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Table of Contents
 
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 26, 2002
 
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
incorporation or organization)
  
(I.R.S. Employer
Identification Number)
 
P.O. Box 1410
1801 Douglas Drive
Sanford, North Carolina
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:
 
common stock, $.01 par value
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
 
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of March 28, 2002 was $13,170,431.
 
As of December 13, 2002, there were issued and outstanding 18,107,597 shares of the registrant’s common stock.
 
Documents Incorporated by Reference
 
Document
     
Where Incorporated
1.      Proxy Statement for the Annual Meeting of Stockholders to be held March 25, 2003
     
Part III
 
 

Table of Contents
THE PANTRY, INC.
 
INDEX TO ANNUAL REPORT ON FORM 10-K
 
           
Page
Part I
            
Item 1:
        
1
Item 2:
        
10
Item 3:
        
10
Item 4:
        
10
Part II
            
Item 5:
        
11
Item 6:
        
12
Item 7:
        
14
Item 7A:
        
31
Item 8:
        
34
Item 9:
        
61
Part III
            
Item 10:
        
62
Item 11:
        
62
Item 12:
        
62
Item 13:
        
62
Part IV
            
Item 14:
        
63
Item 15:
        
63
         
66
         
S-1
         
S-3

i

Table of Contents
PART I
 
Item 1.    Business
 
General
 
The Pantry, Inc., founded in 1967, is the leading convenience store operator in the southeastern United States and the second largest independently operated convenience store chain in the country. As of September 26, 2002, we operated 1,289 stores in 10 southeastern states under approximately two dozen banners including The Pantry®, Handy Way®, Lil Champ®, Quick Stop, Zip Mart®, Kangaroo®, Fast Lane®, Big K™, Depot and Mini Mart. Our stores offer a broad selection of merchandise, gasoline and ancillary services designed to appeal to the convenience needs of our customers.
 
In fiscal 1996, Freeman Spogli & Co. acquired a controlling interest in our stock through a series of transactions which included the purchase of common stock from certain stockholders and the purchase of newly issued common and preferred stock. As of December 13, 2002, Freeman Spogli & Co. owned 11,815,538 shares of common stock and warrants to purchase an additional 2,346,000 shares. Freeman Spogli & Co.’s beneficial ownership, including shares underlying warrants, at December 13, 2002 was 69.2%.
 
Operations
 
Merchandise Operations.    In fiscal 2002, our merchandise sales were 40.0% of total revenues. The following table highlights certain information with respect to our merchandise sales for the last five fiscal years:
 
    
Fiscal Year Ending
  
    
Sept. 26, 2002
     
Sept. 27, 2001
     
Sept. 28, 2000
     
Sept. 30, 1999
     
Sept. 24, 1998
  
Merchandise sales (in millions)
   
$
998.6
 
   
$
968.6
 
   
$
907.6
 
   
$
731.7
 
   
$
460.8
 
Average merchandise sales per store (in thousands)
   
$
765.2
 
   
$
731.0
 
   
$
713.8
 
   
$
666.4
 
   
$
533.3
 
Comparable store merchandise sales increase
   
 
3.4
%
   
 
(0.2
)%
   
 
7.5
%
   
 
9.6
%
   
 
5.3
%
Merchandise gross margins (after purchase rebates, markdowns, inventory spoilage, inventory shrink and LIFO reserve)
   
 
33.0
%
   
 
33.4
%
   
 
33.3
%
   
 
33.1
%
   
 
34.0
%
 
The increase in average merchandise sales per store in fiscal 2002 is primarily due to the fiscal 2002 comparable store merchandise sales increase of 3.4% coupled with the closure of 38 under performing stores.
 
Based on merchandise purchase and sales information, we estimate category sales as a percentage of total merchandise sales for the last five fiscal years as follows:
 
    
Fiscal Year Ending
  
    
Sept. 26, 2002
     
Sept. 27, 2001
     
Sept. 28, 2000
     
Sept. 30, 1999
     
Sept. 24, 1998
  
Tobacco products
   
34.8
%
   
34.6
%
   
35.9
%
   
33.1
%
   
26.8
%
Beer and wine
   
16.3
 
   
16.3
 
   
16.2
 
   
16.1
 
   
16.7
 
Packaged beverages
   
14.6
 
   
14.3
 
   
13.7
 
   
14.8
 
   
15.5
 
Self-service fast foods and beverages
   
5.3
 
   
6.0
 
   
5.3
 
   
5.3
 
   
6.3
 
General merchandise, health and beauty care
   
6.4
 
   
5.7
 
   
6.7
 
   
6.4
 
   
6.2
 
Fast food service
   
4.2
 
   
4.3
 
   
3.6
 
   
3.0
 
   
2.9
 
Salty snacks
   
4.0
 
   
3.8
 
   
3.7
 
   
4.0
 
   
4.4
 
Candy
   
3.5
 
   
3.5
 
   
3.4
 
   
3.8
 
   
4.5
 
Dairy products
   
2.8
 
   
3.0
 
   
3.0
 
   
3.5
 
   
3.4
 
Bread and cakes
   
2.3
 
   
2.5
 
   
2.3
 
   
1.8
 
   
2.0
 
Newspapers and magazines
   
2.0
 
   
2.2
 
   
2.2
 
   
2.9
 
   
3.7
 
Grocery and other merchandise
   
3.8
 
   
3.8
 
   
4.0
 
   
5.3
 
   
7.6
 
    
  
  
  
  
Total
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
    
  
  
  
  

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Table of Contents
 
As of September 26, 2002, we operated 194 quick service restaurants or full-service fast food concepts within 173 of our locations. In 83 of these stores, we offer products from nationally branded food franchises including Subway®, Hardee’s®, Noble Roman’s®, TCBY®, Blimpie®, Church’s®, Hot Stuff®, Bullets®, Dairy Queen®, Sobicks Subs™, Long John Silver’s®, Baskin-Robbins®, Bojangles® and Krystal®. In addition, we offer a variety of proprietary food service programs featuring breakfast biscuits, fried chicken, deli, pizza, tacos and other hot food offerings in 90 of our locations.
 
We purchase over 50% of our merchandise from a single wholesale grocer, McLane Company, Inc., a subsidiary of Walmart, Inc. We purchase the products at McLane’s cost plus an agreed upon percentage, reduced by any promotional allowances and volume rebates offered by manufacturers and McLane. In addition, we receive per store service allowances from McLane which are amortized over the remaining term of the agreement, which expires in October 2007. We purchase the balance of our merchandise from a variety of other distributors under contract terms of up to four years. