lil' Champ") from Docks U.S.A., Inc.
for $125.7 million in cash and repaid $10.7 million in outstanding indebtedness
of Lil' Champ (the "Lil' Champ Acquisition"). The acquisition was funded by a
combination of the proceeds of the sale of Senior Subordinated Notes (as
defined herein), cash on hand and an equity investment of $32.4 million by the
FS Group, Chase and a member of management.
1
On October 23, 1997 in connection with the Lil' Champ Acquisition, the
Company issued and sold 10 1/4% Senior Subordinated Notes due October 15, 2007
in the aggregate principal amount of $200.0 million (the "Senior Subordinated
Notes"). The Senior Subordinated Notes were sold to CIBC Wood Gundy Securities
Corp. and First Union Capital Markets Corp. (the "Initial Purchasers") in a
private placement. The Initial Purchasers subsequently resold the Senior
Subordinated Notes to (i) "qualified institutional buyers" (in reliance on Rule
144A under the Securities Act) and (ii) non-U.S. persons outside the United
States (in reliance on Regulation S under the Securities Act). The proceeds of
the Senior Subordinated Notes were used primarily to acquire Lil' Champ and to
finance a tender offer for the purchase of $51.0 million of the Company's
outstanding 12% Senior Notes due 2000 (the "Senior Notes"). In connection with
the issuance and sale of the Senior Subordinated Notes, the Company and the
Initial Purchasers entered into a registration rights agreement pursuant to
which the Company agreed to use its best efforts to cause a registration
statement to become effective under the Securities Act with respect to the
exchange by the Company of its 10 1/4% Senior Subordinated Notes (the "Exchange
Notes"), for the outstanding Senior Subordinated Notes. The Company complied by
filing a registration statement on Form S-4 which became effective, as amended,
on January 8, 1998.
In addition, the Company entered into a new credit facility which consists
of a $45.0 million revolving credit facility and a $30.0 million acquisition
facility. The new credit facility was amended in July 1998 to increase the
acquisition facility to $85.0 million (as amended, the "New Credit Facility").
The New Credit Facility is available for (i) working capital financing and
general corporate purposes of the Company, (ii) issuing commercial and standby
letters of credit and (iii) acquisitions.
For a further discussion of Lil' Champ and related transactions see "Item
5. Market for Registrants Common Equity and Related Stockholder Matters," "Item
7. Management's 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."
FISCAL YEAR 1998 "TUCK IN" ACQUISITIONS, STORE OPENINGS, AND DISPOSITIONS
In seven separate transactions during fiscal year 1998, the Company
acquired 154 convenience stores located in North Carolina, South Carolina,
Florida and Virginia (the "tuck in" acquisitions). These tuck in acquisitions
were primarily funded from borrowings under the acquisition facility contained
in the Company's New Credit Facility (the "Acquisition Facility"), an equity
investment (see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations"), and cash on hand. In addition, the
Company opened six new stores located in major cities and resort areas of North
and South Carolina.
On September 1, 1998, the Company sold 100% of its convenience store
operations and idle property located in eastern Georgia and acquired four
convenience stores located in Florida. These related transactions effected
management's intention to divest itself of certain operations associated with
the Lil' Champ Acquisition. The net proceeds of the disposition and acquisition
were approximately $2.0 million.
The combination of Pantry "existing stores," the Lil' Champ Acquisition,
the "tuck in" acquisitions, and selected new store development created the
third largest independent convenience store chain in the United States (based
on number of stores as of September 24, 1998) with 953 stores located primarily
in the Southeast.
SUBSEQUENT EVENTS
In two separate transactions subsequent to fiscal year end 1998, the
Company acquired 32 stores located in North and South Carolina. These
transactions were primarily funded from borrowings under the Company's
Acquisition Facility and cash on hand. In addition, subsequent to fiscal year
end the Company signed a purchase agreement to acquire approximately 125
convenience stores in its existing market. There can be no assurances that
these transactions will be consummated.
OPERATIONS
For a discussion of fiscal year 1998 operating results see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In fiscal year 1998, the Company acquired or opened 650 convenience stores
located in Florida, North Carolina, South Carolina, Georgia and Virginia. In
addition, the Company closed 39 convenience stores and sold 48 convenience
stores representing 100% of its convenience store operations in Georgia. The
net increase in store count and timing of these acquisitions materially impact
the Company's results from operations and comparisons to prior periods.
2
Specific strategies implemented by the Company's senior management team
include improving merchandising and supplier relationships, increasing expense
controls, repositioning and rebranding gasoline operations, implementing a
"tuck in" acquisition program, upgrading store facilities and increasing
management depth to facilitate the Company's growth plans.
MERCHANDISE SALES. For the year ended September 24, 1998, The Pantry's
merchandise sales (including commissions from services) were 48.2% of total
revenues. The Pantry's gross margins on merchandise sales after purchase
rebates, mark-downs, inventory spoilage and inventory shrink decreased to 34.0%
for this period from 34.3% in the same period of the prior year. Merchandise
sales for the year ended September 24, 1998 increased by 127.7% from the
comparable period for the previous year. The increase in merchandise revenues
was primarily due to the addition of Lil' Champ, "tuck in" acquisitions, and
same store sales growth.
The following table highlights certain information with respect to the
Company's merchandise sales for the last two fiscal years:
FISCAL YEAR ENDED
-----------------------
1997 1998
----------- -----------
Merchandise sales (in millions) .......................................... $ 202.4 $ 460.8
Average merchandise sales per store (in thousands) ....................... $ 525.8 $ 532.1
Merchandise gross margins (after purchase rebates, mark-downs, inventory
spoilage and inventory shrink) ......................................... 34.3% 34.0%
Average number of stores ................................................. 385 866
The Company's stores generally carry approximately 4,750 stock keeping
units and offer a full line of convenience products, including tobacco
products, beer, soft drinks, self-service fast foods and beverages (including
fountain beverages and coffee), candy, newspapers and magazines, snack foods,
dairy products, canned goods and groceries, health and beauty aids and other
immediate consumables. The Company has also developed an in-house food service
program featuring breakfast biscuits, fried chicken, deli and other hot food
offerings. The following table describes the Company's merchandise sales mix
for the last two fiscal years:
FISCAL YEAR ENDED
--------------------------------
1996 1997 1998
---------- ---------- ----------
Tobacco products ...................... 25.0% 27.8% 28.1%
Beer .................................. 19.5 15.1 15.9
Soft drinks ........................... 15.3 13.7 14.6
Self-service fast foods and beverages . 3.7 6.9 6.5
General Merchandise ................... 4.8 6.4 6.0
Candy ................................. 4.3 4.8 4.7
Newspapers and magazines .............. 4.0 5.0 4.7
Snack foods ........................... 4.9 4.6 4.9
Dairy products ........................ 5.5 2.8 2.4
Bread/Cake ............................ 2.5 2.1 2.0
Grocery and Other ..................... 10.5 10.8 10.2
---- ---- ----
Total ................................. 100% 100% 100%
==== ==== ====
The Company purchases over 50% of its general merchandise (including most
tobacco products, candy, paper products, pet food and food service items) and
groceries from a single wholesale grocer, McLane Company, Inc. ("McLane"). In
addition, McLane supplies health and beauty aids, cigars, smokeless tobacco,
toys, and seasonal items to all stores. However, there are adequate alternative
sources available to purchase this merchandise should a change from the current
wholesaler become necessary or desirable. The Company purchases the balance of
its merchandise from a variety of other distributors.
As reported by the Bureau of Labor Statistics, the consumer price index
for fiscal 1998 on tobacco products increased approximately 15%. Subsequent to
fiscal year end on November 23, 1998, major cigarette manufacturers which
supply the Company increased prices by $0.45 per pack. The fiscal year 1998
increases and subsequent increase have been passed on in higher retails
throughout the chain. Although it is too early to determine the potential
impact on unit volume, management believes it can pass along these and other
cost increases to its customers over the long-term and, therefore, does not
expect inflation to have a significant impact on the results of operations or
financial condition of the Company in the foreseeable future.
3
GASOLINE OPERATIONS. For the year ended September 24, 1998, the Company's
revenues from sales of gasoline were 51.8% of total revenues, and the number of
gallons sold on a Company-wide basis increased by 160.2% in fiscal 1998 when
compared to fiscal 1997. This increase is primarily due to increased store
count associated with the acquisitions. Since the beginning of fiscal 1997, the
average volume per store increased due to (i) more competitive pricing; (ii)
the acquisition or opening of 650 stores, which had in the aggregate higher
than average gasoline volumes and (iii) the upgrading of many locations with
automated gasoline dispensing or payment equipment such as the installation of
multi-product dispensers ("MPDs") or credit card readers ("CRINDs"). MPDs and
CRINDs increase gasoline volume and the percentage of premium grade gasoline
sold, which typically has higher margins than lower grade gasoline. To upgrade
a location with CRINDs, the Company can either retro-fit existing MPDs with
CRINDs or install new MPDs with CRINDs. The Company installed a total of 142
CRINDs at existing and acquired stores in fiscal 1998. In addition, each of the
new stores opened since fiscal 1994 sells gasoline and has MPDs and CRINDs.
The following table highlights certain information regarding the Company's
gasoline operations for the last two fiscal years:
FISCAL YEAR ENDED
-----------------------
1997 1998
----------- -----------
Operating data:
Gasoline sales ($ in millions)................... $ 220.2 $ 510.0
Gasoline gallons sold (in millions) ............. 179.4 466.8
Average gallons sold per store (in thousands) ... 501.2 582.8
Average retail price per gallon ................. $ 1.23 $ 1.09
Average gross profit per gallon (in cents) ...... $ 0.128 $ 0.134
Locations selling gasoline ...................... 364 884
Number of Company-owned branded locations ....... 300 667
Number of Company-owned unbranded locations ..... 35 192
Number of third-party locations (branded & unbranded) 29 25
The increase in gross profit per gallon in fiscal 1998 was primarily due
to the addition of Lil' Champ and the relatively higher gasoline margins in
Florida.
Of the 884 Company stores that sold gasoline as of September 24, 1998, 667
(including third-party locations selling under these brands) or 76% were
branded under the Amoco, Ashland, British Petroleum (BP), Chevron, Citgo,
Exxon, Shell or Texaco brand names. The Company operates a mix of branded and
unbranded locations and evaluates its gasoline offering on a local market
level.
As of September 24, 1998, the Company owned the gasoline operations at 859
locations and at 25 locations had gasoline operations that were operated under
third-party arrangements. At company-operated locations, the Company owns the
gasoline storage tanks, pumping equipment and canopies, and retains 100% of the
gross profit received from gasoline sales. In fiscal 1998, these locations
accounted for approximately 98% 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 the Company approximately 50% of the gross profit. In fiscal 1998,
third-party locations accounted for approximately 2% of the total gallons sold
by the Company. The Company has been phasing out third-party arrangements
because its owned operations are more profitable.
The Company purchases its gasoline from major oil companies and
independent refiners. There are 20 gasoline terminals in the Company's
operating areas, enabling the Company to choose from more than one distribution
point for most of its stores. The Company's inventories of gasoline (both
branded and unbranded) turn approximately every seven days.
STORE LOCATIONS. As of September 24, 1998, the Company operated 953
convenience stores located primarily in smaller towns and suburban areas in
seven states. Substantially all of the Company's stores are free standing
structures averaging approximately 2,400 square feet and provide ample customer
parking. The following table shows the geographic distribution by state of the
Company's stores at September 24, 1998:
4
NUMBER OF PERCENT OF
STATE STORES TOTAL STORES
- -------------------------- ---------- -------------
Florida ................ 439 46.1
North Carolina ......... 264 27.7%
South Carolina ......... 155 16.3
Kentucky ............... 46 4.8
Indiana ................ 20 2.1
Tennessee .............. 19 2.0
Virginia ............... 10 1.0
--- ----
Total .................. 953 100%
=== ====
Since fiscal 1996, the Company has developed a limited number of new
stores and closed or sold a substantial number of underperforming stores.
Beginning in 1997, the Company turned its attention from developing new stores,
to commencing its "tuck in" acquisition program. The following table summarizes
these activities:
FISCAL YEAR ENDED
-----------------------------------
1995 1996 1997 1998
-------- -------- -------- --------
Number of stores at beginning
of period 406 403 379 390
Opened or acquired .............. 10 4 36 650
Closed or sold .................. (13) (28) (25) (87)
--- --- --- ---
Number of stores at end of period 403 379 390 953
=== === === ===
The Company continually evaluates the performance of each of its stores to
determine whether any particular store should be closed or sold based on its
sales trends and profitability. In deciding to close or sell an underperforming
store, the Company considers such factors as store location, gasoline volumes
and margins, merchandise sales and gross profits, lease term, rental rate and
other obligations and the store's contribution to corporate overhead. Although
closing or selling underperforming stores reduces revenues, the Company's
operating results typically improve since these stores were generally
unprofitable.
ACQUISITIONS. In eight separate transactions during fiscal year 1998, the
Company acquired 643 convenience stores located in Florida, North Carolina,
South Carolina, Georgia and Virginia. With these acquisitions, the Company
expanded its market area to the southeastern states of Florida, Georgia and
Virginia and, together, has created the third largest independent convenience
store chain in the United States (based on number of stores as of September 24,
1998) with 953 stores located primarily in the Southeast.
SITE SELECTION. In opening new stores in recent years, the Company has
focused on selecting store sites on highly traveled thoroughfares in coastal
resort areas and suburban markets of larger cities or near exit and entrance
ramps of highly traveled highways that provide convenient access to the store
location. The Company's cost of opening new stores in these high-traffic areas
has been higher than it has incurred in connection with its prior store
development activities. In selecting sites for new stores, the Company uses an
evaluation process designed to enhance its return on investment by focusing on
market area demographics, population density, traffic volume, visibility,
ingress and egress and economic development in the market area. The Company
also reviews the location of competitive stores and customer activity at those
stores.
UPGRADING OF STORE FACILITIES AND EQUIPMENT. During fiscal 1997 and fiscal
1998, the Company upgraded the facilities and equipment at many of its existing
and acquired store locations, including gasoline equipment upgrades, at a cost
of approximately $9.2 million and $30.9 million, respectively. The Company's
store renovation program is an integral part of the Company's operating
strategy. The Company continually evaluates the performance of individual
stores and periodically upgrades store facilities and equipment based on sales
volumes, the lease term for leased locations and management's assessment of the
potential return on investment. Typical upgrades for many stores include
improvements to interior fixtures and equipment for self-service food and
beverages, interior lighting, in-store restrooms for customers and exterior
lighting and signage. The upgrading program for the Company's gasoline
operations includes the addition of automated gasoline dispensing and payment
systems, such as MPDs and CRINDs, to enhance customer convenience and service
and the installation of UST(as defined herein) leak detection and other
equipment in accordance with applicable Environmental Protection Agency ("EPA")
environmental regulations. For further discussion of EPA and other
environmental regulations see "Item 1. Business -- Government Regulation and
Environmental Matters" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
5
STORE OPERATIONS. Each convenience store is staffed with a manager, an
assistant manager and sales associates, and most stores are open 24 hours,
seven days a week. The Company's field operations organization is comprised of
a network of regional and district managers who, with the Company's corporate
management, evaluate store operations. The Company also monitors 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 the Company's stores in particular.
The Company competes with numerous other convenience store chains,
franchisees of other convenience stores chains, local owner-operated
convenience stores and grocery stores, and convenience stores owned and
operated by major oil companies. In addition, the Company's stores offering
self-service gasoline compete with gasoline service stations, including service
stations operated by major oil companies. The Company's stores also compete to
some extent with supermarket chains, drug stores, fast food operations and
other similar retail outlets. In some of the Company's markets, certain
competitors, particularly major oil companies, have been in existence longer
and have substantially greater financial, marketing and other resources than
the Company.
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
The Company has registered or applied for registration of a variety of
trade names, service marks and trademarks for use in its business, including The
Pantry(R), Worth(R), Bean Street Coffee Company(TM), Bean Street Market(TM), Big
Chill(R), Lil' Chill(R), Quick Stop(TM), Zip Mart(TM), Express Stop(TM), Dash
NTM, Sprint(TM), Smokers Express(TM), and others, which the Company regards as
having significant value and as being important factors in the marketing of the
Company and its convenience stores.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
Many aspects of the Company's operations are subject to regulation under
federal, state and local laws. The most significant of such laws are summarized
below.
STORAGE AND SALE OF GASOLINE. The Company is subject to various federal,
state and local environmental laws. Federal, state, and local regulatory
agencies have adopted regulations governing underground storage tanks ("USTs")
that require the Company to make certain expenditures for compliance. In
particular, at the federal level, the Resource Conservation and Recovery Act of
1976, as amended, requires the EPA to establish a comprehensive regulatory
program for the detection, prevention and cleanup of leaking USTs.
In addition to the technical standards, the Company is required by federal
and state regulations to maintain evidence of financial responsibility for
taking corrective action and compensating third parties in the event of a
release from its UST systems. In order to comply with the applicable
requirements, The Pantry maintains letters of credit in the aggregate amount of
$2.3 million issued by a commercial bank in favor of state environmental
agencies in the states of North Carolina, South Carolina, Virginia, Tennessee,
Kentucky and Indiana and relies upon the reimbursement provisions of applicable
state trust funds. In Florida, the Company meets such financial responsibility
requirements by state trust fund coverage through December 31, 1998 and will
meet such requirements thereafter through private commercial liability
insurance and by qualified self-insurance. The Company has sold all of its
Georgia stores but has retained responsibility for pre-closing environmental
remediation at certain locations. The cost of such remediation and third party
claims should be covered by the state trust fund, subject to applicable
deductibles and caps on reimbursement.
Regulations enacted by the EPA in 1988 established requirements for (i)
installing UST systems; (ii) upgrading UST systems; (iii) taking corrective
action in response to releases; (iv) closing UST systems; (v) keeping
appropriate records; and (vi) maintaining evidence of financial responsibility
for taking corrective action and compensating third parties for bodily injury
and property damage resulting from releases. These regulations permit states to
develop, administer and enforce their own regulatory programs, incorporating
requirements which are at least as stringent as the federal standards. The
Florida
6
rules for 1998 upgrades are more stringent than the 1988 EPA regulations. The
Pantry facilities in Florida all meet or exceed such rules. The following is an
overview of the requirements imposed by these regulations:
LEAK DETECTION. The EPA's and states' release detection regulations were
phased in based on the age of the USTs. All USTs were required to comply with
leak detection requirements by December 22, 1993. The Pantry utilizes several
approved leak detection methods for all Pantry-owned UST systems. Daily and
monthly inventory reconciliations are completed at the store level and at the
corporate support center. The daily and monthly reconciliation data is also
analyzed using statistical inventory reconciliation which compares the reported
volume of gasoline purchased and sold with the capacity of each UST system and
highlights discrepancies. The Company believes it is in full or substantial
compliance with the leak detection requirements applicable to its USTs.
CORROSION PROTECTION. The 1988 EPA regulations require that all UST
systems have corrosion protection by December 22, 1998. The Company began
installing non-corrosive fiberglass tanks and piping in 1982. All of the UST
systems at Pantry stores' have been protected from corrosion either through the
installation of fiberglass tanks or upgrading steel USTs with interior
fiberglass lining or the installation of cathodic protection.
OVERFILL/SPILL PREVENTION. The 1988 EPA regulations require that all sites
have overfill/spill prevention devices by December 22, 1998. The Company has
installed these devices on all Company-owned UST systems to meet these
regulations.
STATE TRUST FUNDS. All states in which the Company operates UST systems
have established trust funds for the sharing, recovering and reimbursing of
certain cleanup costs and liabilities incurred as a result of releases from UST
systems. These trust funds, which essentially provide insurance coverage for
the cleanup of environmental damages caused by the operation of UST systems,
are funded by a UST registration fee and a tax on the wholesale purchase of
motor fuels within each state. The Company has paid UST registration fees and
gasoline taxes to each state where it operates to participate in these trust
programs and the Company has filed claims and received reimbursement in North
Carolina, South Carolina, Kentucky, Indiana, Georgia, Florida and Tennessee.
The coverage afforded by each state fund varies but generally provides from
$150,000 to $1.0 million per site for the cleanup of environmental
contamination, and most provide coverage for third-party liabilities. Costs for
which the Company does not receive reimbursement include but are not limited
to: (i) the per-site deductible; (ii) costs incurred in connection with
releases occurring or reported to trust funds prior to their inception; (iii)
removal and disposal of UST systems; and (iv) costs incurred in connection with
sites otherwise ineligible for reimbursement from the trust funds. The trust
funds require the Company to pay deductibles ranging from $10,000 to $100,000
per occurrence depending on the upgrade status of its UST system, the date the
release is discovered/reported and the type of cost for which reimbursement is
sought. The Florida trust fund will not cover releases first reported after
December 31, 1998. The Company will obtain private coverage for remediation and
third party claims arising out of releases reported after December 31, 1998.
The Company believes that this coverage exceeds federal and Florida financial
responsibility regulations. In addition to immaterial amounts to be spent by
the Company, a substantial amount will be expended for remediation on behalf of
the Company by state trust funds established in the Company's operating areas
or other responsible third parties (including insurers). To the extent such
third parties do not pay for remediation as anticipated by the Company, the
Company will be obligated to make such payments, which could materially
adversely affect the Company's financial condition and results of operations.
Reimbursements from state trust funds will be dependent upon the continued
maintenance and solvency of the various funds.
SALE OF ALCOHOLIC BEVERAGES. In certain areas where stores are located,
state or local laws limit the hours of operation for the sale of certain
products, the most significant of which limit or govern 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 and to 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 to the Company for
damage claims as a seller of alcoholic beverages is substantial, the Company
has adopted procedures intended to minimize such exposure. In addition, the
Company maintains general liability insurance which may mitigate the cost of
any liability.
VIDEO POKER LICENSES. Stores in South Carolina operating video poker
machines are subject to local and state regulations regarding the operation and
ownership of video poker machines. Furthermore, state and local laws limit the
manner in which video poker machines may be operated. In addition, state and
local regulatory agencies have the authority to approve, revoke, suspend or
deny applications for, and renewal of, the applicable licenses for video poker
machines.
7
STORE OPERATIONS. The Company's 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.
The Company's 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 the Company's results
of operations.
EMPLOYEES
As of September 24, 1998, the Company employed approximately 4,548
full-time and 1,606 part-time employees. Fewer part-time employees are employed
during the winter months than during the peak spring and summer seasons. Of the
Company's employees, approximately 5,837 are employed in the Company's stores
and 317 are corporate and field management personnel. None of the Company's
employees are represented by unions. The Company considers its employee
relations to be good.
ITEM 2. PROPERTIES
The Company owns the real property at 323 Company stores and leases the
real property at 630 Company stores. Management believes that none of these
leases is individually material to the Company. Most of the Company's leases
are net leases requiring the Company to pay taxes, insurance and maintenance
costs. Although the Company's leases expire at various times, approximately 90%
of such leases have terms, including renewal options, extending beyond the end
of fiscal 2003. Of the Company's leases that expire prior to the end of fiscal
2003, management anticipates that it will be able to negotiate acceptable
extensions of the leases for those locations that it intends to continue
operating. When appropriate, the Company has chosen to sell and then lease-back
properties. Factors leading to this decision include alternative desires for
use of cash, beneficial taxation, and 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.
The Company owns its corporate headquarters, a three-story, 51,000 square
foot office building in Sanford, North Carolina and leases its Lil'Champ
corporate headquarters in Jacksonville, Florida. Management believes that the
Company's headquarters are adequate for its present and foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is party to various
legal actions which the Company believes are routine in nature and incidental
to the operation of its business. While the outcome of such actions cannot be
predicted with certainty, the Company believes that the ultimate resolution of
these matters will not have a material adverse impact on the business,
financial condition or prospects of the Company. The Company makes 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
UST systems. See "Item 1. Business -- Government Regulation and Environmental
Matters."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information -- There is no market for the Common Stock.
(b) Principal Shareholders -- As of December 21, 1998, there were 54 holders of
record of the Company's Common Stock.
(c) Dividends -- During the last two fiscal years, the Company has not paid any
cash dividends on the Common Stock. The Company intends to retain earnings
to support operations and to finance expansion and does not intend to pay
cash dividends on the Common Stock for the foreseeable future. The payment
of cash dividends in the future will depend upon such factors as the
Company's earnings, operations, capital requirements, financial condition
and other factors deemed relevant by the Board of Directors. The payment
of any cash dividends is prohibited under restrictions contained in (i)
the indentures relating to each of the Senior Notes and the Senior
Subordinated Notes (ii) the Certificate of Designation of Preferences of
the Series B Preferred Stock of the Company and (iii) the Company's senior
credit facility.
(d) Subsequent to fiscal year end 1997, the Company entered into certain
transactions related to the Lil' Champ Acquisition, part of which included
the sale of securities by the Company which were not registered under the
Securities Act. On October 23, 1997, the Company sold 72,000 shares of
Common Stock to the FS Group, Chase and Peter J. Sodini for an aggregate
purchase price of $32.4 million in cash. Prior to the purchase of Common
Stock, the FS Group, Chase and Peter J. Sodini contributed all outstanding
shares of Series A Preferred Stock, par value $0.01 per share, and related
accrued and unpaid dividends to the capital of the Company.
On July 2, 1998, in connection with the acquisition of certain of the
assets of Quick Stop Food Mart, Inc. ("Quick Stop") and the acquisition of
certain of the assets of Stallings Oil Company ("Stallings"), the Company
issued 43,478 shares of Common Stock, par value $0.01 per share for an
aggregate purchase price of $25.0 million. The Common Stock was issued to
affiliates of existing shareholders, namely FS Equity Partners IV, L.P., a
Delaware limited partnership ("FSEP IV," collectively with FSEP
International and FSEP III, "the FS Group"), and CB Capital Investors, L.P.,
an affiliate of Chase (collectively "Chase").
Sales of the securities to the above parties were made in reliance upon
Section 4(2) of the Securities Act as transactions not involving any public
offering. Each of the above parties who purchased securities from the
Company were accredited investors as defined in Rule 501 of Regulation D
promulgated under the Securities Act. No underwriter was engaged in
connection with the foregoing sales of equity securities.
On October 23, 1997, the Company issued and sold the Senior Subordinated
Notes. The Senior Subordinated Notes were sold to the Initial Purchasers in
a private placement. No underwriter was engaged in connection with the sale
of the Senior Subordinated Notes. The Initial Purchasers subsequently resold
the Senior Subordinated Notes to (i) "qualified institutional buyers" (in
reliance on Rule 144A under the Securities Act) and (ii) non-U.S. persons
outside the United States (in reliance on Regulation S under the Securities
Act). In connection with the issuance and sale of the Senior Subordinated
Notes, the Company and the Initial Purchasers entered into a registration
rights agreement pursuant to which the Company agreed to use its best
efforts to cause a registration statement to become effective under the
Securities Act with respect to the exchange by the Company of its Exchange
Notes for the outstanding Senior Subordinated Notes. The form and terms of
the Exchange Notes are the same as the form and terms of the Senior
Subordinated Notes in all material respects. The Company filed a
registration statement on Form S-4 which became effective, as amended, on
January 8, 1998.
9
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, the Company's annual 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. (Dollars are in millions except per store and per gallon data.)
SEPTEMBER 29, SEPTEMBER 28,
1994 1995
--------------- ---------------
(52 WEEKS) (52 WEEKS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Merchandise Sales ..................................... $ 189.2 $ 187.4
Gasoline sales ........................................ 175.1 187.2
Commissions ........................................... 4.5 4.5
-------- ----------
Total Revenues ......................................... 368.8 379.1
Cost of Sales:
Merchandise ........................................... 123.1 122.0
Gasoline .............................................. 153.5 161.2
-------- ----------
Gross Profit ........................................... 92.2 95.9
Store operating expense ................................ 53.2 56.1
General and administrative expenses .................... 17.9 18.2
Merger integration costs ............................... -- --
Restructuring charges .................................. -- --
Impairment of long-lived assets ........................ -- --
Depreciation and amortization .......................... 10.2 11.5
--------- ----------
Income from operations ................................. 10.9 10.1
Interest expense ....................................... (12.0) (13.2)
Due diligence costs .................................... -- (1.2)(b)
Income (loss) before income taxes and other items ...... (0.2) (3.6)
Income tax benefit (expense) ........................... 0.4 0.4
Cumulative effect of change in accounting principle..... -- (1.0)(c)
Extraordinary loss ..................................... (0.7)(a) --
Net income(loss) ....................................... $ (0.5) $ (4.2)
OTHER FINANCIAL DATA:
EBITDA (e) ............................................. $ 22.0 $ 22.3
Net cash provided by (used in):
Operating activities .................................. $ (4.1) $ 11.9
Investing activities .................................. (10.6) (15.3)
Financing activities .................................. 26.0 (1.0)
Capital expenditures (f) ............................... 9.9 16.7
Ratio of earnings to fixed charges (g) ................. -- --
OPERATING DATA:
Merchandise gross margin ............................... 34.9% 34.9%
Gasoline gallons sold (in millions) .................... 158.5 160.3
Average retail gasoline price per gallon ............... $ 1.10 $ 1.17
Average gasoline gross profit per gallon
(in cents) ............................................ 13.63(c) 16.21(c)
STORE OPERATING DATA:
Number of stores (end of period) ....................... 406 403
Average sales per store (in thousands) .................
Merchandise sales ..................................... $ 460.4 $ 462.7
Gasoline gallons ...................................... 423.7 440.3
Comparable store sales growth (h):
Merchandise ........................................... 3.3 % (0.8)%
Gasoline gallons ...................................... 5.2 % 0.2 %
BALANCE SHEET DATA (END OF PERIOD):
Working Capital ........................................ $ 6.7 $ (0.8)
Total assets ........................................... 124.0 127.7
Total debt (i) ......................................... 102.4 101.8
Shareholders' Equity (Deficit) ......................... ( 12.1) (16.3)
SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 24,
1996 1997 1998 (J)
--------------- --------------- ----------------
(52 WEEKS) (52 WEEKS) (52 WEEKS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Merchandise Sales ..................................... $ 188.1 $ 202.4 $ 460.8
Gasoline sales ........................................ 192.7 220.2 510.0
Commissions ........................................... 4.0 4.8 14.1
--------- ------- --------
Total Revenues ......................................... 384.8 427.4 984.9
Cost of Sales:
Merchandise ........................................... 126.0 132.8 303.9
Gasoline .............................................. 167.6 197.3 447.6
--------- ------- --------
Gross Profit ........................................... 91.2 97.3 233.4
Store operating expense ................................ 57.8 60.2 140.1
General and administrative expenses .................... 17.1 16.8 32.7
Merger integration costs ............................... -- -- 1.0(k)
Restructuring charges .................................. 2.2(d) -- --
Impairment of long-lived assets ........................ 3.0(d) -- --
Depreciation and amortization .......................... 9.2 9.5 27.7
--------- --------- ---------
Income from operations ................................. 1.9 10.8 31.9
Interest expense ....................................... (12.0) (13.0) (28.9)
Due diligence costs .................................... -- -- --
Income (loss) before income taxes and other items ...... (10.8) (1.0) 4.7
Income tax benefit (expense) ........................... 2.7 -- --
Cumulative effect of change in accounting principle..... -- -- --
Extraordinary loss ..................................... -- -- (8.0)(l)
Net income(loss) ....................................... $ (8.1) $ (1.0) $ (3.3)
OTHER FINANCIAL DATA:
EBITDA (e) ............................................. $ 15.6 $ 21.6 $ 62.3
Net cash provided by (used in):
Operating activities .................................. $ 5.4 $ 7.3 $ 48.0
Investing activities .................................. (7.2) (25.1) (286.5)
Financing activities .................................. (3.9) 15.8 269.5
Capital expenditures (f) ............................... 7.1 14.7 43.2
Ratio of earnings to fixed charges (g) ................. -- -- 1.1
OPERATING DATA:
Merchandise gross margin ............................... 33.0% 34.4% 34.0%
Gasoline gallons sold (in millions) .................... 160.7 179.4 466.8
Average retail gasoline price per gallon ............... $ 1.20 $ 1.23 $ 1.09
Average gasoline gross profit per gallon
(in cents) ............................................ 15.64(c) 12.76(c) 13.4(c)
STORE OPERATING DATA:
Number of stores (end of period) ....................... 379 390 953
Average sales per store (in thousands) .................
Merchandise sales ..................................... $ 479.8 $ 525.8 $ 532.1
Gasoline gallons ...................................... 448.8 501.2 582.8
Comparable store sales growth (h):
Merchandise ........................................... 2.8% 8.5% 5.3%
Gasoline gallons ...................................... (4.3)% 7.2% 4.8%
BALANCE SHEET DATA (END OF PERIOD):
Working Capital ........................................ $ (6.5) $ (8.2) $ (9.0)
Total assets ........................................... 120.9 142.8 554.8
Total debt (i) ......................................... 101.4 101.3 340.7
Shareholders' Equity (Deficit) ......................... (27.5) ( 17.9) 39.3
10
NOTES TO SELECTED FINANCIAL DATA
(a) In fiscal 1994, The Pantry recorded an extraordinary loss of $671,000,
net of taxes, related to the early extinguishment of debt.
(b) During fiscal 1995, The Pantry expended $1,181,000 in due diligence
costs related to the evaluation of the potential purchase of a regional
convenience store company. The proposed transaction was abandoned and, as a
result, the costs incurred in connection with the prospective acquisition were
charged to earnings in fiscal 1995.
(c) In fiscal 1995, The Pantry adopted, SFAS No. 112, "Employer's
Accounting for Post Retirement Benefits," and as a result, recorded a
cumulative effect for a change in accounting principle of $(960,000), net of
taxes.
(d) During 1996, The Pantry recorded restructuring charges of $2,184,000
pursuant to a formal plan to restructure its corporate offices. The costs
include: $1,484,000 for employee severance; $350,000 for employee moving costs;
and $350,000 for charges associated with the investment by FS&Co. and CMC.
Substantially all of these amounts were expended during fiscal 1996. Also
during fiscal 1996, The Pantry early-adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Pursuant to SFAS No. 121, The Pantry evaluated its long-lived assets for
impairment on a store-by-store basis by comparing the sum of the projected
future undiscounted cash flows attributable to each store to the carrying value
of the long-lived assets (including an allocation of goodwill, if appropriate)
of that store. Based on this evaluation, The Pantry determined that certain
long-lived assets were impaired and recorded an impairment loss based on the
difference between the carrying value and the fair value of property and
equipment and goodwill of $415,000 and $2,619,000, respectively.
(e) "EBITDA" represents income (loss) before depreciation and
amortization, interest expense, income tax expense (benefit), merger
integration costs, restructuring charges, impairment of long-lived assets,
extraordinary item, cumulative effect of change in accounting principle and the
write-off of due diligence costs incurred in connection with a potential
purchase of a regional convenience store company that was abandoned in 1995.
EBITDA is not a measure of performance under generally accepted accounting
principles, and should not be considered as a substitute for net income, cash
flows from operating activities and other income or cash flow statement data
prepared in accordance with generally accepted accounting principles, or as a
measure of profitability or liquidity. The Pantry has included information
concerning EBITDA as one measure of an issuer's historical ability to service
debt. EBITDA should not be considered as an alternative to, or more meaningful
than, income from operations or cash flow as an indication of The Pantry's
operating performance.
(f) Purchases of assets to be held for sale are excluded from these
amounts.
(g) 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). The Pantry's earnings were inadequate to
cover fixed charges by $0.2 million, $3.6 million, $10.8 million, and $1.0
million for fiscal years 1994, 1995, 1996, and 1997, respectively.
(h) The stores included in calculating same store sales growth are stores
that were under Company management and in operation for both fiscal years of
the comparable period; therefore, acquired stores, new stores and closed stores
are not included.
(i) Total debt includes capital lease obligations.
(j) For a further discussion of the Lil' Champ Acquisition and its impact
on the comparability of the periods reflected in Selected Financial Data, see
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(k) During 1998, The Pantry recorded an integration charge of
approximately $1.0 million for costs of combining its existing business with
the acquired business of Lil' Champ. The charge includes $0.3 million for
relocation costs and $0.7 million for consolidation and related expenses.
(l) On October 23, 1997 in connection with the Lil' Champ Acquisition, the
Company completed the offering of the Senior Subordinated Notes and, in a
related transaction completed a Tender Offer and Consent Solicitation with
respect to the Senior Notes. The Tender Offer resulted in the Company's
purchase of $51 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, the
Company 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.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the financial statements and
notes thereto. Further information is contained in the Company's Quarterly
Reports on Form 10-Q for the quarters ended December 25, 1997, March 26, 1998
and June 25, 1998, and the Company's Registration Statement on Form S-4, as
amended, effective January 8, 1998.
INTRODUCTION
Since late 1996, the Company has focused on several strategic initiatives
to capitalize on and enhance the Company's position as a leading convenience
store retailer in the Southeast. Specific elements of management's operating
strategy include the following:
FOCUS ON MERCHANDISING MIX AND MARGINS. The Company's merchandising
strategy is to offer a broader and more locally defined variety of
products than is provided by other convenience stores, with particular
emphasis on "fresh" food and beverage offerings, general merchandise and
monthly promotional displays. This tailored product mix appeals to the
tastes and needs of local customers and improves inventory turnover.
Furthermore, specific improvements have been implemented to enhance the
breadth, quality and presentation of the the Company's cigarette, coffee,
prepared foods, general merchandise and novelty product offerings. These
improvements have contributed to increases in merchandise sales and gross
profit margin. Management believes there are opportunities to increase
revenues and gross profit margin of acquired stores by applying elements
of the Company's merchandising strategy to these operations.
LEVERAGE RELATIONSHIPS WITH SUPPLIERS. An important element of the
Company's operating strategy is developing and maintaining strong
relationships with its merchandise and gasoline suppliers. The Company
represents an attractive distribution channel to suppliers given its
geographically concentrated store base and demonstrated ability to
increase its merchandise sales and gasoline volumes. These factors enhance
the Company's ability to obtain favorable terms from key suppliers.
STRENGTHEN EXPENSE CONTROLS. The Company has significantly reduced its
operating, general and administrative expenses as a percentage of sales by
eliminating redundant positions, outsourcing certain non-core functions to
third parties, renegotiating supply and service agreements and
implementing improved employee training and retention, risk management and
inventory shrink procedures and programs.
IMPROVE GASOLINE OPERATIONS. The Company will continue to focus on
improving gasoline sales volumes at existing locations through its "Major
Market" improvement program. The program involves (i) increasing the
competitiveness of the Company's gasoline pricing, while maintaining
acceptable profit margins, (ii) upgrading gasoline facilities and
equipment and (iii) selectively rebranding or "unbranding" stores. As part
of this effort, the Company is consolidating its gasoline purchasing among
a select number of branded and unbranded gasoline suppliers. Benefits of
consolidating gasoline purchases include lower costs through volume
rebates as well as obtaining allowances from certain gas suppliers for
advertising and reimaging, which includes upgrading gasoline equipment by
installing MPDs and CRINDs.
UPGRADE STORE FACILITIES AND EQUIPMENT. The Company's store renovation
program is an integral part of its operating strategy. The Company
continually evaluates the performance of individual stores and
periodically upgrades store facilities and equipment based on sales
volumes, the lease term for leased locations and management's assessment
of the potential return on investment. Typical upgrades include
improvements to interior fixtures and equipment for self-service food and
beverages, interior lighting, in-store restrooms for customers and
exterior lighting and signage. The upgrading program for the Company's
gasoline operations typically includes upgrading canopies, the addition of
automated gasoline dispensing and payment equipment to enhance customer
convenience and service and the installation of UST leak detection and
other equipment in accordance with applicable EPA environmental
regulations. The Company remodeled a total of 180 stores in 7 markets in
fiscal 1998. At acquired stores, the Company implements a program of
cosmetic upgrades, including new paint and interior lighting, in addition
to selectively upgrading gasoline facilities and equipment. Management
believes that its store upgrade program offers an opportunity to improve
the performance of existing and acquired operations.
12
PURSUE "TUCK IN" ACQUISITIONS AND NEW STORE DEVELOPMENT. Management
believes there are opportunities to increase the Company's sales and gain
operating efficiencies through store acquisitions and new store
development. The Pantry's "tuck in" acquisition strategy focuses on
acquiring small- to medium-sized chains within the Company's existing and
contiguous market areas. The Company's "tuck in" acquisition program is
complemented by new store development in existing markets with strong
growth characteristics. Management also continuously reviews operating
performance of stores and regularly closes poor performing locations.
Growth by acquisition has been the central theme for fiscal year 1998.
This strategy stems from the Company's desire to add quality, high volume and
mature locations in the Southeast. During the current fiscal year, the Pantry
has acquired a total of 643 stores in eight separate transactions, with
aggregate annual revenues of approximately $800 million. On a selected basis,
the Company expects to continue to pursue this growth strategy in its primary
markets. These acquired locations with demonstrated revenue volume
characteristically have a lower risk component than traditional site selection
and new store development programs. Further, the Company believes that its
ability to target selected marketing areas and incorporate the Company's
operating initiatives into the acquired operations has made a significant
contribution to the consolidated operating results for fiscal year 1998.
THE LIL' CHAMP ACQUISITION
On October 23, 1997, the Pantry purchased Lil' Champ, the largest
convenience store chain in northern Florida, operating 489 convenience stores
located in 33 counties in northern Florida and southeastern Georgia. Following
are highlights of some of the activities and accomplishments at Lil' Champ:
MERCHANDISING ADJUSTMENTS. Lil' Champ introduced and implemented new
merchandising programs in all stores which included the Bean Street Coffee
program, and a broader mix of snack and candy items. The general
merchandise offerings at all stores have been expanded with 250 stores
receiving four additional cooler doors and eighteen remodels. Additionally,
management initiated periodic promotional programs from market leaders in
primary categories.
FIELD OPERATIONS ENHANCEMENTS. By January 15, 1998, management had
converted all 489 store managers from an hourly to a salary compensation
program, increased district manager compensation, and instituted an
incentive plan for all levels of management. Additionally, store operations
were focused on daily store results and operating conditions to enable
management to quickly highlight opportunities.
UPGRADE STORE FACILITIES AND GASOLINE EQUIPMENT. The Company's upgrade and
remodel program was initiated, focusing on selected markets and individual
locations. Sixty-nine stores were remodeled and over 50 locations were
upgraded from single hose product dispensers to pay at the pump
multi-product dispensers. The Company continues to selectively upgrade
existing facilities and enhance store conditions.
GEORGIA DIVESTITURE AND SELECTED STORE CLOSINGS. On September 1, 1998, the
Company sold 100% of Lil' Champ's convenience store operations and idle
property located in eastern Georgia and, as a part of the transaction,
acquired four convenience stores located in Florida. Additionally, Lil'
Champ closed selected locations resulting in total fiscal year closings of
68 stores. These dispositions and closing are consistent with management's
intention to sell or close underperforming or non-strategic operations of
Lil' Champ.
LIL' CHAMP 1998 ENVIRONMENTAL UPGRADES. As of the date of the Lil' Champ
Acquisition, there were approximately 125 facilities which did not meet
federal and state 1998 UST regulatory compliance standards for petroleum
underground storage systems. Since such date, 93 facilities have been
upgraded to meet the 1998 standards and 32 facilites have been sold, closed
or gasoline operations ceased. These activities, coupled with other
upgrades in each of the seven states in which the Company conducts
business, will bring the Company in compliance with the environmental
standards effective December 22, 1998.
Despite a decrease in average store count and the impact of other factors
including the much publicized weather conditions in Florida, these and other
strategic initiatives implemented at Lil' Champ during the year resulted in
increased merchandise revenues, gasoline gallons, gross profit and income from
operations for the eleven month period ended September 24, 1998 when compared
to the eleven month period ended September 30, 1997.
OTHER "TUCK IN" ACQUISITIONS AND NEW STORES
In seven separate transactions during fiscal year 1998, the Company
acquired 154 convenience stores located in North Carolina, South Carolina,
Florida and Virginia ("tuck in" acquisitions). These "tuck in" acquisitions
were primarily funded
13
from borrowings under the Company's Acquisition Facility, an equity investment,
and cash on hand. In addition, the Company opened six new stores located in
major cities and resort areas of North and South Carolina.
The combination of Pantry "existing stores," the Lil' Champ Acquisition,
the "tuck in" acquisitions, and selected new store development has created the
third largest independent convenience store chain in the United States (based
on number of stores as of September 24, 1998) with 953 stores located primarily
in the Southeast. On a proforma basis, fiscal year 1998 revenues are estimated
$1.2 billion.
RESULTS OF OPERATIONS
The Company's operations for fiscal years 1996, 1997 and 1998 each
contained 52 weeks. The following table sets forth certain of the Company's
results as a percentage of revenues for the periods indicated:
FISCAL YEAR ENDED
--------------------------------
1996 1997 1998
---------- ---------- ----------
Revenues:
Merchandise sales ......................... 48.9% 47.4% 46.8%
Gasoline sales ............................ 50.1 51.5 51.8
Commissions ............................... 1.0 1.1 1.4
----- ----- -----
Total revenues ........................... 100.0 100.0 100.0
Gross profit .............................. 23.7 22.8 23.7
Operating, general and administrative expenses 20.8 18.0 17.6
Depreciation and amortization ............... 2.4 2.2 2.8
Income from operations ...................... 0.5 2.5 3.2
FISCAL 1998 COMPARED TO FISCAL 1997
IMPACT OF THE LIL CHAMP AND "TUCK IN" ACQUISITIONS. The Lil' Champ
Acquisition, other "tuck in" acquisitions and related transactions have had a
significant impact on the Company's financial condition and results of
operations since their respective transaction dates. Due to the method of
accounting for fiscal year 1998 acquisitions, the Consolidated Statements of
Operations for the fiscal year ended September 24, 1998 herein includes results
from operations for each of the acquisitions from the date of each acquisition
only. Moreover, the Consolidated Balance Sheets as of September 25, 1997 and
the Consolidated Statements of Operations for fiscal years September 25, 1997
and September 26, 1996 do not include the assets, liabilities, and results of
operations relating to these acquisitions. As a result, comparisons to prior
fiscal year results and prior balance sheets are impacted materially and
obfuscate the underlying performance of same store results.
GROSS REVENUES. Gross revenue for fiscal 1998 increased $557.5 million or
130.4% over fiscal 1997. The increase in total revenue is primarily
attributable to Lil' Champ revenue of $462.8 million for the eleven month
period ended September 24, 1998, the revenue from stores acquired or opened in
fiscal year 1998, full year revenue from stores acquired or opened in fiscal
year 1997, and same store sales growth.
MERCHANDISE REVENUE. Total merchandise revenue for fiscal 1998 increased
$258.4 million or 127.6% over fiscal 1997. The increase in merchandise revenue
is primarily attributable to Lil' Champ merchandise revenue of $215.4 million
for the eleven month period ended September 24, 1998, the revenue from stores
acquired or opened in fiscal year 1998, full year revenue from stores acquired
or opened in fiscal year 1997, and same store sales growth. Fiscal 1998 same
store merchandise revenue growth increased 5.3% over fiscal year 1997. Same
store sales increases at The Pantry locations are primarily attributable to
increased customer counts and average transaction size resulting from more
competitive gasoline pricing, enhanced store appearance and store
merchandising, and increased in-store promotional activity.
GASOLINE REVENUE AND GALLONS. Total gasoline revenue for fiscal 1998
increased $289.8 million or 131.6% over fiscal 1997. The increase in gasoline
revenue is primarily attributable to Lil' Champ gasoline revenue of $240.1
million for the eleven month period ended September 24, 1998, the revenue from
stores acquired or opened in fiscal year 1998, full year revenue from stores
acquired or opened in fiscal year 1997, and same store gallon sales growth.
Overall, gasoline revenue growth was partially offset by lower average gasoline
retail prices in fiscal 1998 versus fiscal 1997. In fiscal 1998, the Company's
average retail price of gasoline was $0.14 lower than in fiscal 1997. The
decrease in average retail is primarily attributable to lower wholesale
gasoline pricing.
14
In fiscal 1998, total gasoline gallons increased 287.4 million gallons or
160.0% over fiscal 1997, 212 million of which is attributable to Lil' Champ
volume. Fiscal 1998 same store gallon sales growth was 4.8% and is primarily
attributable to more competitive gasoline pricing, rebranding and promotional
activity, enhanced store appearance and local market and economic conditions.
COMMISSION REVENUE. Total commission revenue for fiscal 1998 increased
$9.3 million or 195.1% over fiscal 1997. The increase in commission revenue is
primarily attributable to Lil' Champ revenue of $7.3 million for the eleven
month period ended September 24, 1998, revenue from stores acquired or opened
in fiscal year 1998. Lil' Champ's commission revenue is principally lottery
revenue in locations throughout Florida and Georgia.
TOTAL GROSS PROFIT. Total gross profit for fiscal 1998 increased $136.1
million or 140.0% over fiscal 1997. The increase in gross profit is primarily
attributable to Lil' Champ gross profit of $111.7 million for the eleven month
period ended September 24, 1998, the gross profit from stores acquired or
opened in fiscal year 1998, full year revenue from stores acquired or opened in
fiscal year 1997 and same store gross profit increases.
MERCHANDISE GROSS MARGIN. Merchandise gross margins remained relatively
constant from fiscal 1997 to fiscal 1998, decreasing only 30 basis points
despite significant cost inflation in the tobacco category.
GASOLINE GROSS PROFIT PER GALLON. The gasoline gross profit per gallon
increase from $0.128 in fiscal 1997 to $0.134 in fiscal 1998 is the result of
general gasoline market conditions in Lil' Champ's markets and improved
gasoline market conditions in the Pantry's primary markets.
STORE OPERATING AND GENERAL AND ADMINISTRATIVE EXPENSES. Store operating
expenses for fiscal 1998 increased $79.9 million or 132.7% over fiscal 1997.
The increase in store expenses is primarily attributable to Lil' Champ expenses
of $66.0 million for the eleven month period ended September 24, 1998, the
personnel and lease expenses associated with the stores acquired or opened in
fiscal year 1998 and full year personnel and lease expenses associated with
stores acquired or opened in fiscal year 1997.
General and administrative expenses for fiscal 1998 increased $16.0
million or 95.1% over fiscal 1997. The increase in general and administrative
expenses is primarily attributable to Lil' Champ expenses of $14.3 million for
the eleven month period ended September 24, 1998. Operating, general and
administrative expenses in total decreased as a percentage of total revenues.
INCOME FROM OPERATIONS. Income from operations for fiscal 1998 increased
$21.1 million or 195.6% over fiscal 1997. The increase is primarily
attributable to Lil' Champ income from operations of $16.6 million, earnings
from stores acquired or opened in fiscal year 1998, full year revenue from
store is acquired or opened in fiscal year 1997, same store volume increases,
and the margin impact as discussed above. The increase is partially offset by
the personnel and lease expenses associated with the stores acquired or opened
in fiscal year 1998 and full year of expenses from stores acquired or opened in
fiscal year 1997.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION ("EBITDA").
EBITDA represents income (loss) before interest expense, income tax benefit,
depreciation and amortization, merger integration costs, restructuring charges,
impairment of long-lived assets, extraordinary item, cumulative effect of
change in accounting principle and the write-off of due diligence costs
incurred in connection with a potential purchase of a regional convenience
store company that was abandoned in 1995 and extraordinary loss. EBITDA for
fiscal 1998 increased $40.7 million or 188.4% over fiscal 1997. The increase is
attributable to Lil' Champ EBITDA of $32.4 million for the eleven month period
ended September 24, 1998 and the items discussed above.
EBITDA is not a measure of performance under generally accepted accounting
principles, and should not be a substitute for net income, cash flows from
operating activities and other income or cash flow statement data prepared in
accordance with generally accepted accounting principles, or as a measure of
profitability or liquidity. The Company has included information concerning
EBITDA as one measure of an issuer's historical ability to service debt. EBITDA
should not be considered as an alternative to, or more meaningful than, income
from operations or cash flow as an indication of the Company's operating
performance.
INTEREST EXPENSE (SEE "LIQUIDITY AND CAPITAL RESOURCES; LONG-TERM DEBT").
Interest expense is primarily interest on the Company's Senior Notes, Senior
Subordinated Notes, and borrowing under the Acquisition Facility. Interest
expense increased $15.9 million in fiscal 1998 over fiscal 1997 and is
attributable to interest on the Senior Subordinated Notes and borrowing under
the Acquisition Facility, which was partially offset by the interest savings
related to the repurchase of $51.0 million in principal amount of Senior Notes.
15
EXTRAORDINARY ITEM. The Company recognized an extraordinary loss, net of
taxes, of approximately $8.0 million in connection with the Tender Offer and
Consent Solicitation. The loss is the sum, net of taxes, of the premium paid
for the early redemption of $51.0 million in principal amount of the Senior
Notes, the respective portion of the consent fees paid, and the write-off of a
respective portion of the deferred financing cost associated with the Senior
Notes.
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES. Total revenues increased 11.1% in fiscal 1997 from fiscal 1996.
This increase is attributable to significant revenue increases in merchandise,
gasoline and commissions despite a reduction in average store count compared to
the prior year.
Merchandise revenues increased 7.6% in fiscal 1997 from fiscal 1996 due to
increased volume in major categories, a general increase in the price of
cigarettes and growth in new merchandising programs and categories. Same store
merchandise sales increased 8.5% over fiscal 1996 and average merchandise sales
per store increased as the Company closed or sold 25 lower volume stores while
acquiring or opening 36 new stores.
Gasoline sales increased 14.2% in fiscal 1997 from fiscal 1996 primarily
due to the Company's competitive pricing strategy, the closing of
underperforming stores and acquiring or opening 36 new stores with average
gasoline volume greater than the Company's overall average. Additionally, the
average retail price per gallon in fiscal 1997 was $1.23 versus an average
retail price per gallon in fiscal 1996 of $1.20. This average retail price is
indicative of the Company's more competitive gasoline pricing strategy, general
gasoline market conditions and increased price competition from other gasoline
marketers in certain markets. The Company's same store gasoline volume increase
of 7.2% in fiscal 1997 can be attributed to more competitive pricing and a
relatively mild 1996-1997 winter season compared to the prior year.
Commission revenues increased 20.3% in fiscal 1997 from fiscal 1996 due to
the expansion and enhancement of existing commission related programs and the
introduction of new programs in selected markets.
GROSS PROFIT. Gross profit for fiscal 1997 increased 6.6% or $6.1 million
from fiscal 1996 as a result of the increases in merchandise, gasoline and
commission revenues discussed above and an increase in merchandise gross profit
margin from 33.0% in fiscal 1996 to 34.4% in fiscal 1997. Overall gross profit
margin declined from 23.7% in fiscal 1996 to 22.8% in fiscal 1997 due to the
decrease in gasoline margin per gallon from $0.156 in 1996 to $0.128 in 1997.
The decrease in gasoline gross profit margin is attributable to a shift in the
Company's pricing practices and less favorable conditions in the wholesale and
retail gasoline markets.
STORE OPERATING EXPENSES. Store operating expenses increased in fiscal
1997 over fiscal 1996 in terms of total dollars, but decreased as a percentage
of merchandise sales. Store expenses increased due to increases in store
personnel related expenses of $1.0 million, real estate lease expense of $0.9
million and equipment rental expense of $0.5 million. The increase in store
personnel related expenses is attributable to increased customer traffic and
transaction volume. The increase in real estate leases is attributable to the
consummation of several sale/leaseback transactions. The increase in equipment
rental expense is primarily attributable to the Company roll-out of a frozen
drink program to a majority of stores.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for fiscal 1997 decreased 1.9% from fiscal 1996. The decrease in both total
dollar terms and as a percentage of merchandise sales is attributable to
improved fiscal management of major expense categories.
INCOME FROM OPERATIONS. Income from operations increased from $1.9 million
in fiscal 1996 to $10.8 million in fiscal 1997. The increase is attributable to
the items discussed above, as well as nonrecurring restructuring charges and
charges for impairment of long-lived assets of $2.2 million and $3.0 million,
respectively, in fiscal 1996 which were not present in fiscal 1997.
INTEREST EXPENSE. Interest expense for fiscal 1997 increased $1 million
from 1996 due to (i) a temporary interest rate increase on the Company's Senior
Notes from 12% to 12 1/2% (see "Liquidity and Capital Resources -- Long-Term
Debt") and (ii) a nonrecurring decrease of $0.6 million related to an interest
accrual that was reversed in fiscal 1996 and did not occur in fiscal 1997. The
accrual had been recorded related to a potential income tax issue that was
resolved in The Pantry's favor in fiscal 1996.
INCOME TAX BENEFIT (EXPENSE). The Company's income tax benefit decreased
in fiscal 1997 due to a $9.8 million decrease in pre-tax loss compared to the
prior year and the computation of the Company's tax liability for fiscal 1997.
Additionally, no income tax benefit was recorded in fiscal 1997, which was
principally attributable to an increase in the valuation allowance for state
deferred income tax assets of approximately $325,000.
16
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION. EBITDA
represents income (loss) before depreciation and amortization, interest
expense, income tax (expense) benefit, restructuring charges, impairment of
long-lived assets, extraordinary item and write-off of acquisition due
diligence costs. EBITDA for fiscal 1997 increased $6.0 million from 1996 due to
the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS. Due to the nature of the Company's business,
substantially all sales are for cash, and cash provided by operations is the
Company's primary source of liquidity. Capital expenditures, acquisitions and
interest expense represent the primary uses of funds. The Company relies
primarily upon cash provided by operating activities, supplemented as necessary
from time to time by borrowings under its New Credit Facility, sale-leaseback
transactions, asset dispositions and equity investments, to finance its
operations, pay interest, and fund capital expenditures and acquisitions. Cash
provided by operating activities for fiscal 1996, fiscal 1997 and fiscal 1998
totaled $5.4 million, $7.3 million and $48.0 million, respectively. The Company
had $34.4 million of cash and cash equivalents on hand at September 24, 1998.
LINE AND LETTER OF CREDIT FACILITY. On October 23, 1997, to supplement
cash on hand and cash provided by operating activities, the Company entered
into the New Credit Facility. On July 2, 1998 and in connection with "tuck in"
acquisition activity and an equity investment by existing shareholders, the New
Credit Facility was amended to increase the amount available under the
Acquisition Facility from $30 million to $85 million. The New Credit Facility
consists of a $45.0 million Revolving Credit Facility and a $85.0 million
Acquisition Facility (see "Item 8. Consolidated Financial Statements and
Supplementary Data -- Notes to Consolidated Financial Statements -- Note 5 --
Long-Term Debt"). The Revolving Credit Facility is available to fund working
capital and for the issuance of standby letters of credit. The Acquisition
Facility is available to fund future acquisitions of related businesses. As of
September 24, 1998, there were no borrowings outstanding under the working
capital line of credit and $78.0 million outstanding under the Acquisition
Facility (see "Tuck In Acquisitions" and "Long-Term Debt"). As of September 24,
1998, approximately $14.0 million of letters of credit were issued under the
standby letter of credit facility.
THE LIL' CHAMP ACQUISITION. On October 23, 1997, the Company acquired all
of the outstanding common stock of Lil' Champ from Docks U.S.A., Inc. for
$125.7 million in cash and repaid $10.7 million in outstanding indebtedness of
Lil' Champ. The purchase price, the refinancing of existing Lil' Champ debt,
and the fees and expenses of the Lil' Champ Acquisition were financed with the
proceeds from the sale of the Senior Subordinated Notes, cash on hand, and an
equity investment of $32.4 million by the FS Group, Chase and a member of
management.
On October 23, 1997 in connection with the Lil' Champ Acquisition, the
Company purchased $51.0 million in principal amount of the Senior Notes at a
purchase price of 110% of the aggregate principal amount of each tendered
Senior Note plus accrued and unpaid interest up to, but not including, the date
of purchase (the "Tender Offer"). The Company obtained consents (the "Consent
Solicitation") from the holders of the Senior Notes to amendments and waivers
to certain of the covenants contained in Senior Notes Indenture. The
consideration paid in respect of validly delivered consents was 1 3/4% of the
principal amount of the Senior Notes. The Company recognized an extraordinary
loss, net of taxes, of approximately $8.0 million in connection with the Tender
Offer and Consent Solicitation. See "Results of Operations."
"TUCK IN" ACQUISITIONS. In addition to the Lil' Champ Acquisition and in
fiscal 1998, the Company acquired a total of 154 convenience stores in seven
separate transactions for approximately $92.9 million. These stores are located
North Carolina, South Carolina, Florida and Virginia. The Company funded these
transactions with $78.0 million in proceeds from the Acquisition Facility, the
net proceeds from the sale of the Company's Common Stock, par value $0.01 per
share to existing stockholders and management of the Company and cash on hand.
Subsequent to fiscal year end 1998, the Company acquired the operating
assets of 32 stores located in North and South Carolina. The Company funded
these transactions with $7.0 million in proceeds from the Acquisition Facility
and cash on hand. In addition, subsequent to fiscal year end 1998 the Company
has signed an stock purchase agreement for approximately 125 stores located in
its existing market. There can be no assurances this transaction will be
consumated, and the acquisition is contingent upon, among other things, the
Company's ability to obtain additional financing.
CAPITAL EXPENDITURES. Capital expenditures (excluding all acquisitions)
for fiscal 1998 were $48.4 million. Capital expenditures are primarily
expenditures for existing store improvements, store equipment, new store
development and expenditures to comply with regulatory statutes, including
those related to environmental matters. The Company finances substantially all
capital expenditures and new store development through cash flow from
operations, a sale-leaseback program or
17
similar lease activity, vendor programs and asset dispositions. In fiscal 1998,
the Company received approximately $20.7 million in sale-leaseback and other
reimbursements for capital improvements; therefore, net capital expenditures,
excluding all acquisitions, for fiscal 1998 were $27.7 million.
LONG-TERM DEBT. At September 24, 1998, the Company's long-term debt
consisted primarily of $49.0 million of the Senior Notes, $200 million of the
Senior Subordinated Notes (together with the Senior Notes, the "Notes"), and
$78.0 million outstanding under the Acquisition Facility. The interest payments
on the Senior Notes are due May 15 and November 15. The interest payments on
the Senior Subordinated Notes are due October 15 and June 15. The interest
payments on the Acquisition Facility are due monthly.
The Notes are unconditionally guaranteed, on an unsecured basis, as to the
payment of principal, premium, if any, and interest, jointly and severally, by
the Guarantors. The Notes contain covenants that, among other things, restrict
the ability of the Company and any restricted subsidiary to: (i) incur
additional indebtedness; (ii) pay dividends or make distributions; (iii) issue
stock of subsidiaries; (iv) make certain investments; (v) repurchase stock;
(vi) create liens; (vii) enter into transactions with affiliates; (viii) enter
into sale-leaseback transactions; (ix) merge or consolidate the Company or any
of its subsidiaries; and (x) transfer and sell assets.
During fiscal 1998 and relating to the "tuck in" acquisitions discussed
above, the Company borrowed $78.0 million under its Acquisition Facility. Under
the terms of the New Credit Facility, the Acquisition Facility is available to
finance acquisitions of related businesses with certain restrictions. The New
Credit Facility contains covenants restricting the ability of the Company and
any of its of subsidiaries to, among other things: (i) incur additional debt;
(ii) declare dividends or redeem or repurchase capital stock; (iii) prepay,
redeem or purchase debt; (iv) incur liens; (v) make loans and investments; (vi)
make capital expenditures; (vii) engage in mergers, acquisitions and asset
sales; and (viii) engage in transactions with affiliates. The Company is also
required to comply with financial covenants with respect to (a) a minimum
coverage ratio, (b) a minimum pro forma EBITDA, (c) a maximum pro forma
leverage ratio, and (d) a maximum capital expenditure allowance.
CASH FLOWS FROM FINANCING ACTIVITIES. The Lil' Champ Acquisition price,
the refinancing of existing Lil' Champ debt, the Tender Offer, the total
purchase price of all "tuck in" acquisitions and all related fees and expenses
were financed with the proceeds from the offering of the Senior Subordinated
Notes, cash on hand, the net proceeds of approximately $56.0 million from the
sale to existing stockholders and management of the Company of additional
shares of the Company's Common Stock, par value $0.01 per share.
CASH REQUIREMENTS. The Company believes that cash on hand, together with
cash flow anticipated to be generated from operations, short-term borrowing for
seasonal working capital, permitted borrowings under the Company's credit
facilities and permitted borrowings by its Unrestricted Subsidiary will be
sufficient to enable the Company to satisfy anticipated cash requirements for
operating, investing and financing activities, including debt service for the
next twelve months.
SHAREHOLDERS' EQUITY. As of September 24, 1998, the Company's
shareholders' equity totaled $39.3 million. The increase in shareholders'
equity of $57.2 million is attributed to the proceeds from the sale of
additional Common Stock and the contribution of all outstanding shares of
Series A Preferred Stock and related accrued dividends, which was partially
offset by the Company's net loss of $3.3 million for fiscal 1998.
Additional paid in capital is impacted by the accounting treatment applied
to a 1987 leveraged buyout of the outstanding Common Stock of the Company's
predecessor which resulted in a debit to equity of $17.1 million. This debit had
the effect, among others, of offsetting $7.0 million of equity capital invested
in the Company by its shareholders. Additionally, the accumulated deficit
includes the cumulative effect of (i) the accrued dividends on previously
outstanding preferred stock of $5.0 million, (ii) the accrued dividends on
current outstanding Series B Preferred Stock of $4.4 million, (iii) the net cost
of equity transactions and (iv) the cumulative results of operations, which
include extraordinary losses and cumulative effect of accounting changes,
interest expense of $17.2 million on previously outstanding subordinated
debentures and preferred stock obligations. This interest and the related
subordinated debt and these dividends and the related preferred stock were paid
or redeemed in full with a portion of the proceeds from the fiscal 1994 sale of
the Senior Notes.
ENVIRONMENTAL CONSIDERATIONS. The Company is subject to various federal,
state and local environmental laws and regulations governing USTs that require
the Company to make certain expenditures for compliance. In particular, at the
federal level, the Resource Conservation and Recovery Act of 1976, as amended,
requires the EPA to establish a comprehensive regulatory program for the
detection, prevention, and cleanup of leaking USTs. Regulations enacted by the
EPA in 1988 established requirements for (i) installing UST systems; (ii)
upgrading UST systems; (iii) taking corrective action in response
18
to releases; (iv) closing UST systems; (v) keeping appropriate records; and (vi)
maintaining evidence of financial responsibility for taking corrective action
and compensating third parties for bodily injury and property damage resulting
from releases. These regulations permit states to develop, administer and
enforce their own regulatory programs, incorporating requirements which are at
least as stringent as the federal standards. The following is an overview of the
requirements imposed by these regulations:
o Leak Detection: The EPA and states' release detection regulations were phased
in based on the age of the USTs. All USTs were required to comply with leak
detection requirements by December 22, 1993. The Company utilizes several
approved leak detection methods for all Company-owned UST systems. Daily and
monthly inventory reconciliations are completed at the store level and at
the corporate support center. The daily and monthly reconciliation data is
also analyzed using statistical inventory reconciliation which compares the
reported volume of gasoline purchased and sold with the capacity of each UST
system and highlights discrepancies. The Company believes it is in full or
substantial compliance with the leak detection requirements applicable to
USTs.
o Corrosion Protection: The 1988 EPA regulations require that all UST systems
have corrosion protection by December 22, 1998. The Company's UST systems
have been protected from corrosion either through the installation of
fiberglass tanks or upgrading steel USTs with interior fiberglass lining or
the installation of cathodic protection.
o Overfill/Spill Prevention: The 1988 EPA regulations require that all sites
have overfill/spill prevention devices by December 22, 1998. The Company has
installed these devices on all Company-owned UST systems to meet these
regulations.
The 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 UST systems. In
order to comply with this requirement, The Pantry maintains letters of credit
in the aggregate amount of $2.3 million issued by a commercial bank in favor of
state environmental enforcement agencies in the states of North Carolina, South
Carolina, Virginia, Tennessee, Indiana and Kentucky and relies on
reimbursements from applicable state trust funds. In Florida, the Company meets
such financial responsibility requirements by state trust fund coverage through
December 31, 1998 and will meet such requirements thereafter through private
commercial liability insurance and through qualified self-insurance.
All states in which The Pantry operates or has operated UST systems have
established trust funds for the sharing, recovering, and reimbursing of certain
cleanup costs and liabilities incurred as a result of releases from UST systems.
These trust funds, which essentially provide insurance coverage for the cleanup
of environmental damages caused by the operation of UST systems, are funded by a
UST registration fee and a tax on the wholesale purchase of motor fuels within
each state. The Company has paid UST registration fees and gasoline taxes to
each state where it operates to participate in these programs and has filed
claims and received reimbursement in North Carolina, South Carolina, Kentucky,
Indiana, Georgia, Florida and Tennessee. The coverage afforded by each state
fund varies but generally provides from $150,000 to $1.0 million per site for
the cleanup of environmental contamination, and most provide coverage for third
party liabilities. Costs for which the Company does not receive reimbursement
include but are not limited to: (i) the per-site deductible; (ii) costs incurred
in connection with releases occurring or reported to trust funds prior to their
inception; (iii) removal and disposal of UST systems; and (iv) costs incurred in
connection with sites otherwise ineligible for reimbursement from the trust
funds. The trust funds require the Company to pay deductibles ranging from
$10,000 to $100,000 per occurrence depending on the upgrade status of its UST
system, the date the release is discovered/reported and the type of cost for
which reimbursement is sought. The Florida trust fund will not cover releases
first reported after December 31, 1998. The Company will obtain private coverage
for remediation and third party claims arising out of releases reported after
December 31, 1998. The Company believes that this coverage exceeds federal and
Florida financial responsibility regulations. In addition to immaterial amounts
to be spent by the Company, a substantial amount will be expended for
remediation on behalf of the Company by state trust funds established in the
Company's operating areas or other responsible third parties (including
insurers). To the extent such third parties do not pay for remediation as
anticipated by the Company, the Company will be obligated to make such payments,
which could materially adversely affect the Company's financial condition and
results of operations. Reimbursement from state trust funds will be dependent
upon the maintenance and continued solvency of the various funds.
Environmental reserves of $17.1 million as of September 24, 1998,
represent estimates for future expenditures for remediation, tank removal and
litigation associated with all known contaminated sites as a result of releases
(e.g., overfills, spills and underground storage tank releases) and are based
on current regulations, historical results and certain other factors. Although
the Company can make no assurances, the Company anticipates that it will be
reimbursed for a portion of these expenditures from state insurance funds and
private insurance. As of September 24, 1998, these anticipated reimbursements
of $13.2 million are recorded as long-term environmental receivables. In
Florida, remediation of such contamination
19
will be performed by the state and substantially all of the costs will be paid
by the state trust fund. The Company will perform remediation in other states
through independent contractor firms engaged by the Company. For certain sites
the trust fund does not cover a deductible or has a copay which may be less than
the cost of such remediation.
The Company has reserved $500,000 to cover third party claims that are not
covered by state trust funds or by private insurance. This reserve is based on
management's best estimate of losses that may be incurred over the next several
years based on, among other things, the fact that remediation standards and
expectations are evolving, the legal principles regarding the right to and
proper measure of damages for diminution in value, lost profit, lost
opportunity and damage to soil and subsurface water that may be owned by the
state, the absence of controlling authority of the limitation period, if any,
that may be applicable and the possibility that remediation (which will be
funded by state trust funds, private insurance or is included within the
reserve described above for remediation) may be sufficient. Although the
Company is not aware of releases or contamination at other locations where it
currently operates or has operated stores, any such releases or contamination
could require substantial remediation costs, some or all of which may not be
eligible for reimbursement from state trust funds.
Several of the locations identified as contaminated are being cleaned up
by third parties who have indemnified The Pantry as to responsibility for clean
up matters. Additionally, The Pantry is awaiting closure notices on several
other locations which will release the Company from responsibility related to
known contamination at those sites.
YEAR 2000 INITIATIVE
The Year 2000 ("Y2K") issue is the result of computer programs being
written using two digits rather than four to define the applicable year in
respective date fields. The Company uses a combination of hardware devices run
by computer programs at its support centers and retail locations to process
transactions and other data which are essential to the Company's business
operations. The Y2K issue and its impact on data integrity could result in
system interruptions, miscalculations or failures causing disruptions of
operations.
The Company completed its assessment phase of Y2K vulnerability early in
fiscal year 1998 including a formal third-party assessment completed in
November 1997. In 1998, several programs and devices have been either tested or
remediated. Lil' Champ began an internal assessment and remediation project
several years ago and is estimated to be approximately 85% complete. Based on a
formal asssesment completed by a third-party, internal assessment, and project
results as of December 16, 1998, the Company believes all system modifications,
hardware and software replacements or upgrades and related testing will be
completed by September 1999 and does not believe either the direct or indirect
costs of Y2K compliance will be material to the Company's operations or
operating results.
The Company has tested, replaced, or plans to replace significant portions
of its existing systems and related hardware which did not properly interpret
dates beyond December 31, 1999. In addition, the Company has tested, modified,
or plans to modify the remaining systems and related hardware to ensure Y2K
compliance. The Company's testing methodology plan includes, but is not limited
to, rolling dates forward to critical dates in the future and simulating
transactions, inclusion of several critical date scenarios, and utilizing
software programs which test for compliance on certain equipment. The Company's
expenditures to date have been immaterial and consist primarily of internal
costs and expenses associated with third-party contractors. The Company believes
the total costs of its Y2K project will be immaterial and, therefore, should not
have a material impact on the Company's financial condition or financial
statements.
The Company has initiated communications with its significant vendors,
suppliers, and financial institutions to determine the extent to which the
Company is vulnerable to those third-parties' failure to be Y2K compliant. Based
on these communications and presently available information, the Company does
not anticipate any material effects related to vendor, supplier, or financial
institution compliance. Additionally, the Company does not believe it has any
customers whose failure to be Y2K compliant would materially impact business
operations or operating results. Noncompliance by suppliers and credit card
processing companies utilized by the Company could result in a material adverse
effect on the financial condition and results of operations of the Company.
While the Company believes its planning efforts are adequate to address
its Y2K concerns, there can be no assurances that the systems of other
companies on which the Company's systems and operations rely will be converted
on a timely basis and will not have a material impact on the Company. The
Company is in the process of formulating a contingency plan to address possible
noncompliance by its vendors, suppliers, financial institutions and credit card
processors.
20
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for the first fiscal
quarter of fiscal 2000. Earlier application of all of the provisions of SFAS
No. 133 is encouraged. As of September 24, 1998, the Company has not determined
the effect of SFAS No. 133 on its consolidated financial statements.
INFLATION
General inflation has not had a significant impact on the Company over the
past three years. As reported by the Bureau of Labor Statistics, the consumer
price index for fiscal 98 on tobacco products increased approximately 15%.
Subsequent to fiscal year end on November 23, 1998, major cigarette
manufacturers which supply the Company increased prices by $0.45 per pack. These
increases have been passed on in higher retails throughout the chain. Although
it is too early to determine the potential impact on cigarette unit volume,
management believes it can pass along these and other cost increases to its
customers over the long-term and, therefore, does not expect inflation to have a
significant impact on the results of operations or financial condition of the
Company in the foreseeable future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative Disclosures:
The Company is exposed to certain market risks inherent in the Company's
financial instruments. These instruments arise from transactions entered into
in the normal course of business and, in some cases, relate to the Company's
acquisitions of related businesses. Certain of the Company's financial
instruments are fixed rate, short-term investments which are held-to-maturity.
The Company is subject to interest rate risk on its existing long-term debt
(including without limitation, the Senior Notes and Senior Subordinated Notes)
and any future financing requirements. The Company's fixed rate debt consists
primarily of outstanding balances on its Senior Notes and Senior Subordinated
Notes and its variable rate debt relates to borrowings under its New Credit
Facility (see "Liquidity and Capital Resources").
The following table presents the future principal cash flows and
weighted-average interest rates expected on the Company's existing long-term
debt instruments.
EXPECTED MATURITY DATE
(DOLLARS IN THOUSANDS) FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 THEREAFTER TOTAL
Long-Term Debt ................ $ 45 $ 45 $ 49,040 $ 45 $ 78,045 $ 200,049 $327,269
Weighted Average Interest Rate 10.59% 10.29% 10.25% 10.25% 10.25% 10.25%
Qualitative Disclosures:
The Company's primary exposure relates to (i) interest rate risk on
long-term and short-term borrowings, (ii) its ability to refinance its Senior
Notes and Senior Subordinated Notes at maturity at market rates, (iii) the
impact of interest rate movements on its ability to meet interest expense
requirements and exceed financial covenants and (iv) the impact of interest
rate movements on the Company's ability to obtain adequate financing to fund
future acquisitions. The Company manages interest rate risk on its outstanding
long-term and short-term debt through its use of fixed and variable rate debt.
While the Company can not predict or manage its ability to refinance existing
debt or the impact interest rate movements will have on its existing debt,
management continues to evaluate its financial position on an ongoing basis.
21
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-------------
Financial Statements:
Independent Auditors' Report ............................................................ 23
Consolidated Balance Sheet as of September 25, 1997 and September 24, 1998 .............. 24
Consolidated Statement of Operations for the years ended September 26, 1996, September
25, 1997, and September 24, 1998 ...................................................... 26
Consolidated Statement of Changes in Shareholders' Equity (Deficit) for the years ended
September 26, 1996, September 25, 1997, and September 24, 1998 ........................ 27
Consolidated Statement of Cash Flows for the years ended September 26, 1996, September
25, 1997, and September 24, 1998 ...................................................... 28
Notes to Consolidated Financial Statements .............................................. 30
Financial Statement Exhibit:
Exhibit 12.1 -- Computation of Ratio of Earnings to Fixed Charges ....................... Exhibit 12.1
Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts and Reserves ........................... S-1
22
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
THE PANTRY, INC.
Sanford, North Carolina
We have audited the accompanying consolidated balance sheets of The
Pantry, Inc. and subsidiaries as of September 25, 1997 and September 24, 1998,
and the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the three years in the period ended September 24,
1998. 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 Company'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 generally accepted auditing
standards. 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 25, 1997 and September 24, 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended September 24, 1998 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
As discussed in Note 1 to the consolidated financial statements, in fiscal
1996 the Company adopted Statement of Financial Standards No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF.
/s/ DELOITTE & TOUCHE LLP
Raleigh, North Carolina
December 18, 1998
23
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
SEPTEMBER 25, SEPTEMBER 24,
1997 1998
--------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents .......................................................... $ 3,347 $ 34,404
Receivables (net of allowance for doubtful accounts of $150 at 1997 and
$280 at 1998....................................................................... 2,101 9,907
Inventories (Note 3) ............................................................... 17,161 47,809
Income taxes receivable (Note 6) ................................................... -- 488
Prepaid expenses ................................................................... 1,204 2,216
Property held for sale ............................................................. 3,323 3,761
Deferred income taxes (Note 6) ..................................................... 1,142 3,988
-------- --------
Total current assets .............................................................. 28,278 102,573
-------- --------
Property and equipment, Net (Notes 4, 5, 7 and 10) ................................... 77,986 300,978
-------- --------
Other assets:
Goodwill (net of accumulated amortization of $9,705 at 1997 and $11,940 at 1998)
(Notes 2 and 10) .................................................................. 20,318 120,025
Deferred lease cost (net of accumulated amortization of $8,956 at 1997 and
$9,001 at 1998).................................................................... 314 269
Deferred financing cost (net of accumulated amortization of $4,345 at 1997 and
$4,871 at 1998) (Note 5)........................................................... 4,578 14,545
Environmental receivables (Note 8) ................................................. 6,511 13,187
Deferred income taxes (Note 6) ..................................................... 156 --
Escrow for Lil' Champ acquisition (Note 2) ......................................... 4,049 --
Other .............................................................................. 609 3,243
-------- --------
Total other assets ................................................................ 36,535 151,269
-------- --------
Total assets ......................................................................... $142,799 $554,820
======== ========
24
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
SEPTEMBER 25, SEPTEMBER 24,
1997 1998
--------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Current maturities of long-term debt (Note 5) ............................... $ 33 $ 45
Current maturities of capital lease obligations (Note 7) .................... 285 1,240
Accounts payable:
Trade ..................................................................... 16,035 49,559
Money orders .............................................................. 3,022 5,181
Accrued interest (Note 5) ................................................... 4,592 11,712
Accrued compensation and related taxes ...................................... 3,323 6,719
Income taxes payable (Note 6) ............................................... 296 --
Other accrued taxes ......................................................... 2,194 7,007
Accrued insurance ........................................................... 3,887 5,745
Other accrued liabilities ................................................... 2,856 24,348
--------- ---------
Total current liabilities ................................................ 36,523 111,556
--------- ---------
Long-term debt (Note 5) ...................................................... 100,305 327,269
--------- ---------
Other noncurrent liabilities:
Environmental costs (Note 8) ................................................ 7,806 17,137
Deferred income taxes (Note 6) .............................................. -- 20,366
Capital lease obligations (Note 7) .......................................... 679 12,129
Employment obligations ...................................................... 1,341 934
Accrued dividends on preferred stock (Notes 2 and 13) ....................... 7,958 4,391
Intercompany note payable ................................................... -- --
Other ....................................................................... 6,060 21,734
--------- ---------
Total other non-current liabilities ...................................... 23,844 76,691
--------- ---------
Commitments and contingencies (Notes 5, 7, 8 and 15) ......................... -- --
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 150,000 shares authorized; 43,499 issued and
outstanding at September 25, 1997 and 17,500 issued and outstanding at
September 24, 1998, liquidation preference $1,000 per share (Notes 2 and 13) -- --
Common stock, $.01 par value, 300,000 shares authorized; 114,029 issued and
outstanding at September 25, 1997 and 229,507 issued and outstanding at
September 24, 1998 (Note 12) .............................................. 1 2
Additional paid-in capital .................................................. 5,396 68,115
Shareholder loan ............................................................ -- (215)
Accumulated deficit ......................................................... (23,270) (28,598)
--------- ---------
Total shareholders' equity (deficit) ..................................... (17,873) 39,304
--------- ---------
Total liabilities and shareholders' equity (deficit) ......................... $ 142,799 $ 554,820
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
25
THE PANTRY, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 24,
1996 1997 1998
--------------- --------------- --------------
(52 WEEKS) (52 WEEKS) (52 WEEKS)
Revenues:
Merchandise sales ............................. $ 188,091 $ 202,440 $ 460,798
Gasoline sales ................................ 192,737 220,166 509,958
Commissions ................................... 3,979 4,787 14,128
--------- --------- ---------
Total revenues ............................... 384,807 427,393 984,884
--------- --------- ---------
Cost of sales:
Merchandise ................................... 125,979 132,846 303,968
Gasoline ...................................... 167,610 197,268 447,565
--------- --------- ---------
Total cost of sales .......................... 293,589 330,114 751,533
--------- --------- ---------
Gross Profit .................................... 91,218 97,279 233,351
--------- --------- ---------
Operating Expenses:
Store expenses ................................ 57,841 60,208 140,089
General and administrative expenses ........... 17,127 16,796 32,761
Merger integration costs (Note 2) ............. -- -- 1,016
Restructuring charges (Note 11) ............... 2,184 -- --
Impairment of long-lived assets (Note 10) ..... 3,034 -- --
Depreciation and amortization ................. 9,158 9,504 27,642
--------- --------- ---------
Total operating expenses ..................... 89,344 86,508 201,508
--------- --------- ---------
Income from operations .......................... 1,874 10,771 31,843
--------- --------- ---------
Other Income (Expense):
Interest expense .............................. (11,992) (13,039) (28,946)
Miscellaneous ................................. (660) 1,293 1,776
--------- --------- ---------
Total other expense .......................... (12,652) (11,746) (27,170)
--------- --------- ---------
Income (loss) before income taxes and
extraordinary loss ............................ (10,778) (975) 4,673
Income tax benefits (Note 6) .................... 2,664 -- --
--------- --------- ---------
Income (loss) before extraordinary item ......... (8,114) (975) 4,673
Extraordinary loss (Note 5) ..................... -- -- (7,998)
--------- --------- ---------
Net loss ........................................ $ (8,114) $ (975) $ (3,325)
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
26
THE PANTRY, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
PREFERRED
STOCK COMMON STOCK
-------------------- -----------------
ADDITIONAL
PAR PAR PAID IN
SHARES VALUE SHARES VALUE CAPITAL
------------ ------- --------- ------- ------------
Balance, September 28, 1995 ......... -- $-- 100,000 $ 1 $ 6,999
Net loss ............................ -- -- -- -- --
Issuances of common and
preferred stock .................... 25,999 -- 14,029 -- (447)
Dividends on preferred stock ........ -- -- -- -- --
------ --- ------- --- -------
Balance, September 26, 1996 ......... 25,999 -- 114,029 1 6,552
Net loss ............................ -- -- -- -- --
Net proceeds from stock issue ....... 17,500 -- -- -- 15,953
Dividends on preferred stock ........ -- -- -- -- --
------ --- ------- --- -------
Balance, September 25, 1997 ......... 43,499 -- 114,029 1 22,505
------ --- ------- --- -------
Net loss ............................ -- -- -- -- --
Issuances of common stock ........... -- -- 115,478 1 57,150
Contribution of Series A
Preferred Stock and related
dividends to Additional
Paid in Capital .................... (25,999) -- -- -- 5,569
Dividends on preferred stock ........ -- -- -- -- --
------- --- ------- --- -------
17,500 $-- 229,507 $ 2 $85,224
======= === ======= === =======
TOTAL
ADDITIONAL
PAID IN SHAREHOLDER ACCUMULATED
OTHER (1) CAPITAL LOAN DEFICIT TOTAL
------------- ------------- ------------- ------------ -------------
Balance, September 28, 1995 ......... $ (17,109) $ (10,110) $ -- $ (6,223) $ (16,332)
Net loss ............................ -- -- -- (8,114) (8,114)
Issuances of common and
preferred stock .................... -- (447) -- -- (447)
Dividends on preferred stock ........ -- -- -- (2,654) (2,654)
--------- --------- ------ --------- ---------
Balance, September 26, 1996 ......... (17,109) (10,557) -- (16,991) (27,547)
Net loss ............................ -- -- -- (975) (975)
Net proceeds from stock issue ....... -- 15,953 -- -- 15,953
Dividends on preferred stock ........ -- -- -- (5,304) (5,304)
--------- --------- ------ --------- ---------
Balance, September 25, 1997 ......... (17,109) 5,396 -- (23,270) (17,873)
--------- --------- ------ --------- ---------
Net loss ............................ -- -- -- (3,325) (3,325)
Issuances of common stock ........... -- 57,150 (215) -- 56,936
Contribution of Series A
Preferred Stock and related
dividends to Additional
Paid in Capital .................... -- 5,569 -- -- 5,569
Dividends on preferred stock ........ -- -- -- (2,003) (2,003)
--------- --------- ------ --------- ---------
$ (17,109) $ 68,115 $ (215) $ (28,598) $ 39,304
========= ========= ====== ========= =========
- ---------
(1) Represents excess of amount paid in 1987 leveraged buy-out over net book
value for "carry over" shareholders (Note 1).
The accompanying notes are an integral part of these consolidated financial
statements.
27
THE PANTRY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED
----------------------------------------------
SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 24,
1996 1997 1998
--------------- --------------- --------------
(52 WEEKS) (52 WEEKS) (52 WEEKS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $ (8,114) $ (975) $ (3,325)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Extraordinary loss ........................................................... -- -- 2,006
Impairment of long-lived assets .............................................. 3,034 -- --
Depreciation and amortization ................................................ 9,158 9,504 27,642
Provision for deferred income taxes .......................................... (1,558) 371 138
(Gain) loss on sale of property and equipment ................................ 470 (1,054) 531
Provision for environmental expenses ......................................... 512 1,574 6,181
Provision for closed stores .................................................. 673 (11) 50
Write-off of property held for sale .......................................... 168 -- --
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables .................................................................. (539) (527) (8,512)
Inventories .................................................................. (937) (2,273) (4,518)
Prepaid expenses ............................................................. 20 (429) 390
Other non-current assets ..................................................... 432 (4,295) 5,111
Accounts payable ............................................................. 2,104 603 13,896
Other current liabilities and accrued expenses ............................... (639) 3,393 2,241
Employment obligations ....................................................... (255) (698) (407)
Other noncurrent liabilities ................................................. 886 2,155 6,608
-------- --------- ----------
Net cash provided by operating activities ....................................... 5,415 7,338 48,032
-------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ............................................ (4,050) (1,828) (5,203)
Additions to property and equipment ............................................ (7,084) (14,749) (43,153)
Proceeds from sale of property held for sale ................................... 2,462 1,345 4,807
Proceeds from sale of property and equipment ................................... 1,468 2,315 7,648
Acquisitions of related businesses, net of cash acquired ....................... -- (12,162) (250,592)
-------- --------- ----------
Net cash used in investing activities ........................................... (7,204) (25,079) (286,493)
-------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases ...................................... (347) (303) (1,424)
Proceeds from issuance of capital leases ....................................... -- -- 1,086
Principal repayments of long-term debt ......................................... (20) (26) (51,543)
Net proceeds from issuance of long-term debt ................................... -- 200 278,508
Net proceeds from equity issues ................................................ -- 15,953 56,935
Other financing costs .......................................................... (3,505) (74) (14,044)
-------- --------- ----------
Net cash provided by (used in) financing activities ............................. (3,872) 15,750 269,518
-------- --------- ----------
Net increase (decrease) in cash ................................................. (5,661) (1,991) 31,057
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................................. 10,999 5,338 3,347
-------- --------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................................ $ 5,338 $ 3,347 $ 34,404
======== ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
28
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
YEAR ENDED
----------------------------------------------
SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 24,
1996 1997 1998
--------------- --------------- --------------
Cash paid (refunded) during the year:
Interest ........................... $12,719 $12,863 $21,826
======= ======= =======
Taxes .............................. $ (403) $ (917) $ 784
======= ======= =======
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES
During fiscal 1997 and 1998, the Company entered into several business
acquisitions and divestitures (see Note 2 -- Business Acquisitions and Note 12
- -- Common Stock). In connection with the acquisitions, the holders of the
Company's Series A Preferred Stock contributed all outstanding shares of Series
A Preferred Stock and related accrued and unpaid dividends to the capital of
the Company, resulting in an increase in paid in capital of $5,569.
29
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- HISTORY OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
The consolidated financial statements include the accounts of The Pantry,
Inc. ("The Pantry" or the "Company") and its wholly-owned subsidiaries,
Sandhills, Inc., Lil' Champ Food Stores, Inc. ("Lil' Champ"), PH Holding
Corporation ("PH") and PH's wholly-owned subsidiaries, TC Capital Management,
Inc. and Pantry Properties, Inc. All intercompany transactions and balances
have been eliminated in consolidation. The Pantry owns and operates
approximately 953 convenience stores in North Carolina, South Carolina,
Florida, Tennessee, Kentucky, Indiana and Virginia.
Prior to November 2, 1993, The Pantry was a wholly-owned subsidiary of
Montrose Pantry Acquisition Corporation ("MPAC"), an entity formed to affect
the 1987 leveraged buy-out of The Pantry. On November 2, 1993, The Pantry was
merged into MPAC and MPAC's name was changed to The Pantry. MPAC had no assets
or operations other than its investment in The Pantry.
On November 30, 1995, Freeman Spogli & Co. Incorporated, through its
affiliates, FS Equity Partners III, L.P., a Delaware limited partnership ("FSEP
III") and FS Equity Partners International, L.P., a Delaware limited
partnership ("FSEP International," collectively with FSEP III, "the FS Group"),
acquired a 39.9% interest in the Company and Chase Manhattan Capital
Corporation ("Chase") acquired a 12.0% interest in the Company through a series
of transactions which included the purchase of common stock from certain
shareholders and the purchase of newly issued common and preferred stock. The
FS Group and Chase subsequently acquired the remaining interests of
approximately 37.0% and 11.1%, respectively, on August 19, 1996 through the
purchase of common and preferred stock from certain shareholders. On December
30, 1996, the FS Group purchased additional preferred stock of the Company.
On October 23, 1997, The Pantry acquired 100% of the outstanding common
stock of Lil' Champ from Docks U.S.A., Inc. (the "Lil' Champ Acquisition"). The
acquisition was funded by a combination of Senior Subordinated Notes and an
additional equity investment by the FS Group, Chase and a member of managment.
Also during fiscal 1998, the Company acquired several smaller convenience store
chains, financed primarily from an additional equity issuance (see discussion
of 1998 acquisitions at Note 2 -- Business Acquisitions). As of September 24,
1998, the Company was owned 76.4% and 17.0% by the FS Group and Chase,
respectively.
ACQUISITION ACCOUNTING
MPAC acquired all of The Pantry's common stock in a leveraged buy-out as
of August 13, 1987. Certain individuals and entities which held an ownership
interest in The Pantry retained approximately 45% of ownership interest after
the August 13, 1987 transaction. A new basis of accounting was established as a
result of the acquisition to the extent of the "new" equity interests (partial
step-up). The original basis of accounting was retained for those shareholders
that retained an equity interest in MPAC after the acquisition. To the extent
of ownership change, the excess amount paid over The Pantry's net book value
was allocated to property and equipment, inventories, deferred lease cost and
goodwill based on relative fair market values. 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' deficit
($17,109,000). Had there not been a partial step-up, this amount would have
been allocated to property and equipment, inventories, deferred lease cost and
goodwill based on relative fair market values.
LONG-LIVED ASSETS
In 1996, the Company early-adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Accordingly, long-lived assets are
reviewed for impairment on a store-by-store basis 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 attributable 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 (see Note 10 --
Impairment of Long-Lived Assets).
30
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- HISTORY OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(Continued)
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. The Company 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.
DEFERRED LEASE COST
Deferred lease cost represents the value assigned to favorable leases
acquired. Such amounts are being amortized over the remaining term of the
respective leases.
PROPERTY HELD FOR SALE
Certain 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.
DEFERRED FINANCING COST
Deferred financing cost represents expenses related to issuing the
Company's long-term debt (see Note 5 -- Long-Term Debt), obtaining its lines of
credit (see Note 5 -- Long-Term Debt), and obtaining lease financing (see Note
7 -- Leases). Such amounts are being amortized over the remaining term of the
respective financing.
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.
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 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.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out ("LIFO") method, except for gasoline inventories
maintained by Lil' Champ, for which cost is determined using the first-in,
first-out ("FIFO") method.
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 bases.
STOCK BASED COMPENSATION
The Company's stock option plan is accounted for in accordance with
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES ("APB 25"). The Company follows the disclosure requirements of SFAS
No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION.
31
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 1 -- HISTORY OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(Continued)
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, cash and cash
equivalents include cash, deposits in interest bearing accounts, and other
financial instruments with original maturities of less than three months.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
ACCOUNTING PERIOD
The Pantry operates on a 52-53 week fiscal year ending on the last
Thursday in September. For 1996, 1997 and 1998, each of the Company's fiscal
years contained 52 weeks.
RECLASSIFICATIONS
Certain amounts in the fiscal 1996 and 1997 consolidated financial
statements have been reclassified to conform to the current year presentation.
NEWLY ADOPTED ACCOUNTING STANDARDS AND RECENTLY ISSUED ACCOUNTING
STANDARDS NOT YET ADOPTED
In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 96-1, Environmental Remediation Liabilities. SOP 96-1 contains
authoritative guidance on specific accounting issues that are present in the
recognition, measurement, display and disclosure of environmental remediation
liabilities. The adoption of SOP 96-1 in fiscal 1998 did not have a material
effect on the Company's 1998 consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(b) a hedge of the exposure to variable cash flows of a forecasted transaction,
or (c) a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. Under SFAS
No. 133, an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing
the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. SFAS No. 133 is
effective for the first quarter of fiscal 2000. Earlier application of all of
the provisions of SFAS No. 133 is encouraged. As of September 24, 1998, the
Company has not determined the effect of SFAS No. 133 on its consolidated
financial statements.
NOTE 2 -- BUSINESS ACQUISITIONS:
During fiscal 1998, the Company acquired the businesses described below,
which were accounted for by the purchase method of accounting:
o The October 23, 1997 acquisition of all of the common stock of Lil' Champ
Food Stores, Inc. ("Lil' Champ") for $136.4 million (net of cash acquired),
including the repayment of $10.7 million in outstanding indebtedness of
Lil' Champ. Lil' Champ is a leading operator of convenience stores in
Florida and the largest convenience store operator in northern Florida.
Lil' Champ's 479 stores are located primarily in northern Florida and
Georgia. The purchase price, the refinancing of existing Lil' Champ debt,
and the fees and expense of the Lil' Champ acquisition were
32
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- BUSINESS ACQUISITIONS: (Continued)
financed with the proceeds from the offering of $200.0 million, 10 1/4%
Senior Subordinated Notes due 2007, cash on hand and the purchase by
existing stockholders and management of the Company of an additional $32.4
million of the Company's capital stock in connection with the Lil' Champ
acquisition.
o The March 19, 1998 acquisition of the operating assets of 23 convenience
stores in eastern North Carolina which was financed primarily from the
Acquisition Facility and cash on hand.
o The May 1998 acquisitions, in three separate transactions, of 12
convenience stores in the Gainesville, Florida area which were financed
primarily from the Acquisition Facility and cash on hand.
o The July 2, 1998 acquisition of certain assets of Quick Stop Food Mart,
Inc. ("Quick Stop") including, but not limited to, seventy-five (75)
convenience stores located throughout North Carolina and South Carolina
(the "Quick Stop Acquisition"). Total consideration paid was approximately
$56.0 million.
o The July 16, 1998 acquisition of certain assets of Stallings Oil Company,
Inc. ("Stallings") including, but not limited to, forty-one (41)
convenience stores located throughout North Carolina and Virginia (the
"Stallings Acquisition"). Total consideration paid was approximately $29.3
million. The Stallings and Quick Stop acquisitions were financed by
proceeds of $50.0 million from the Acquisition Facility, cash on hand, and
an equity investment of $25.0 million in the aggregate by existing
shareholders of the Company.
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):
STALLINGS,
QUICK STOP
LIL' CHAMP AND OTHERS TOTAL
------------ ------------ -----------
ASSETS ACQUIRED:
Receivables, net ......................................................... $ 1,617 $ 2,100 $ 3,717
Inventories .............................................................. 20,113 8,758 28,871
Deferred income taxes .................................................... 2,992 -- 2,992
Prepaid expenses and other current assets ................................ 1,402 -- 1,402
Property and equipment ................................................... 155,382 48,682 204,064
Other noncurrent assets .................................................. 3,696 -- 3,696
-------- -------- --------
Total assets acquired .................................................... 185,202 59,540 244,742
-------- -------- --------
LIABILITIES ASSUMED:
Short-term capital lease obligations ..................................... 1,027 -- 1,027
Accounts payable -- trade ................................................ 10,870 228 11,098
Other liabilities and accrued expenses ................................... 36,093 -- 36,093
Long-term capital lease obligations ...................................... 11,716 -- 11,716
Environmental remediation liabilities .................................... 3,150 -- 3,150
Noncurrent deferred income taxes ......................................... 20,530 -- 20,530
Other noncurrent liabilities ............................................. 8,070 996 9,066
Total liabilities assumed ................................................ 91,456 1,224 92,680
-------- -------- --------
Net tangible assets acquired ............................................. 93,746 58,316 152,062
Goodwill ................................................................. 42,622 55,908 98,530
-------- -------- --------
Total consideration paid, including direct costs, net of cash acquired ... $136,368 $114,224 $250,592
======== ======== ========
The Stallings and Quick Stop purchase price allocations are preliminary
estimates, based on available information and certain assumptions management
believes are reasonable. Accordingly, the purchase price allocations are
subject to finalization. The purchase price allocations for other acquisitions
have been finalized. The excess of the purchase prices over fair
33
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 2 -- BUSINESS ACQUISITIONS: (Continued)
values of the net assets acquired for all 1998 acquisitions, $98,530,000 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 Company and acquired businesses as if
the transactions occurred at the beginning of the fiscal year for each of the
periods presented (amounts in thousands):
1997 1998
----------- ------------
Total revenues ......................... 1,246,596 1,235,520
Income (loss) before extraordinary loss (9,684) 4,278
Net loss ............................... (9,684) (3,720)
In management's opinion, the unaudited pro forma information is not
necessarily indicative of actual results that would have occurred had the
acquisitions been consummated at the beginning of fiscal 1997 or fiscal 1998,
or of future operations of the combined companies.
In connection with the Lil' Champ acquisition, the Company recorded an
integration charge of approximately $1.0 million for costs of combining its
existing business with the acquired business of Lil' Champ. The charge includes
$0.3 million for relocation costs and $0.7 million for consolidation and
related expenses. All amounts had been expended as of September 24, 1998.
During fiscal 1997, the Company acquired 35 stores, acquired the gasoline
operations at 23 third-party locations and disposed of 21 stores. The net
assets acquired and liabilities assumed are as follows (in thousands):
YEAR ENDED
SEPTEMBER 25,
1997
--------------
Inventories ..................................... $ 1,665
Property and equipment .......................... 6,374
Other noncurrent assets ......................... $ 9
Accrued expenses ................................ (43)
-------
8,005
Goodwill ........................................ 4,157
-------
Total consideration, including direct costs ..... $12,162
=======
NOTE 3 -- INVENTORIES:
At September 25, 1997 and September 24, 1998, inventories consisted of the
following (in thousands):
1997 1998
---------- -----------
Inventories at FIFO cost:
Merchandise ...................... $ 16,877 41,967
Gasoline ......................... 4,969 11,510
-------- ------
21,846 53,477
Less adjustment to LIFO cost:
Merchandise ...................... (4,203) (5,668)
Gasoline ......................... (482) --
-------- ------
Inventories at LIFO cost ......... $ 17,161 $ 47,809
======== ========
Total inventories at September 24, 1998 include $5,213,000 of gasoline
inventories held by Lil' Champ that are recorded under the FIFO method.
34
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- INVENTORIES: (Continued)
The positive effect on cost of sales of LIFO inventory liquidations was
$68,000, $4,141 and $482,000 for fiscal years 1996, 1997 and 1998,
respectively.
NOTE 4 -- PROPERTY AND EQUIPMENT:
At September 25, 1997 and September 24, 1998, property and equipment
consisted of the following (in thousands):
1997 1998
------------ ------------
Land ............................................. $ 16,109 62,183
Buildings ........................................ 29,928 85,278
Gasoline equipment ............................... 50,362 95,729
Other equipment, furniture and fixtures .......... 26,657 96,874
Leasehold improvements ........................... 10,743 28,286
Automobiles ...................................... 134 516
Construction in progress ......................... 1,471 9,443
--------- ------
135,404 378,309
Less -- accumulated depreciation and amortization (57,418) (77,331)
--------- -------
$ 77,986 $ 300,978
========= =========
NOTE 5 -- LONG-TERM DEBT:
At September 25, 1997 and September 24, 1998, long-term debt consisted of
the following (in thousands):
1997 1998
------------ ------------
Notes payable ("Senior Notes"); due November 15, 2000; interest
payable semi-annually at 12% ......................................... $ 99,995 $ 48,995
Notes payable ("Senior Subordinated Notes"); due October 15, 2007;
interest payable semi-annually at 10.25% ............................. -- 200,000
Note payable; secured by certain property; due monthly through 2004;
interest at 10% ...................................................... 153 136
Notes payable ("Acquisition Facility"); interest payable monthly at
LIBOR (5.85% at September 24, 1998) plus 2.5%; principal due in
quarterly installments through October 31, 2002 ...................... -- 78,000
Note payable; secured by certain property; due monthly through 2005;
interest at 8% ....................................................... 190 173
-------- --------
Other notes payable; due monthly through 1999; interest at 9% ......... -- 10
100,338 327,314
Less -- current maturities ............................................ (33) (45)
-------- --------
$100,305 $327,269
======== ========
While the Senior Notes are unsecured, the terms of the Senior Notes
contain certain covenants restricting (i) the use of proceeds from the
offering; (ii) the placing of liens on properties; (iii) certain "restricted
payments" as defined in the agreement; (iv) the incurrance of additional debt;
(v) the sale of assets; (vi) any merger, consolidation or change in control;
(vii) lines of business and (viii) transactions with affiliates. In addition,
the Indenture requires certain positive covenants including the maintenance of
a "Consolidated Fixed Charge Ratio" (the "Coverage Ratio") of greater than 1.69
to 1.0.
On October 23, 1997 in connection with the Lil' Champ Acquisition, the
Company completed the offering of the Senior Subordinated Notes and, in a
related transaction, completed the Tender Offer and Consent Solicitation with
respect to the Senior Notes. The Tender Offer resulted in the Company's
purchase of $51 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
35
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5 -- LONG-TERM DEBT: (Continued)
connection with this repurchase, the Company incurred an extraordinary loss of
approximately $8.0 million related to costs of the Tender Offer and Consent
Solicitation and write-off of deferred financing costs.
The Senior Subordinated Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, as to the payment of principal, premium,
if any, and interest, jointly and severally, by all Guarantors (see Note 15 --
Supplemental Guarantors Information). The Senior Subordinated Notes contain
covenants that, among other things, restrict the ability of the Company and any
restricted subsidiary to: (i) incur additional indebtedness; (ii) pay dividends
or make distributions; (iii) issue stock of subsidiaries; (iv) make certain
investments; (v) repurchase stock; (vi) create liens; (vii) enter into
transactions with affiliates; (viii) enter into sale-leaseback transactions;
(ix) merge or consolidate the Company or any of its subsidiaries; and (x)
transfer and sell assets.
Historically, The Pantry had two bank lines of credit with borrowing
capacity limits of $10.0 million and $15.0 million, respectively. The $10.0
million line of credit bore interest at prime (8.50% at September 25, 1997)
plus 0.5%.
On October 23, 1997 in connection with the Lil' Champ Acquisition, the
Company entered into the New Credit Facility replacing the $10.0 million and
$15.0 million bank lines discussed above. Originally, the New Credit Facility
consisted of a $45.0 million Revolving Credit Facility and a $30 million
Acquisition Facility.
Under the terms of the New Credit Facility, the Acquisition Facility is
available to finance acquisition of related businesses with certain
restrictions (see Note 2 -- Business Acquisitions). The New Credit Facility
contains covenants restricting the ability of the Company and any of its
subsidiaries to among other things: (i) incur additional indebtedness; (ii)
declare dividends or redeem or repurchase capital stock; (iii) prepay, redeem
or purchase debt; (iv) incur liens; (v) make loans and investments; (vi) make
capital expenditures; (vii) engage in mergers, acquisitions or asset sales; and
(viii) engage in transactions with affiliates. The Company is also required to
comply with financial covenants with respect to (a) a minimum coverage ratio,
(b) a minimum pro forma EBITDA, (c) a maximum pro forma leverage ratio, and (d)
a maximum capital expenditure allowance.
During the year, the New Credit Facility was amended to increase the
amount available to the Company for acquisitions from $30.0 million to $85.0
million. In addition, amendments were made to certain of the Company's
financial covenants under the New Credit Facility, including (a) the minimum
coverage ratio, (b) the minimum pro forma EBITDA, (c) the maximum pro forma
leverage ratio, and (d) the maximum capital expenditure allowance. As of
September 24, 1998, there was $78,000,000 outstanding under the acquisition
line. The acquisition line secures the Company's outstanding letters of credit
of $13,545,000 at September 24, 1998.
As of September 24, 1998, the Company was in compliance with all covenants
and restrictions relating to all its outstanding borrowings.
As of September 24, 1998, substantially all of the Company's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
36
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- INCOME TAXES:
The components of income tax expense (benefit) are summarized below (in
thousands):
1996 1997 1998
------------ --------- ---------
Current:
Federal ............... $ (1,111) $ 163 $ --
State ................. 5 (534) 138
-------- ------ ------
(1,106) (371) 138
-------- ------ ------
Deferred:
Federal ............... (1,074) 371 --
State ................. (484) -- (138)
-------- ------ ------
(1,558) 371 (138)
-------- ------ ------
$ (2,664) $ -- $ --
======== ====== ======
As of September 25, 1997 and September 24, 1998, deferred tax liabilities
(assets) are comprised of the following (in thousands):
1997 1998
----------- ------------
Depreciation ................................ $ 6,513 $ 32,921
Deferred lease cost ......................... 27 17
Inventory ................................... 940 3,417
Other ....................................... 469 1,672
-------- ---------
Gross deferred tax liabilities .............. 7,949 38,027
-------- ---------
Capital lease obligations ................... (321) (1,207)
Allowance for doubtful accounts ............. (58) (108)
Environmental expenses ...................... (500) (2,114)
Accrued insurance reserves .................. (1,607) (4,482)
Exit and employee termination costs ......... -- (1,860)
Accrued compensation ........................ (667) --
Other ....................................... (616) (3,154)
-------- ---------
Gross deferred tax assets ................... (3,769) (12,925)
Net operating loss carryforwards ............ (2,622) (6,836)
General business credits .................... (1,846) (1,832)
AMT Credits ................................. (2,696) (2,492)
Deferred tax assets valuation allowance ..... 1,686 2,436
-------- ---------
$ (1,298) $ 16,378
======== =========
As of September 25, 1997 and September 24, 1998, net current deferred
income tax assets totaled $1,142,000 and $3,988,000, respectively, and net
noncurrent deferred income tax assets (liabilities) totaled $156,000 and
$(20,366,000), respectively.
37
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 6 -- INCOME TAXES: (Continued)
Reconciliations of income taxes at the Federal statutory rate (34%) to
actual taxes provided are as follows (in thousands):
1996 1997 1998
------------ ---------- ------------
Tax benefit at Federal statutory rate ....................... $ (3,665) $ (332) $ (1,131)
Tax benefit at state rate, net of Federal income tax benefit (316) (325) (153)
Permanent differences:
Amortization of goodwill ................................... 1,127 235 474
Other ...................................................... 14 248 190
Tax benefit from creation of general business credits ....... -- (151) --
Valuation allowance ......................................... 176 325 620
-------- ------ --------
Net income tax benefit ...................................... $ (2,664) $ -- $ --
======== ====== ========
As of September 24, 1998 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, net of
a valuation allowance, as a reduction in the Company's net deferred tax asset.
Loss carryforwards as of September 24, 1998 have the following expiration dates
(in thousands):
FEDERAL STATE
--------- ---------
2009 .............................. $ -- $ 3,158
2010 .............................. -- 2,974
2011 .............................. -- 10,919
2012 .............................. 2,332 5,101
2013 .............................. -- 12,820
2018 .............................. 12,022 --
------- -------
Total loss carryforwards .......... $14,354 $34,972
======= =======
The valuation allowance increased $176,000 and $325,000 in 1996 and 1997,
respectively, to provide for state net economic loss carryforwards. The
valuation allowance increased $620,000 in 1998, which was primarily
attributable to federal net operating losses, net of a decrease for state tax
net economic loss carryovers (as discussed below).
The State of North Carolina and the State of Tennessee have assessed
Sandhills, Inc., a subsidiary of the Company, with additional taxes plus
penalties and accrued interest totaling approximately $5 million, for the
periods February 1, 1992 to September 26, 1996. The Company reached a
settlement with the State of North Carolina, which is pending final approval by
the State. Under the settlement, the Company will reduce State net economic
loss carryforwards and pay a de minimis amount of additional tax. The expected
settlement is reflected in the financial statements as a reduction to State net
economic losses and a reduction of deferred tax assets which is fully offset by
a corresponding reduction to the valuation allowance. The Company is contesting
the Tennessee assessment and believes that, in the event of a mutual
settlement, the assessment amount and related penalties would be substantially
reduced. Based on this, the Company believes the outcome of the audits will not
have a material adverse effect on the Company's financial condition or
financial statements.
NOTE 7 -- 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 25, 1997, and September 24, 1998 are as follows (in
thousands):
1997 1998
----------- ----------
Buildings .............................. $ 2,196 $ 12,344
Less -- accumulated amortization ....... (1,649) (2,142)
-------- --------
$ 547 $ 10,202
======== ========
38
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7 -- LEASES: (Continued)
Amortization expense related to capitalized leased assets was $261,000,
$185,000, and $1,249,000 for fiscal 1996, 1997, and 1998 respectively.
Future minimum lease payments as of September 24, 1998, for capital leases
and operating leases that have initial or remaining terms in excess of one year
are as follows (in thousands):
FISCAL CAPITAL OPERATING
YEAR LEASES LEASES
- --------------------------------------------------- --------- ----------
1999 ................................... $ 2,507 $ 21,462
2000 ................................... 2,396 20,179
2001 ................................... 2,309 18,203
2002 ................................... 2,307 16,954
2003 ................................... 2,307 15,817
Thereafter ............................. 5,022 38,083
------- --------
Net minimum lease payments ............. 16,848 $130,698
========
Amount representing interest (8% to 20%) 3,479
-------
Present value of net minimum lease payments 13,369
Less -- current maturities ............. 1,240
--------
$ 12,129
========
Rental expense for operating leases was approximately $8,126,000,
$9,618,000 and $23,758,000 for fiscal years 1996, 1997 and 1998, respectively.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES:
As of September 24, 1998, the Company was contingently liable for
outstanding letters of credit in the amount of $13,545,000 related primarily to
several areas in which the Company is self-insured. The letters of credit are
not to be drawn against unless the Company 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.
ENVIRONMENTAL LIABILITIES AND CONTINGENCIES
The Company is subject to various federal, state and local environmental
laws and regulations governing underground petroleum storage tanks ("USTs")
that require the Company to make certain expenditures for compliance. In
particular, at the federal level, the Resource Conservation and Recovery Act,
as amended, requires the EPA to establish a comprehensive regulatory program
for the detection, prevention, and cleanup of leaking USTs. Regulations enacted
by the EPA in 1988 established requirements for (i) installing UST systems;
(ii) upgrading UST systems; (iii) taking corrective action in response to
releases; (iv) closing UST systems; (v) keeping appropriate records; and (vi)
maintaining evidence of financial responsibility for taking corrective action
and compensating third parties for bodily injury and property damage resulting
from releases. These regulations permit states to develop, administer and
enforce their own regulatory programs, incorporating requirements which are at
least as stringent as the federal standards. The Florida rules for 1998
upgrades are more stringent than the 1998 EPA regulations. The Pantry
facilities in Florida all meet or exceed such rules. The following is an
overview of the requirements imposed by these regulations:
o Leak Detection: The EPA and states' release detection regulations were phased
in based on the age of the USTs. All USTs were required to comply with leak
detection requirements by December 22, 1993. The Company utilizes several
approved leak detection methods for all Company-owned UST systems. Daily and
monthly inventory reconciliations are completed at the store level and at
the corporate support center. The daily and monthly reconciliation data is
also analyzed using statistical inventory reconciliation which compares the
reported volume of gasoline purchased and sold with the capacity of
39
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- COMMITMENTS AND CONTINGENCIES: (Continued)
each UST system and highlights discrepancies. The Company believes it is in
full or substantial compliance with the leak detection requirements applicable
to USTs.
o Corrosion Protection: The 1988 EPA regulations require that all UST systems
have corrosion protection by December 22, 1998. All of the Company's USTs
have been protected from corrosion either through the installation of
fiberglass tanks or upgrading steel USTs with interior fiberglass lining and
the installation of cathodic protection.
o Overfill/Spill Prevention: The 1988 EPA regulations require that all sites
have overfill/spill prevention devices by December 22, 1998. The Company has
installed spill/overfill equipment on all Company-owned UST systems to meet
these regulations.
In addition to the technical standards, The Pantry is required by federal and
state regulations to maintain evidence of financial responsibility for taking
corrective action and compensating third parties in the event of a release
from its UST systems. In order to comply with this requirement, The Pantry
maintains letters of credit in the aggregate amount of $2.3 million issued by
a commercial bank in favor of state environmental enforcement agencies in the
states of North Carolina, Virginia, South Carolina, Tennessee, Indiana and
Kentucky and relies on reimbursements from applicable state trust funds. In
Florida, the Company meets such financial responsibility requirements by state
trust fund coverage through December 31, 1998 and will meet such requirements
thereafter through private commercial liability insurance and by qualified
self insurance. The Company has sold all of its Georgia stores but has
retained responsibility for pre-closing environmental remediation at certain
locations. The costs of such remediation and third party claims should be
covered by the state trust fund, subject to applicable deductibles and caps on
reimbursements.
All states in which The Pantry operates or has operated UST systems have
established trust funds for the sharing, recovering, and reimbursing of
certain cleanup costs and liabilities incurred as a result of releases from
UST systems. These trust funds, which essentially provide insurance coverage
for the cleanup of environmental damages caused by the operation of UST
systems, are funded by a UST registration fee and a tax on the wholesale
purchase of motor fuels within each state. The Company has paid UST
registration fees and gasoline taxes to each state where it operates to
participate in these programs and has filed claims and received reimbursement
in North Carolina, South Carolina, Kentucky, Indiana, Florida, Georgia, and
Tennessee. The coverage afforded by each state fund varies but generally
provides up to $1.0 million per site for the cleanup of environmental
contamination, and most provide coverage for third party liabilities. Costs
for which the Company does not receive reimbursement include but are not
limited to: (i) the per-site deductible; (ii) costs incurred in connection
with releases occurring or reported to trust funds prior to their inception;
(iii) removal and disposal of UST systems; and (iv) costs incurred in
connection with sites otherwise ineligible for reimbursement from the trust
funds. The trust funds require the Company to pay deductibles ranging from
$10,000 to $100,000 per occurrence depending on the upgrade status of its UST
system, the date the release is discovered/reported and the type of cost for
which reimbursement is sought. The Florida trust fund will not cover releases
first reported after December 31, 1998. The Company will obtain private
coverage for remediation and third party claims arising out of releases
reported after December 31, 1998. The Company believes that this coverage
exceeds federal and Florida financial responsibility regulations. In addition
to material amounts to be spent by the Company, a substantial amount will be
expended for remediation on behalf of the Company by state trust funds
established in the Company's operating areas or other responsible third
parties (including insurers). To the extent such third parties do not pay for
remediation as anticipated by the Company, the Company will be obligated to
make such payments, which could materially adversely affect the Company's
financial condition and results of operations. Reimbursement from state trust
funds will be dependent upon the maintenance and continued solvency of the
various funds.
Environmental reserves of $17.1 million as of September 24, 1998 represent
estimates for future expenditures for remediation, tank removal and litigation
associated with all known contaminated sites as a result of releases (e.g.,
overfills, spills and underground storage tank releases) and are based on
current regulations, historical results and certain other factors. The Company
anticipates that it will be reimbursed for a portion of these expenditures
from state insurance funds and private insurance. As of September 24, 1998,
these anticipated reimbursements of $13.2 million are recorded as long-term
environmental receivables. In Florida, remediation of such contamination will
be performed by the state and substantially all
40
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8 -- COMMITMENTS AND CONTINGENCIES: (Continued)
of the costs will be paid by the state trust fund. The Company will perform
remediation in other states through independent contractor firms engaged by
the Company. For certain sites the trust fund does not cover a deductible or
has a copay which may be less than the cost of such remediation.
The Company has reserved $500,000 to cover third party claims that are not
covered by state trust funds or by private insurance. This reserve is based on
management's best estimate of losses that may be incurred over the next
several years based on, among other things, the fact that remediation
standards and expectations are evolving, the legal principles regarding the
right to and proper measure of damages for diminution in value, lost profit,
lost opportunity and damage to soil and subsurface water that may be owned by
the state, the absence of controlling authority of the limitation period, if
any, that may be applicable and the possibility that remediation (which will
be funded by state trust funds, private insurance or is included within the
reserve described above for remediation) may be sufficient.
Several of the locations identified as contaminated are being cleaned up by
third parties who have indemnified The Pantry as to responsibility for clean
up matters. Additionally, The Pantry is awaiting closure notices on several
other locations which will release the Company from responsibility related to
known contamination at those sites.
NOTE 9 -- 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 $330,000, $305,000 and $396,000
for fiscal years 1996, 1997 and 1998, respectively.
NOTE 10 -- IMPAIRMENT OF LONG-LIVED ASSETS:
In fiscal year 1996, the Company early-adopted SFAS No. 121, "ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF". SFAS No. 121 establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used and for long-lived and certain identifiable
intangible assets to be disposed of.
Pursuant to SFAS No. 121, the Company evaluated its long-lived assets for
impairment on a store-by-store basis by comparing the sum of the projected
future undiscounted cash flows attributable to each store to the carrying value
of the long-lived assets (including an allocation of goodwill, if appropriate)
of that store. Projected future cash flows for each store were estimated for a
period approximating the remaining lives of that store's long-lived assets,
based on earnings history, lease expiration dates and renewal periods, market
conditions and assumptions reflected in internal operating plans and
strategies. Based on this evaluation, the Company determined that certain
long-lived assets were impaired and recorded an impairment loss based on the
difference between the carrying value and the fair value of the assets. Fair
value was determined based on an evaluation of each property's value. The
impairment consists of the following assets (in thousands):
Property, plant and equipment ......... $ 415
Goodwill .............................. 2,619
------
Total ................................. $3,034
======
NOTE 11 -- RESTRUCTURING CHARGES:
In fiscal year 1996, the Company recorded restructuring charges of
$2,184,000 pursuant to a formal plan to restructure its corporate offices. The
costs include $1,484,000 for employee severance, $350,000 for employee moving
costs, and $350,000 for legal costs related to the ownership litigation.
Substantially all of these amounts were expended during fiscal 1996.
41
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 12 -- COMMON STOCK
In connection with the Lil' Champ Acquisition and related transactions,
the Company issued 72,000 shares of Common Stock, par value $0.01, to certain
existing stockholders and a member of management for $32.4 million. Prior to
the purchase of Common Stock, holders of the Company's Series A Preferred
Stock, par value $0.01 per share, contributed all outstanding shares of Series
A Preferred Stock and related accrued and unpaid dividends to the capital of
the Company (together with the issuance of Common Stock, "the Equity
Investment"). As a result, preferred stock and accrued dividends were reduced
by $260 and $5,569,000 respectively, and additional paid in capital was
increased by $5,569,260.
On July 2, 1998 and in connection with two acquisitions completed in July
1998, the Company issued 43,478 shares of Common Stock, par value $0.01 per
share, to certain existing stockholders for an aggregate purchase price of
$25.0 million.
NOTE 13 -- PREFERRED STOCK:
As of September 24, 1998, preferred stock consists of 150,000 authorized
shares. As discussed in Note 12 -- Common Stock, holders of the Company's
25,999 shares of Series A contributed all outstanding shares of Series A and
related accrued and unpaid dividends to the Capital of the Company in
connection with the Lil' Champ acquisition. Issued and outstanding shares at
September 24, 1998 include 17,500 shares designated as Series B, all of which
is held by FS Group. The Company is limited from paying dividends under the
terms and conditions of the Senior Notes Indenture, Senior Subordinated Notes
Indenture and the Certificate of Designation of Preferences of the Series B
Preferred Stock of The Pantry, Inc. ("Series B Preferred Stock Certificate").
In addition, the Series B Preferred Stock Certificate, without consent of
the holders of a majority of the outstanding shares of Series B Preferred
Stock, voting separately as a single class, restricts the following: (i) the
issuance of any securities with equal or superior rights with respect to
dividends or liquidation preferences, (ii) the repurchase of any shares of,
making of any dividend or distribution to, or any reclassification with respect
to, any of the Company's outstanding shares of capital stock, (iii) amendment
or modification of the Company's Article of Incorporation or Bylaws so as to
adversely affect the relative rights, preferences, qualification, limitations
or restrictions or the Series B Preferred Stock and (iv) amendment of the
related paragraph regarding Restrictions and Limitations in the Series B
Preferred Stock Certificate.
At all meetings of the stockholders of the Company and in the case of any
actions of stockholders in lieu of a meeting date, the holders of the Series B
Preferred Stock shall be entitled to ten (10) votes per share and, except as
required by Delaware law, shall vote together with the holders of Common Stock
as a single class. The holders of Series B Preferred Stock are entitled to
cumulative dividends from the Company on each share of Series B Preferred Stock
at a quarterly rate equal to $32.5 per share plus an amount determined by
applying a thirteen percent (13%) annual rate compounded quarterly to any
accrued but unpaid dividend. Except as limited by both the Senior Notes and
Senior Subordinated Notes Indentures, such dividends on the outstanding shares
of Series B Preferred Stock shall be payable at such intervals as the Board of
Directors of the Company may from time to time determine and may be paid in
cash or by issuing additional shares, including fractional shares of Series B
Preferred Stock, at the rate of one share for each $1,000 of dividends
outstanding. As of September 24, 1998, substantially all of the Company's and
its subsidiaries' net assets are restricted as to payment of dividends and
other distributions.
Upon the dissolution, liquidation or winding up of the Company, whether
voluntary or involuntary, the holders of outstanding shares of Series B
Preferred Stock, shall be entitled to be paid out of the assets of the Company
available for distribution to its Stockholders, whether such assets are
capital, surplus or earnings, before any payment or declaration and setting
apart for payment of any amount shall be made in respect of the outstanding
shares of any other class or series of the Company's capital stock, including
without limitation, shares of Common Stock, an amount equal to $1,000 per share
of Series B Preferred Stock then outstanding, plus all accrued but unpaid
dividends thereon to the date fixed for liquidation (whether or not declared),
and no more. If upon the dissolution, liquidation or winding up of the Company,
whether voluntary or involuntary, the assets to be distributed among the
holders of outstanding shares of Series B Preferred Stock shall be insufficient
to permit the payment to such stockholders of the full preferential amounts
aforesaid, then the entire assets of the Company are to be distributed ratably
among the holders of outstanding shares of Series B Preferred Stock based on
the full preferential amounts for the number of outstanding shares of Series B
Preferred Stock held by each holder.
42
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 14 -- STOCK BASED COMPENSATION:
On January 1, 1998, the Company adopted an incentive and non-qualified
1998 Stock Option Plan (the "1998 Plan"). Pursuant to the provisions of the
1998 Plan, options may be granted to officers, key employees and consultants of
the Company or any of its subsidiaries and certain members of the Board of
Directors ("BOD") to purchase up to 25,000 shares of the Company's Common
Stock. The 1998 Plan is administered by the BOD or a committee of the BOD.
Options are granted at prices determined by the BOD and may be exercisable in
one or more installments. Additionally, the terms and conditions of awards
under the 1998 Plan may differ from one grant to another. Under the 1998 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. During 1998, options to acquire 11,311 shares of Common
Stock were granted under the Plan with exercise prices ranging from $450 - $575
per share (weighted-average exercise price of $479 per share).
The following table summarizes information about stock options outstanding
at September 24, 1998:
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OUTSTANDING AT REMAINING EXERCISE
RANGE OF EXERCISE PRICES SEPTEMBER 24, 1998 CONTRACTUAL LIFE PRICE
- -------------------------- -------------------- ------------------ -----------------
$450 ................... 8,701 9 $450
$575 ................... 2,610 9 $575
-----
Total .................. 11,311
======
All options granted in 1998 vest over a three year period, with one-third
of each grant vesting on the anniversary of the initial grant. None of the
options outstanding at September 24, 1998 had vested as of that date. All stock
options are granted at estimated fair market value of the common stock at the
grant date. Had compensation cost for the 1998 Plan been determined consistent
with SFAS 123, the Company's pro-forma net loss for 1998 would have been
approximately $3,395,000. The fair value of each option grant is estimated on
the date of grant using the minimum value method with the following
assumptions:
1998
---------
Weighted-average grant date fair value ........... $479
Weighted-average expected lives (years) .......... 2.33
Risk-free interest rate .......................... 5.5%
Dividend yield ................................... 0.00%
On August 31, 1998, the Company adopted the 1998 Stock Subscription Plan
("1998 Subscription Plan"). The 1998 Subscription Plan allows the Company to
offer to certain employees the right to purchase shares of the Company's Common
Stock at a purchase price equal to the fair market value on the date of
purchase. A purchaser may not sell, transfer or pledge their shares (a) prior
to the first anniversary of the date on which the purchaser acquires the
shares, or (b) 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 Company and all of its subsidiaries
terminates for any reason, the Company shall have 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"). The Repurchase Option shall
terminate upon the later to occur of (a) the first anniversary of the date the
shares were originally acquired, and (b), an initial public offering of common
stock by the Company registered under the Securities Act (other than an
offering registered on Form S-4 or Form S-8) resulting in gross proceeds to the
Company 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 Company's right of
first refusal with respect to such sale. Finally, under certain circumstances,
a purchaser of shares under the 1998 Subscription Plan may be forced to sell
all or part of the shares purchased under such plan if any members of the FS
Group find a third-party buyer for all or part of the shares of Company Common
Stock held by the FS Group. No issuances of shares under the 1998 Subscription
Plan had been made at September 24, 1998.
43
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- SUPPLEMENTAL GUARANTORS INFORMATION:
As discussed in Note 2 -- Business Acquisitions, on October 23, 1997, the
Company purchased all of the capital stock of Lil' Champ, Sandhills, Inc., Lil'
Champ and all future direct and indirect restricted subsidiaries (together the
"Guarantors"), jointly and severally, unconditionally guaranteed, on an
unsecured senior subordinated basis, the full and prompt performance of The
Pantry's obligations under the Senior Subordinated Notes and the related
Indenture, the issuance of which occured on October 23, 1997. The Senior
Subordinated Notes were exchanged for new notes in an exchange offer which was
registered under the Securities Act on a registration statement on Form S-4
which became effective on January 8, 1998. The form and terms of the exchange
notes are the same as the form and terms of the Senior Subordinated Notes
(which they replaced) except that (i) the exchange notes are registered under
the Securities Act and, therefore, do not bear legends restricting the transfer
thereof, and (ii) the holders of the exchange notes are not entitled to certain
rights under the Registration Rights Agreement by virtue of consummation of the
exchange offer.
The Senior Subordinated Notes are unconditionally guaranteed, on an
unsecured senior subordinated basis, as to the payment of principal, premium,
if any, and interest, jointly and severally, by all current direct and indirect
restricted subsidiaries (currently, Sandhills, Inc. and Lil Champ, wholly-owned
subsidiaries of The Pantry) and future direct and indirect restricted
subsidiaries (the "Guarantors"). The Senior Subordinated Notes contain
covenants that, among other things, restrict the ability of The Pantry and any
restricted subsidiary to: (i) incur additional indebtedness; (ii) pay dividends
or make distributions; (iii) issue stock of subsidiaries; (iv) make certain
investments; (v) repurchase stock; (vi) create liens; (vii) enter into
transaction with affiliates; (viii) enter into sale-leaseback transactions;
(ix) merge or consolidate The Pantry or any of its subsidiaries; and (x)
transfer and sell assets.
As of September 24, 1998, substantially all of the Company's and its
subsidiaries' net assets are restricted as to payment of dividends and other
distributions.
Management has determined that separate, full financial statements of the
Guarantors (Sandhills, Inc. and Lil' Champ as of September 24, 1998) would not
be material to investors and therefore such financial statements are not
provided. The following supplemental combining financial statements present
information regarding the Guarantors and The Pantry.
Certain reclassifications have been made to conform all of the financial
information to the financial presentation on a consolidated basis. The
principal eliminating entries eliminate investments in subsidiaries and
intercompany balances.
44
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- SUPPLEMENTAL GUARANTORS INFORMATION: (Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 26, 1996
(DOLLARS IN THOUSANDS)
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
------------ ------------ -------------- -------------- -----------
Revenues:
Merchandise sales ....................... $ 188,091 $ -- $ -- $ -- $ 188,091
Gasoline sales .......................... 192,737 -- -- -- 192,737
Commissions ............................. 3,979 -- -- -- 3,979
--------- -------- ------ --------- ---------
Total revenues ......................... 384,807 -- -- -- 384,807
--------- -------- ------ --------- ---------
Cost of sales:
Merchandise ............................. 125,979 -- -- -- 125,979
Gasoline ................................ 167,610 -- -- -- 167,610
--------- -------- ------ --------- ---------
Total cost of sales .................... 293,589 -- -- -- 293,589
--------- -------- ------ --------- ---------
Gross profit .............................. 91,218 -- -- -- 91,218
--------- -------- ------ --------- ---------
Operating expenses:
Store expenses .......................... 68,331 -- (293) (11,471) 56,567
Store expenses -- related parties ....... 1,274 -- -- -- 1,274
General and administrative expenses ..... 17,024 80 23 -- 17,127
Restructuring charges ................... 2,184 -- -- -- 2,184
Impairment of long-lived assets ......... 3,034 -- -- -- 3,034
Depreciation and amortization ........... 9,138 14 6 -- 9,158
--------- -------- ------ --------- ---------
Total operating expenses ............... 100,985 94 (264) (11,471) 89,344
--------- -------- ------ --------- ---------
Income from operations .................... (9,767) (94) 264 11,471 1,874
--------- -------- ------ --------- ---------
Equity in earnings of subsidiaries ........ 14,597 -- -- (14,597) --
--------- -------- ------ --------- ---------
Other income (expense):
Interest expense ........................ (14,540) -- (14) 2,562 (11,992)
Miscellaneous ........................... (1,068) 14,243 198 (14,033) (660)
--------- -------- ------ --------- ---------
Total other expense .................... (15,608) 14,243 184 (11,471) (12,652)
--------- -------- ------ --------- ---------
Income (loss) before income taxes ......... (10,778) 14,149 448 (14,597) (10,778)
Income tax benefit (expense) .............. 2,664 (4,811) (128) 4,939 2,664
--------- -------- ------ --------- ---------
Net income (loss) ......................... $ (8,114) $ 9,338 $ 320 $ (9,658) $ (8,114)
========= ======== ====== ========= =========
45
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- SUPPLEMENTAL GUARANTORS INFORMATION: (Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 26, 1996
(DOLLARS IN THOUSANDS)
GUARANTOR
THE PANTRY SUBSIDIARY
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ........................................ $(8,114) $ 9,339
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Impairment of long-lived assets ......................... 3,034 --
Depreciation and amortization ........................... 9,152 --
Provision for deferred income taxes ..................... (1,558) --
Loss on sale of property and equipment .................. 470 --
Provision for environmental expenses .................... 512 --
Provision for closed stores ............................. 673 --
Write-off of property held for sale ..................... 168 --
Equity earnings of affiliates ........................... (9,658) --
Changes in operating assets and liabilities, net:
Receivables ............................................. (627) (392)
Inventories ............................................. (937) --
Prepaid expenses ........................................ 19 (1)
Other non-current assets ................................ 448 (17)
Accounts payable ........................................ 2,104 --
Other current liabilities and accrued expenses .......... (641) 125
Employment obligations .................................. (255) --
Other noncurrent liabilities ............................ 1,279 --
------- -----------
Net cash provided by (used in) operating activities ........ (3,931) 9,054
------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ...................... (3,301) --
Additions to property and equipment ...................... (7,070) --
Proceeds from sale of property held for sale ............. 2,462 --
Proceeds from sale of property and equipment ............. 1,458 --
Intercompany notes receivable (payable) .................. 12,502 (12,502)
Acquisition of related businesses ........................ -- --
------- -----------
Net cash provided by (used in) investing activities ........ 6,051 (12,502)
------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital lease obligations ..... (347) --
Principal repayments of long-term debt ................... (5) --
Net proceeds from equity issue ........................... -- --
Other financing costs .................................... (3,505) --
--------- -----------
--------- -----------
Net cash provided by (used in) financing activities ........ (3,857) --
--------- -----------
Net increase (decrease) in cash ............................ (1,737) (3,448)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............. 3,247 3,584
--------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................... $ 1,510 $ 136
========= ===========
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS TOTAL
-------------- -------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ........................................ $ 319 $ (9,658) $ (8,114)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Impairment of long-lived assets ......................... -- -- 3,034
Depreciation and amortization ........................... 6 -- 9,158
Provision for deferred income taxes ..................... -- -- (1,558)
Loss on sale of property and equipment .................. -- -- 470
Provision for environmental expenses .................... -- -- 512
Provision for closed stores ............................. -- -- 673
Write-off of property held for sale ..................... -- -- 168
Equity earnings of affiliates ........................... -- 9,658 --
Changes in operating assets and liabilities, net:
Receivables ............................................. (8) 488 (539)
Inventories ............................................. -- -- (937)
Prepaid expenses ........................................ 2 -- 20
Other non-current assets ................................ 1 -- 432
Accounts payable ........................................ -- -- 2,104
Other current liabilities and accrued expenses .......... (27) (96) (639)
Employment obligations .................................. -- -- (255)
Other noncurrent liabilities ............................ (1) (392) 886
-------- -------- --------
Net cash provided by (used in) operating activities ........ 292 -- 5,415
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ...................... (799) 50 (4,050)
Additions to property and equipment ...................... (14) -- (7,084)
Proceeds from sale of property held for sale ............. 50 (50) 2,462
Proceeds from sale of property and equipment ............. 10 -- 1,468
Intercompany notes receivable (payable) .................. -- --
Acquisition of related businesses ........................ -- -- --
------- -------- --------
Net cash provided by (used in) investing activities ........ (753) -- (7,204)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital lease obligations ..... -- -- (347)
Principal repayments of long-term debt ................... (15) -- (20)
Net proceeds from equity issue ........................... -- -- --
Other financing costs .................................... -- -- (3,505)
------- -------- --------
------- -------- --------
Net cash provided by (used in) financing activities ........ (15) -- (3,872)
------- -------- --------
Net increase (decrease) in cash ............................ (476) -- (5,661)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............. 4,168 -- 10,999
------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................... $3,692 $ -- $ 5,338
======= ======== =========
46
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- SUPPLEMENTAL GUARANTORS INFORMATION: (Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
SEPTEMBER 25, 1997
(DOLLARS IN THOUSANDS)
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
------------ ------------ -------------- -------------- -----------
ASSETS
Current assets:
Cash and cash equivalents ............. $ 2,247 $ 279 $ 821 $ -- $ 3,347
Receivables, net ...................... 4,056 4,562 30 (6,547) 2,101
Inventories ........................... 17,161 -- -- -- 17,161
Prepaid expenses ...................... 1,195 6 3 -- 1,204
Property held for sale ................ 3,323 -- -- -- 3,323
Deferred income taxes ................. 1,142 -- -- -- 1,142
-------- ------- ------ --------- --------
Total current assets ................. 29,124 4,847 854 (6,547) 28,278
-------- ------- ------ --------- --------
Investment in subsidiaries .............. 47,225 -- -- (47,225) --
-------- ------- ------ --------- --------
Property and equipment, net ............. 77,641 -- 345 -- 77,986
-------- ------- ------ --------- --------
Other assets:
Goodwill, net ......................... 20,318 -- -- -- 20,318
Deferred lease cost, net .............. 314 -- -- -- 314
Deferred financing cost, net .......... 4,578 -- -- -- 4,578
Environmental receivables ............. 6,511 -- -- -- 6,511
Deferred income taxes ................. 156 -- -- -- 156
Escrow for Lil' Champ acquisition ..... -- -- 4,049 -- 4,049
Intercompany notes receivable ......... -- 39,434 -- (39,434) --
Other ................................. 534 74 1 -- 609
-------- ------- ------ --------- --------
Total other assets ................... 32,411 39,508 4,050 (39,434) 36,535
-------- ------- ------ --------- --------
Total assets ............................ $186,401 $44,355 $5,249 $ (93,206) $142,799
======== ======= ====== ========= ========
47
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- SUPPLEMENTAL GUARANTORS INFORMATION: (Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING BALANCE SHEETS
SEPTEMBER 25, 1997
(DOLLARS IN THOUSANDS)
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
------------ ------------ -------------- -------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Current maturities of long-term debt ................... $ 17 $ -- $ 16 $ -- $ 33
Current maturities of capital lease obligations ........ 285 -- -- -- 285
Accounts payable:
Trade ................................................. 16,032 3 -- -- 16,035
Money orders .......................................... 3,022 -- -- -- 3,022
Accrued interest ....................................... 5,564 -- 1 (973) 4,592
Accrued compensation and related taxes ................. 3,322 -- 1 -- 3,323
Income taxes payable ................................... 313 1,560 235 (1,812) 296
Other accrued taxes .................................... 2,194 -- -- -- 2,194
Accrued insurance ...................................... 3,887 -- -- -- 3,887
Other accrued liabilities .............................. 6,382 113 122 (3,761) 2,856
--------- ------- ------ --------- ---------
Total current liabilities ............................. 41,018 1,676 375 (6,546) 36,523
--------- ------- ------ --------- ---------
Long-term debt ........................................... 100,168 -- 137 -- 100,305
--------- ------- ------ --------- ---------
Other non-current liabilities:
Environmental expenses ................................. 7,806 -- -- -- 7,806
Capital lease obligations .............................. 679 -- -- -- 679
Employment obligations ................................. 1,341 -- -- -- 1,341
Accrued dividends on preferred stock ................... 7,958 -- -- -- 7,958
Intercompany note payable .............................. 39,434 -- -- (39,434) --
Other .................................................. 5,870 150 40 -- 6,060
--------- ------- ------ --------- ---------
Total other non-current liabilities ................... 63,088 150 40 (39,434) 23,844
--------- ------- ------ --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock ........................................ -- -- -- -- --
Common stock ........................................... 1 -- -- -- 1
Additional paid-in capital ............................. 5,396 25 5,001 (5,026) 5,396
Retained earnings (deficit) ............................ (23,270) 42,504 (304) (42,200) (23,270)
--------- ------- ------ --------- ---------
Total shareholders' equity (deficit) .................. (17,873) 42,529 4,697 (47,226) (17,873)
--------- ------- ------ --------- ---------
Total liabilities and shareholders' equity (deficit) ..... $ 186,401 $44,355 $5,249 $ (93,206) $ 142,799
========= ======= ====== ========= =========
48
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- SUPPLEMENTAL GUARANTORS INFORMATION: (Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 25, 1997
(DOLLARS IN THOUSANDS)
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
------------ ------------ -------------- -------------- -----------
Revenues:
Merchandise sales ....................... $ 202,440 $ -- $ -- $ -- $ 202,440
Gasoline sales .......................... 220,166 -- -- -- 220,166
Commissions ............................. 4,787 -- -- -- 4,787
--------- -------- ------ --------- ---------
Total revenues ......................... 427,393 -- -- -- 427,393
--------- -------- ------ --------- ---------
Cost of sales:
Merchandise ............................. 132,846 -- -- -- 132,846
Gasoline ................................ 197,268 -- -- -- 197,268
--------- -------- ------ --------- ---------
Total cost of sales .................... 330,114 -- -- -- 330,114
Gross profit .............................. 97,279 -- -- -- 97,279
--------- -------- ------ --------- ---------
Operating expenses:
Store expenses .......................... 71,945 -- (291) (12,726) 58,928
Store expenses -- related parties ....... 1,280 -- -- -- 1,280
General and administrative expenses ..... 16,731 42 23 -- 16,796
Depreciation and amortization ........... 9,485 13 6 -- 9,504
--------- -------- ------ --------- ---------
Total operating expenses ............... 99,441 55 (262) (12,726) 86,508
--------- -------- ------ --------- ---------
Income from operations .................... (2,162) (55) 262 12,726 10,771
--------- -------- ------ --------- ---------
Equity in earnings of subsidiaries ........ 16,605 -- -- (16,605) --
Other income (expense):
Interest expense ........................ (16,095) -- (13) 3,069 (13,039)
Miscellaneous ........................... 677 16,207 204 (15,795) 1,293
--------- -------- ------ --------- ---------
Total other expense .................... (15,418) 16,207 191 (12,726) (11,746)
--------- -------- ------ --------- ---------
Income (loss) before income taxes ......... (975) 16,152 453 (16,605) (975)
Income tax benefit (expense) .............. -- (5,492) (155) 5,647 --
--------- -------- ------ --------- ---------
Net income (loss) ......................... $ (975) $ 10,660 $ 298 $ (10,958) $ (975)
========= ======== ====== ========= =========
49
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- SUPPLEMENTAL GUARANTORS INFORMATION: (Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 25, 1997
(DOLLARS IN THOUSANDS)
GUARANTOR NON-GUARANTOR
THE PANTRY SUBSIDIARY SUBSIDIARY ELIMINATIONS TOTAL
------------ ------------ -------------- -------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ......................................... $ (975) $10,660 $ 298 $ (10,958) $ (975)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization .......................... 9,499 -- 5 -- 9,504
Provision for deferred income taxes .................... 371 -- -- -- 371
Gain on sale of property and equipment ................. (1,054) -- -- -- (1,054)
Provision for environmental expenses ................... 1,574 -- -- -- 1,574
Provision for closed stores ............................ (11) -- -- -- (11)
Equity earnings of affiliates .......................... (10,958) -- -- 10,958 --
Changes in operating assets and liabilities, net:
Receivables ............................................ 129 (664) 8 -- (527)
Inventories ............................................ (2,273) -- -- -- (2,273)
Prepaid expenses ....................................... (426) (3) -- -- (429)
Other non-current assets ............................... (5,378) 14 1 1,068 (4,295)
Accounts payable ....................................... 600 3 -- -- 603
Other current liabilities and accrued expenses ......... 3,396 246 135 (384) 3,393
Employment obligations ................................. (698) -- -- -- (698)
Other noncurrent liabilities ........................... 2,970 (131) -- (684) 2,155
--------- --------- ----- --------- ---------
Net cash provided by (used in) operating activities ....... (3,234) 10,125 447 -- 7,338
--------- --------- ----- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ...................... (1,874) -- (4) 50 (1,828)
Additions to property and equipment ...................... (14,749) -- -- -- (14,749)
Proceeds from sale of property held for sale ............. 642 -- 753 (50) 1,345
Proceeds from sale of property and equipment ............. 2,315 -- -- -- 2,315
Intercompany notes receivable (payable) .................. 9,982 (9,982) -- -- --
Acquisition of related businesses ........................ (12,162) -- -- -- (12,162)
--------- --------- ------- --------- ---------
Net cash provided by (used in) investing activities ....... (15,846) (9,982) 749 -- (25,079)
--------- --------- ------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital lease obligations ..... (303) -- -- -- (303)
Principal repayments of long-term debt ................... (10) -- (16) -- (26)
Proceeds from issuance of long-term debt ................. 200 -- -- -- 200
Net proceeds from equity issue ............................ 15,953 -- -- -- 15,953
Other financing costs .................................... (74) -- -- -- (74)
--------- --------- ------- --------- ---------
Net cash provided by (used in) financing activities ....... 15,766 -- (16) -- 15,750
--------- --------- ------- --------- ---------
Net increase (decrease) in cash ........................... (3,314) 143 1,180 -- (1,991)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............ 1,512 136 3,690 -- 5,338
--------- --------- ------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR .................. $ (1,802) $ 279 $4,870 $ -- $ 3,347
========= ========= ======= ========= =========
50
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- SUPPLEMENTAL GUARANTORS INFORMATION: (Continued)
THE PANTRY, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINING BALANCE SHEETS
YEAR ENDED SEPTEMBER 24, 1998
(DOLLARS IN THOUSANDS)
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- ----------
ASSETS
Current assets:
Cash and cash equivalents .......... $ 24,031 $ 6,300 $4,073 $ -- $ 34,404
Receivables, net ................... 11,211 9,263 1,030 (11,597) 9,907
Inventories ........................ 24,933 22,876 -- -- 47,809
Income taxes receivable ............ 270 (2,098) (472) 2,788 488
Prepaid expenses ................... 1,206 1,007 3 -- 2,216
Property held for sale ............. 3,761 -- -- -- 3,761
Deferred income taxes .............. 1,262 2,726 -- -- 3,988
-------- -------- ------ ---------- --------
Total current assets ............. 66,674 40,074 4,634 (8,809) 102,573
-------- -------- ------ ---------- --------
Investment in subsidiaries .......... 69,317 -- -- (69,317) --
-------- -------- ------ ---------- --------
Property and equipment, net ......... 125,340 175,298 340 -- 300,978
-------- -------- ------ ---------- --------
Other assets:
Goodwill, net ...................... 72,375 47,650 -- -- 120,025
Deferred lease cost, net ........... 269 -- -- -- 269
Deferred financing cost, net ....... 14,545 -- -- -- 14,545
Environmental receivables, net ..... 11,566 1,621 -- -- 13,187
Intercompany notes receivable ...... 19,803 49,705 -- (69,508) --
Other .............................. 155 3,088 -- -- 3,243
-------- -------- ------ ---------- --------
Total other assets ............... 118,713 102,064 -- (69,508) 151,269
-------- -------- ------ ---------- --------
Total assets ........................ $380,044 $317,436 $4,974 $ (147,634) $554,820
======== ======== ====== ========== ========
51
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- SUPPLEMENTAL GUARANTORS INFORMATION: (Continued)
THE PANTRY, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINING BALANCE SHEETS
YEAR ENDED SEPTEMBER 24, 1998
(DOLLARS IN THOUSANDS)
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- ---------------- ------------
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT):
Current liabilities:
Current maturities of long-term debt ................... $ 17 $ 10 $ 18 $ -- $ 45
Current maturities of capital lease obligations ........ 213 1,027 -- -- 1,240
Accounts payable:
Trade ................................................ 28,563 20,996 -- -- 49,559
Money orders ......................................... 4,112 1,069 -- -- 5,181
Accrued interest ....................................... 11,564 1,283 1 (1,136) 11,712
Accrued compensation and related taxes ................. 4,366 2,352 1 -- 6,719
Other accrued taxes .................................... 3,108 3,899 -- -- 7,007
Accrued insurance ...................................... 3,188 2,557 -- -- 5,745
Other accrued liabilities .............................. 11,118 18,877 122 (5,769) 24,348
--------- -------- ------ --------- ---------
Total current liabilities ............................ 66,249 52,070 142 (6,905) 111,556
--------- -------- ------ --------- ---------
Long-term debt .......................................... 188,151 139,000 118 -- 327,269
--------- -------- ------ --------- ---------
Other non-current liabilities:
Environmental expenses ................................. 13,487 3,650 -- -- 17,137
Deferred income taxes .................................. (36) 22,001 -- (1,599) 20,366
Capital lease obligations .............................. 1,534 10,595 -- -- 12,129
Employment obligations ................................. 934 -- -- -- 934
Accrued dividends on preferred stock ................... 4,391 -- -- -- 4,391
Intercompany note payable .............................. 50,705 20,822 -- (71,527)
Other .................................................. 15,325 5,737 38 634 21,734
--------- -------- ------ --------- ---------
Total other non-current liabilities .................. 86,340 62,805 38 (72,492) 76,691
--------- -------- ------ --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock ........................................ -- -- -- -- --
Common stock ........................................... 2 1 -- (1) 2
Additional paid-in capital ............................. 68,115 6,758 5,001 (11,759) 68,115
Shareholder loan ....................................... (215) -- -- -- (215)
Accumulated earnings (deficit) ......................... (28,598) 56,802 (325) (56,477) (28,598)
--------- -------- ------ ----------- ---------
Total shareholders' equity (deficit) ................. 39,304 63,561 4,676 (68,237) 39,304
--------- -------- ------ ----------- ---------
Total liabilities and shareholders equity (deficit) ..... $ 380,044 $317,436 $4,974 $(147,634) $ 554,820
========= ======== ====== =========== =========
52
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- SUPPLEMENTAL GUARANTORS INFORMATION: (Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 24, 1998
(DOLLARS IN THOUSANDS)
THE PANTRY GUARANTOR NON-GUARANTOR
(ISSUER) SUBSIDIARIES SUBSIDIARY ELIMINATIONS TOTAL
------------ -------------- -------------- -------------- -----------
Revenues:
Merchandise sales .................................... $ 245,402 $ 215,396 $ -- $ -- $ 460,798
Gasoline sales ....................................... 269,865 240,093 -- -- 509,958
Commissions .......................................... 6,838 7,290 -- -- 14,128
--------- --------- ------ --------- ---------
Total revenues ..................................... 522,105 462,779 -- -- 984,884
--------- --------- ------ --------- ---------
Cost of sales:
Merchandise .......................................... 162,027 141,941 -- -- 303,968
Gasoline ............................................. 238,381 209,184 -- -- 447,565
--------- --------- ------ --------- ---------
Total cost of sales ................................ 400,408 351,125 -- -- 751,533
--------- --------- ------ --------- ---------
Gross profit .......................................... 121,697 111,654 -- -- 233,351
--------- --------- ------ --------- ---------
Operating expenses:
Store expenses ....................................... 89,774 66,046 (240) (15,491) 140,089
General and administrative expenses .................. 18,398 14,341 22 -- 32,761
Merger integration costs ............................. -- 1,016 -- -- 1,016
Depreciation and amortization ........................ 14,003 13,633 6 -- 27,642
--------- --------- ------ --------- ---------
Total operating expenses ........................... 122,175 95,036 (212) (15,491) 201,508
--------- --------- ------ --------- ---------
Income (loss) from operations ......................... (478) 16,618 212 15,491 31,843
--------- --------- ------ --------- ---------
Equity in earnings of subsidiaries .................... 22,864 -- -- (22,864) --
--------- --------- ------ --------- ---------
Other income (expense):
Interest expense ..................................... (18,241) (14,926) (12) 4,233 (28,946)
Miscellaneous ........................................ 528 20,943 29 (19,724) 1,776
--------- --------- ------ --------- ---------
Total other income (expense) ....................... (17,713) 6,017 17 (15,491) (27,170)
--------- --------- ------ --------- ---------
Income (loss) before income taxes and extraordinary
loss ................................................. 4,673 22,635 229 (22,864) 4,673
Income tax benefit (expense) .......................... -- (8,337) (250) 8,587 --
--------- --------- ------ --------- ---------
Net income (loss) before extraordinary item ........... 4,673 14,298 (21) (14,277) 4,673
Extraordinary loss .................................... (7,998) -- -- -- (7,998)
--------- --------- ------ --------- ---------
Net income (loss) ..................................... (3,325) 14,298 (21) (14,277) (3,325)
========= ========= ====== ========= =========
53
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 15 -- SUPPLEMENTAL GUARANTORS INFORMATION: (Continued)
THE PANTRY, INC.
SUPPLEMENTAL COMBINING STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 24, 1998
(DOLLARS IN THOUSANDS)
GUARANTOR
THE PANTRY SUBSIDIARIES
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ............................................ $ (3,325) $ 14,298
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss .......................................... 2,006 --
Depreciation and amortization ............................... 14,014 13,623
Change in deferred income taxes ............................. -- 1,737
(Gain) loss on sale of property and equipment ............... 88 443
Provision for environmental expenses ........................ 5,681 500
Provision for closed stores ................................. 50 --
Equity earnings of affiliates ............................... (15,359) --
Changes in operating assets and liabilities, net:
Receivables ................................................. (10,380) (2,165)
Inventories ................................................. 986 (5,504)
Prepaid expenses ............................................ (11) 401
Other noncurrent assets ..................................... 379 681
Accounts payable ............................................ 13,392 503
Other current liabilities and accrued expenses .............. 11,632 (6,497)
Employment obligations ...................................... (407) --
Other noncurrent liabilities ................................ 8,459 (2,483)
----------- -----------
Net cash provided by operating activities .................... 27,206 15,537
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ......................... (5,203) --
Additions to property and equipment ......................... (27,569) (15,584)
Proceeds from sale of property held for sale ................ 4,807 --
Proceeds from sale of property and equipment ................ 2,102 5,546
Intercompany notes receivable (payable) ..................... (8,532) 10,551
Acquisition of related businesses, net of cash acquired ..... (102,684) (147,908)
----------- -----------
Net cash used in investing activities ........................ (137,079) (147,395)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases ................... (303) (1,121)
Proceeds from issuance of capital leases .................... 1,086 --
Principal repayments of long-term debt ...................... (51,516) (10)
Proceeds from issuance of long-term debt .................... 139,499 139,010
Net proceeds from equity issue .............................. 56,935 --
Other financing costs ....................................... (14,044) --
----------- -----------
Net cash provided by (used in) financing activities .......... 131,657 137,879
----------- -----------
Net increase in cash ......................................... 21,784 8,000
Cash and Cash Equivalents
at Beginning of Year ........................................ 2,247 279
----------- -----------
Cash and Cash Equivalents
at End of Year .............................................. $ 24,031 $ 8,279
=========== ===========
NON-GUARANTOR
SUBSIDIARY ELIMINATIONS TOTAL
-------------- -------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ............................................ $ (21) $(14,277) $ (3,325)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss .......................................... -- -- 2,006
Depreciation and amortization ............................... 5 -- 27,642
Change in deferred income taxes ............................. -- -- 138
(Gain) loss on sale of property and equipment ............... -- -- 531
Provision for environmental expenses ........................ -- -- 6,181
Provision for closed stores ................................. -- -- 50
Equity earnings of affiliates ............................... -- 15,359 --
Changes in operating assets and liabilities, net:
Receivables ................................................. (1,017) 3,451 (8,512)
Inventories ................................................. -- -- (4,518)
Prepaid expenses ............................................ -- -- 390
Other noncurrent assets ..................................... 4,050 1 5,111
Accounts payable ............................................ -- -- 13,896
Other current liabilities and accrued expenses .............. 254 (3,148) 2,241
Employment obligations ...................................... -- -- (407)
Other noncurrent liabilities ................................ (2) 634 6,608
----------- -------- -----------
Net cash provided by operating activities .................... 3,269 2,020 48,032
---------- -------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property held for sale ......................... -- -- (5,203)
Additions to property and equipment ......................... -- -- (43,153)
Proceeds from sale of property held for sale ................ -- -- 4,807
Proceeds from sale of property and equipment ................ -- -- 7,648
Intercompany notes receivable (payable) ..................... -- (2,019) --
Acquisition of related businesses, net of cash acquired ..... -- (250,592)
---------- -----------
Net cash used in investing activities ........................ -- (2,019) (286,493)
---------- -------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments under capital leases ................... -- -- (1,424)
Proceeds from issuance of capital leases .................... -- -- 1,086
Principal repayments of long-term debt ...................... (17) -- (51,543)
Proceeds from issuance of long-term debt .................... -- (1) 278,508
Net proceeds from equity issue .............................. -- -- 56,935
Other financing costs ....................................... -- -- (14,044)
---------- ---------- -----------
Net cash provided by (used in) financing activities .......... (17) (1) 269,518
---------- ----------- -----------
Net increase in cash ......................................... 3,252 -- 33,036
Cash and Cash Equivalents
at Beginning of Year ........................................ 821 -- 3,347
---------- ---------- -----------
Cash and Cash Equivalents
at End of Year .............................................. $ 4,073 $ -- $ 36,383
========== ========== ===========
54
THE PANTRY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 16 -- SUBSEQUENT EVENTS:
In two separate transactions, subsequent to fiscal year end, the Company
acquired 32 stores located in North and South Carolina. These transactions were
primarily funded from borrowings under the Company's Acquisition Facility and
cash on hand. In addition, subsequent to fiscal year end the Company signed a
purchase agreement to acquire approximately 125 convenience stores in its
existing market. There can be no assurances that this transaction will be
consummated.
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors
and executive officers of the Company as of December 15, 1998:
NAME AGE POSITION WITH THE COMPANY
- -------------------------- ----- --------------------------------------------------
Peter J. Sodini 57 President, Chief Executive Officer and Director
Dennis R. Crook 55 Senior Vice President, Administration and
Gasoline Marketing
William T. Flyg 56 Senior Vice President and Chief Financial Officer
Douglas M. Sweeney 59 Senior Vice President, Operations
Daniel J. McCormack 55 Vice President, Marketing
William M. Wardlaw 51 Director
Charles P. Rullman 50 Director
Todd W. Halloran 36 Director
Jon D. Ralph 34 Director
Christopher C. Behrens 37 Director
PETER J. SODINI, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR, joined
The Pantry in February 1996 as Chief Operating Officer and was named President
and Chief Executive Officer in June 1996. Mr. Sodini has served as a director
of the Company since November 1995. Mr. Sodini is a director of Buttrey Food
and Drug Stores Company and Pamida Holding Corporation. From December 1991 to
November 1995, Mr. Sodini was Chief Executive Officer and a director of Purity
Supreme, Inc. ("Purity"). Prior to 1991, Mr. Sodini held executive positions at
several supermarket chains including Boys Markets, Inc. and Piggly Wiggly
Southern, Inc.
DENNIS R. CROOK, SENIOR VICE PRESIDENT, ADMINISTRATION AND GASOLINE
MARKETING, joined The Pantry in March 1996. From December 1987 to November
1995, Mr. Crook was Senior Vice President, Human Resources and Labor Relations
of Purity.
WILLIAM T. FLYG, SENIOR VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL
OFFICER. Mr. Flyg joined The Pantry in January 1997. He was employed by Purity
as Chief Financial Officer from January 1992 until the Company was sold in
November 1995, at which time he continued as an employee of Purity until
December 1996.
DOUGLAS M. SWEENEY, SENIOR VICE PRESIDENT, OPERATIONS, joined The Pantry
in March 1996. From December 1991 to December 1995, Mr. Sweeney was Senior Vice
President, Operations of Purity.
DANIEL J. MCCORMACK, VICE PRESIDENT, MARKETING, joined The Pantry in March
1996. From 1989 to February 1996, Mr. McCormack was Director of Purchasing of
Purity.
WILLIAM M. WARDLAW, DIRECTOR, has been a director of the Company since
August 1998. Mr. Wardlaw joined Freeman Spogli in 1988 and became a General
Partner in 1991. From 1984 to 1988, Mr. Wardlaw was Managing Partner in the Los
Angeles law firm of Riordan & McKinzie. Prior to 1984, he served as a partner
in the law firm of O'Melveny & Myers. Mr. Wardlaw received his bachelor's
degree with highest honors from Whittier College in 1968 and earned a juris
doctor degree in 1972 from the University of California, Los Angeles.
CHARLES P. RULLMAN, DIRECTOR, has been a director of the Company since
November 1995. Mr. Rullman joined FS&Co. as a General Partner in 1995. From
1992 to 1995, Mr. Rullman was a General Partner of Westar Capital, a private
equity investment firm specializing in middle market transactions. Prior to
joining Westar, Mr. Rullman spent twenty years at Bankers Trust Company and its
affiliate BT Securities Corporation where he was a Managing Director and
Partner.
TODD W. HALLORAN, DIRECTOR, has been a director of the Company since
November 1995. Mr. Halloran joined FS&Co. in 1995. From 1994 to 1995 and from
1990 to 1994, Mr. Halloran was a Vice President and Associate at Goldman, Sachs
& Co., respectively, where he worked in the Principal Investment Area and the
Mergers and Acquisition Department.
56
JON D. RALPH, DIRECTOR, has been a director of the Company since November
1995. Mr. Ralph joined FS&Co. in 1989. Prior to joining FS&Co., Mr. Ralph spent
three years at Morgan Stanley & Co. where he served as an Analyst in the
Investment Banking Division. Mr. Ralph is also a director of EnviroSource, Inc.
CHRISTOPHER C. BEHRENS, DIRECTOR, has been a director of the Company since
February 1996. Since 1994, he has been a principal of Chase Capital Partners,
an affiliate of The Chase Manhattan Corporation engaged in the venture capital
and leveraged buyout business. From 1990 to 1994, Mr. Behrens was a Vice
President in The Chase Manhattan Corporation's Merchant Banking Group. Mr.
Behrens is a director of Portola Packaging and a number of other private
companies.
Directors of the Company are elected annually and hold office until the
next annual meeting of stockholders and until their successors are duly elected
and qualified.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to the fiscal
1996, fiscal 1997 and fiscal 1998 compensation for services in all capacities
of the Company's Chief Executive Officer and four other most highly compensated
executive officers who were serving as executive officers at the end of the
last completed fiscal year (collectively, the "Executive Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------------------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION (A) OPTIONS/SARS COMPENSATION (B)
- ----------------------------------- ------------- ----------- ----------- ------------------ -------------- -----------------
Peter J. Sodini 1998 $475,000 $250,000 $15,257 5,221 $2,500
President and Chief 1997 305,218 150,000 5,908 -- 2,500
Executive Officer (c) 1996 124,086 50,000 3,392 -- --
Dennis R. Crook 1998 175,000 87,000 6,129 1,178 4,253
Senior Vice President, 1997 151,832 70,000 1,025 -- 2,019
Administrative and Gasoline (d) 1996 82,933 20,000 41,250 -- --
William T. Flyg 1998 175,000 75,000 4,578 1,128 --
Senior Vice President, 1997 109,615 54,000 3,076 -- --
Finance and Chief Financial
Officer (e)
Douglas Sweeney 1998 180,000 90,000 8,082 1,178 4,651
Senior Vice President, 1997 149,983 72,000 2,593 -- 2,014
Operations (f) 1996 91,334 20,000 1,352 -- --
Daniel J. McCormack 1998 110,000 60,000 8,949 1,178 2,645
Vice President, Marketing (g) 1997 95,488 45,000 4,269 -- 1,279
1996 45,334 15,000 5,934 -- --
- ---------
(a) Consists primarily of executive medical, moving and relocation
reimbursements.
(b) Consists of matching contributions to the Company's 401(k) Savings Plan.
See "Benefit Plan" below.
(c) Mr. Sodini was appointed Chief Operating Officer in February 1996 and
appointed President and Chief Executive Officer of the Company in June
1996.
(d) Dennis R. Crook was appointed Senior Vice President, Administration and
Gasoline Marketing in March 1996.
(e) William T. Flyg was appointed Senior Vice President, Finance and Chief
Financial Officer of the Company in January 1997 and, accordingly, only
fiscal 1997 and fiscal 1998 information is provided.
(f) Douglas M. Sweeney was appointed Senior Vice President, Operations in March
1996.
(g) Daniel J. McCormack was appointed Vice President, Marketing in September
30, 1996.
57
The following table sets forth information with respect to stock options
granted to the Company's Chief Executive Officer and four other most highly
compensated executives during the year ended September 24, 1998:
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED
UNDERLYING TO EMPLOYEES EXERCISE
OPTIONS/SARS IN FISCAL PRICE PER EXPIRATION
NAME GRANTED YEAR SHARE DATE
- ------------------------------------- -------------- -------------- ----------- -----------
Peter J. Sodini 4,061 (a) 35.9 $450 01/01/08
President and Chief 1,160 (b) 10.3 575 08/25/08
Executive Officer
Dennis R. Crook 928 (a) 8.2 450 01/01/08
Senior Vice President, 250 (b) 2.2 575 08/25/08
Administrative and Gasoline
William T. Flyg 928 (a) 8.2 450 01/01/08
Senior Vice President, 200 (b) 1.8 575 08/25/08
Finance & Chief Financial Officer
Douglas Sweeney 928 (a) 8.2 450 01/01/08
Senior Vice President, Operations 250 (b) 2.2 575 08/25/08
Daniel J. McCormack 928 (a) 8.2 450 01/01/08
Vice President, Marketing 250 (b) 2.2 575 08/25/08
- ---------
(a) This option vests and becomes exercisable in three equal, annual
installments beginning on the first anniversary of the date of grant and
expires to the extent not exercised by January 1, 2008.
(b) This option vests and becomes exercisable in three equal, annual
installments beginning on the first anniversary of the date of grant and
expires to the extent not exercised by August 25, 2008.
EXECUTIVE EMPLOYMENT CONTRACTS
On June 3, 1996, the Company entered into an employment agreement with Mr.
Crook. This agreement contains customary employment terms and provides for an
annual base salary of $150,000, subject to annual adjustment by the Board of
Directors and participation in any benefit or bonus programs instituted by the
Company. The agreement terminates on March 31, 1998, subject to automatic
one-year extensions which continue annually so long as neither the Company nor
Mr. Crook gives notice of termination. Pursuant to the terms of the agreement,
if Mr. Crook is terminated by the Company prior to a "change of control" (as
defined) without cause, Mr. Crook shall be entitled to severance pay for the
longer of the balance of the term or one year from the termination date,
subject to certain limitations. If Mr. Crook is terminated by the Company
following a change of control without cause or Mr. Crook terminates his
employment for "good reason" (as defined), Mr. Crook shall be entitled to
severance pay (including regular benefits) for a period of two years from the
termination date, subject to certain limitations. This agreement contains
covenants prohibiting Mr. Crook, for so long as he is employed by or receiving
severance benefits from the Company, from competing with the Company or
soliciting employment from employees of the Company.
On October 1, 1997, the Company entered into an employment agreement with
Mr. Sodini. This Agreement contains customary employment terms and provides for
an annual base salary of $475,000, subject to annual adjustment by the Board of
Directors, participation in any benefit or bonus programs instituted by the
Company, participation in an incentive bonus program which provides for a
payout of a minimum of 25% upon the achievement of goals determined by the
Board of Directors, and other perquisites. This agreement terminates on
September 30, 2000. Pursuant to the terms of the agreement, if Mr. Sodini is
terminated by the Company prior to a "change in control" (as defined) with
"just cause" (as defined) or upon death or disability, Mr. Sodini shall be
entitled to his then effective compensation and benefits through the last day
of his actual employment by the Company (for termination for just cause or upon
death) or his effective date of termination, as determined by the Board of
Directors (for termination upon disability). In addition, if Mr. Sodini is
terminated because of death or disability, the Company shall pay to the estate
of Mr. Sodini or to Mr. Sodini, as the case may be, one year's pay (less
amounts paid under any disability plan).
58
If Mr. Sodini is terminated by the Company prior to a change in control
without cause, Mr. Sodini shall be entitled to severance pay (including regular
benefits) through the term of the agreement until such time as he engages in
other employment. If Mr. Sodini is terminated by the Company following a change
in control without cause or Mr. Sodini terminates his employment for "good
reason" (as defined), Mr. Sodini shall be entitled to severance pay (including
regular benefits) for a period of 18 months from the termination date, subject
to certain limitations. This agreement contains covenants prohibiting Mr.
Sodini, through the period ending on the latter of (i) 18 months after
termination or (ii) such time at which he no longer received severance benefits
from the Company, from competing with the Company or soliciting employment from
employees of the Company.
COMPENSATION OF DIRECTORS
Directors of the Company receive no compensation as directors. Directors
are reimbursed for their reasonable expenses in attending meetings.
BENEFIT PLAN
The Company sponsors a 401(k) employee retirement savings plan with
Fidelity Investments for eligible employees. Employees must be at least
nineteen years of age and have one year of service working at least 1,000 hours
to be eligible to participate in the 401(k) plan. Employees may contribute up
to 15% of their annual compensation and contributions are matched by the
Company on the basis of 50% of the first 5% contributed. Matching contribution
expense was $330,000, $305,000 and $396,000 for fiscal years 1996, 1997, and
1998 respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company determines the compensation of
Executive Officers. During fiscal 1997, Mr. Sodini participated in Board of
Director deliberations regarding the compensation of the Company's Executive
Officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of December 21,
1998, with respect to the beneficial ownership of Common Stock by (i) each
person who beneficially owns more than 5% of such shares, (ii) each of the
executive officers named in the Summary Compensation Table, (iii) each director
of the Company and (iv) all executive officers and directors of the Company as
a group.
SHARES OF
NAME AND ADDRESS COMMON STOCK PERCENTAGE OF
OF BENEFICIAL OWNER BENEFICIALLY OWNED CLASS
- ------------------------------------------------------ -------------------- --------------
Freeman Spogli & Co. Incorporated (1) 229,324 82.3%
William M. Wardlaw (1) -- --
Charles P. Rullman (1) -- --
Jon D. Ralph (2) -- --
Todd W. Halloran (2) -- --
Chase Manhattan Capital, L.P. (3) 32,743 11.7%
Christopher C. Behrens (3) (4) 5,263 1.9%
Peter J. Sodini (5) 1,237 *
Dennis R. Crook 87 *
William T. Flyg -- --
Douglas Sweeney 174 *
Daniel J. McCormack 87 *
All directors and executive officers as a group
(13 individuals) 1,969 *
59
- ---------
* Less than 1.0%.
(1) Includes 46,000 shares issuable on the exercise of currently exercisable
warrants. 141,441 shares, 36,190 and 5,693 shares of Common Stock are held
of record, by FSEP III, FSEP IV and FSEP International, respectively. As
general partner of FS Capital Partners, L.P. ("FS Capital"), which is
general partner of FSEP III, FS Holdings, Inc. ("FSHI") has the sole power
to vote and dispose of the shares owned by FSEP III. As general partner of
FS&Co. International, L.P. ("FS&Co. International"), which is the general
partner of FSEP International, FS International Holdings Limited ("FS
International Holdings") has the sole power to vote and dispose of the
shares owned by FSEP International. Messrs. Spogli and Rullman and
Bradford M. Freeman, William M. Wardlaw, J. Frederick Simmons and John M.
Roth are the sole directors, officers and shareholders of FSHI, FS
International Holdings and Freeman Spogli & Co. Incorporated, and as such
may be deemed to be the beneficial owners of the shares of the Common
Stock and rights to acquire the Common Stock owned by FSEP III and FSEP
International. The business address of Freeman Spogli & Co. Incorporated,
FSEP III, FS Capital, FSHI and its sole directors, officers and
shareholders is 11100 Santa Monica Boulevard, Suite 1900, Los Angeles,
California 90025 and the business address of FSEP International, FS&Co.
International and FS International Holdings is c/o Padget-Brown & Company,
Ltd., West Winds Building, Third Floor, Grand Cayman, Cayman Islands,
British West Indies.
(2) Each of Messrs. Ralph and Halloran is an employee of an affiliate of
Freeman Spogli & Co. Incorporated.
(3) 21,053 and 11,690 shares of Common Stock are held of record, by Chase
Manhattan Capital, and CB Capital Investors, L.P., respectively. The
business address of Chase Manhattan Capital, L.P. is 380 Madison Avenue,
12th Floor, New York, New York 10017. Mr. Behrens is a principal at Chase
Capital Partners, an affiliate of CMC.
(4) Mr. Behrens is a general partner of Baseball Partners, a New York general
partnership, that is the beneficial owner of 5,263 shares of Common Stock.
Mr. Behrens disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CAPITAL AND OTHER TRANSACTIONS
In October 1997, the FS Group, Chase and Peter J. Sodini purchased an
aggregate of $32.4 million of the common stock of the Company in connection
with the Lil' Champ Acquisition, thereby changing the FS group's aggregate
ownership interest to approximately 83.2% on a fully diluted basis. Mr. Sodini
purchased 889 shares of the common stock of the Company for an aggregate
purchase price of $400,500, payable $185,500 in cash and $215,000 in the form
of a secured promissory note in favor of the Company. The FS Group and Chase
together invested $92.8 million in the aggregate, $54.8 million of which has
been invested in new equity securities of the Company.
In August 1996, the FS Group, Chase, The Pantry and other stockholders
entered into a stockholders' agreement whereby (i) the FS Group was granted
certain rights of first offer prior to any transfer of securities, (ii) the FS
Group was granted certain "drag-along" rights with respect to the sale of
securities, (iii) the FS Group, Chase and other stockholders were granted
certain "tag-along" rights to the sale of securities by other stockholders,
(iv) various transfer restrictions were agreed upon by the stockholders and (v)
certain Board representation rights of Chase were established. In August 1996,
the FS Group, Chase, The Pantry and other stockholders entered into
registration rights agreements relating to the common stock and preferred stock
of The Pantry whereby certain demand and "piggyback" registration rights were
granted to the stockholders. In connection with the October 1997 equity
investment, the stockholders agreement and registration rights agreements were
amended to include Mr. Sodini as a party and make the shares purchased subject
to such agreements.
On July 2, 1998 in connection with the acquisition of certain of the
assets of Quick Stop and the acquisition of certain of the assets of Stallings,
FS Group, Chase and a member of management purchased an aggregate of 43,478
shares of Common Stock, par value $0.01 per share, for an aggregate purchase
price of $25.0 million. As of September 24, 1998, the FS Group and Chase and
its affiliates owned approximately 78.8% and 14.1% of the Company's Common
Stock, respectively. Certain of the Company's directors and executive
management own the remaining 7.1%. In connection with the FS Group's previous
investments in the Company, the Company has paid transaction fees in the amount
of $3.0 million to the FS Group.
In August 1998, the Company adopted the 1998 Stock Subscription Plan,
pursuant to which certain employees, including directors and executive officers
of the Company, were given the opportunity to purchase up to an aggregate of
3,100 shares of Common Stock of the Company at fair market value. The purchase
price for the Common Stock purchased under the Company's 1998 Stock
Subscription Plan is payable in cash and/or the delivery to the Company of a
secured promissory note (at a rate of interest equal to prime). As of September
24, 1998, no issuances had been made under the Company's 1998 Stock
Subscription Plan.
60
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 Form 10-K.
(1) Consolidated Financial Statements -- See index on page 22.
(2) Financial Statement Schedules -- See index on page 22.
EXHIBIT NO. DESCRIPTION OF DOCUMENT
(3) ------------------- --------------------------------------------------------------------------------
1.1 (1) Purchase Agreement dated October 17, 1997 among The Pantry, Inc. ("The
Pantry" or the "Company") and First Union Capital Markets Corp.
2.1 (1) Stock Purchase Agreement dated August 26, 1997 by and between PH Holding
Corporation ("PH Holding") and Docks U.S.A., Inc.
2.2 (1) Assignment and Assumption Agreement dated October 23, 1997 between PH
Holding and The Pantry.
2.3 (2) Asset Purchase Agreement dated June 5, 1998 between Quick Stop Food Mart,
Inc. and the Company.
2.4 (3) Asset Purchase Agreement dated July 6, 1998 between Stallings Oil Company
and the Company.
2.5 (4) Asset Purchase Agreement dated September 28, 1998, as amended on
November 5, 1998, by and among Express Stop, Inc., Bryan Oil Company, Inc.,
Market Express of Shallotte, Inc., Lennon Oil Company and the Company.
3.1 (1) Restated Certificate of Incorporation of The Pantry, as amended to date.
3.2 (5) Bylaws of The Pantry, as amended to date.
4.1 (6) Indenture, including the form of 12% Senior Note due 2000, dated November 4,
1993 between The Pantry and IBJ Schroder Bank and Trust Company ("IBJ
Schroder").
4.2 (5) Supplemental Indenture dated December 4, 1995 between The Pantry and IBJ
Schroder.
4.3 (1) Second Supplemental Indenture dated October 23, 1997 among The Pantry,
Sandhills and IBJ Schroder.
4.4 (1) Third Supplemental Indenture dated October 23, 1997 between The Pantry, Lil'
Champ and IBJ Schroder.
4.5 (1) Indenture dated as of October 23, 1997 among The Pantry, Sandhills, Lil' Champ
(together with Sandhills, the "Guarantors") 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 Note due 2007).
4.6 (1) Registration Rights Agreement dated as of October 23, 1997 among The Pantry,
the Guarantors, CIBC Wood Gundy Securities Corp. and First Union Capital
Markets Corp.
4.7 (1) Amended and Restated Registration Rights Agreement dated October 23, 1997
among The Pantry, FS Equity Partners III, L.P. ("FSEP III"), FS Equity Partners
International, L.P. ("FSEP International"), Peter J. Sodini, Chase Manhattan
Capital, L.P., CB Capital Investors, L.P., and Baseball Partners.
4.8 (1) Amended and Restated Stockholders' Agreement dated October 23, 1997 among
The Pantry, FSEP III, FSEP International, Chase Manhattan Capital, L.P., CB
Capital Investors, L.P., Baseball Partners and Peter J. Sodini.
10.1 (7)(9) The Pantry, Inc. 1998 Stock Option Plan adopted January 1, 1998
10.2 (8) Settlement Agreement dated July 16, 1996 among MVP, MF#6, W. Clay Hamner,
Wayne M. Rogers, FSEP III, FSEP International, Chase Manhattan Capital
Corporation and The Pantry.
10.3 (1) 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 (1) 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 (1) Stock Pledge Agreement dated October 23, 1997 between Peter J. Sodini and
The Pantry.
61
EXHIBIT NO. DESCRIPTION OF DOCUMENT
(3) ------------------- ---------------------------------------------------------------------------------
10.6 (1) Secured Promissory Note dated October 23, 1997 between Peter J. Sodini and
The Pantry.
10.7 (1)(9) Employment Agreement dated June 3, 1996 between Dennis R. Crook and The
Pantry.
10.8 (1) Credit Agreement dated as of October 23, 1997 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.
10.9 (1) Company Security Agreement dated as of October 23, 1997 between The Pantry
and First Union, as administrative agent.
10.10(1) Company Pledge Agreement dated as of October 23, 1997 between The Pantry
and First Union, as administrative agent.
10.11(1) Company Trademark Security Agreement dated as of October 23, 1997 between
The Pantry and First Union, as administrative agent.
10.12(1) Collateral Account Agreement dated as of October 23, 1997 between The Pantry
and First Union, as administrative agent.
10.13(1)(9) Employment Agreement dated October 1, 1997 between Peter J. Sodini and The
Pantry.
10.14(1) 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.
10.15(1) 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.
10.16(1) 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.
10.17(1) 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.
10.18(1) 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.
10.19(1) 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.
10.20(1) 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.
10.21(1) Form of Subsidiary Guaranty.
10.22(1) Form of Subsidiary Security Agreement.
10.23(1) Form of Subsidiary Pledge Agreement.
10.24(1) Form of Subsidiary Trademark Security Agreement.
10.25 The Pantry Inc. 1998 Stock Subscription Plan
12.1 Statement re Computation of Earnings to Fixed Charges Ratio.
21.1 Subsidiaries of The Pantry.
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule.
- ---------
(1) Incorporated by reference to the exhibit designated by the same number in
the Company's Registration Statement on Form S-4 (Registration No.
333-42811).
(2) Incorporated by reference to the exhibit designated by exhibit number 2.1
in the Company's Current Report on Form 8-K dated July 17, 1998.
(3) Incorporated by reference to the exhibit designated by exhibit number 2.3
in the Company's Current Report on Form 8-K dated July 17, 1998.
(4) Incorporated by reference to the exhibit designated by exhibit number 2.1
in the Company's Current Report on Form 8-K dated November 6, 1998.
62
(5) Incorporated by reference to the exhibit designated by the same number in
the Company's Annual Report on Form 10-K for the year ended September 28,
1995.
(6) Incorporated by reference to the exhibit designated by same number in the
Company's Registration Statement on Form S-1 (Registration No. 33-72574).
(7) Incorporated by reference to the exhibit designated by the same number in
the Company's Quarterly Report on Form 10-Q for the quarterly period ended
December 25, 1997.
(8) Incorporated by reference to the exhibit designated by exhibit number 10.1
in the Company's Current Report on Form 8-K dated August 30, 1996.
(9) Represents a management contract or compensation plan arrangement.
(b) Reports on Form 8-K
(1) On July 17, 1998, the Company filed a Current Report on Form 8-K
announcing its acquisition of certain assets of Quick Stop Food Mart,
Inc. and Stallings Oil Company on July 2, 1998 and July 16, 1998,
respectively. On August 7, 1998, the Company filed a Current Report on
Form 8-K/A which provided the financial statements for the acquisitions.
(2) On November 6, 1998, the Company filed a Current Report on Form 8-K
announcing its acquisition of certain assets of each of Express Stop,
Inc., Bryan Oil Company, Inc., Market Express of Shallote, Inc. and
Lennon Oil Company on November 5, 1998.
(c) See (a)(3) above.
(d) See (a)(2) above.
63
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE PANTRY, INC.
By: /s/ PETER J. SODINI
------------------------------------
PETER J. SODINI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: December 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report 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 23, 1998
---------------------------------- and Director (Principal Executive
PETER J. SODINI Officer)
/s/ WILLIAM T. FLYG Senior Vice President and Chief December 23, 1998
---------------------------------- Financial Officer
WILLIAM T. FLYG (Principal Financial Officer)
/s/ JOSEPH J. DUNCAN Vice President and Corporate Controller December 23, 1998
---------------------------------- (Principal Accounting Officer)
JOSEPH J. DUNCAN
Director December 23, 1998
----------------------------------
WILLIAM M. WARDLAW
. Director December 23, 1998
----------------------------------
CHARLES P. RULLMAN
/s/ JON D. RALPH Director December 23, 1998
----------------------------------
JON D. RALPH
/s/ TODD W. HALLORAN Director December 23, 1998
----------------------------------
TODD W. HALLORAN
/s/ CHRISTOPHER C. BEHRENS Director December 23, 1998
----------------------------------
CHRISTOPHER C. BEHRENS
64
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ------------- ---------------------------------------------------
10.25 The Pantry Inc. 1998 Stock Subscription Plan
12.1 Computation of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of the Company.
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule.
65
THE PANTRY, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)
ADDITIONS DEDUCTIONS
BALANCE AT CHARGED TO ADDITIONS FOR BALANCE AT
BEGINNING COSTS AND CHARGED TO PAYMENTS OR END
OF PERIOD EXPENSES GOODWILL WRITE-OFFS OF PERIOD
------------ ------------ ------------ ------------- -----------
Year ended September 26, 1996:
Allowance for doubtful accounts ............ $ 251 $ (46) -- $ (55) $ 150
Reserve for environmental issues ........... 5,720 617 -- (105) 6,232
Reserve for closed stores .................. 463 707 -- (210) 960
Deferred tax asset valuation allowance ..... 573 1,209 -- -- 1,782
------- ------ -- ------ -------
$ 7,007 $2,487 -- $ (370) $ 9,124
======= ====== == ====== =======
Year ended September 25, 1997:
Allowance for doubtful accounts ............ $ 150 $ -- -- $ -- $ 150
Reserve for environmental issues ........... 6,232 1,574 -- -- 7,806
Reserve for closed stores .................. 960 -- -- (10) 950
Deferred tax asset valuation allowance ..... 1,782 (96) -- -- 1,686
------- ------ -- ------ -------
$ 9,124 $1,478 -- $ (10) $10,592
======= ====== == ====== =======
Year ended September 24, 1998:
Allowance for doubtful accounts ............ $ 150 $ 130 -- $ -- $ 280
Reserve for environmental issues ........... 7,806 6,181 3,150 -- 17,137
Reserve for closed stores .................. 950 50 603 -- 1,603
Deferred tax asset valuation allowance ..... 1,686 750 -- -- 2,436
------- ------ ----- ------ -------
$10,592 $7,111 $3,753 $ -- $21,456
======= ====== ====== ====== =======
S-1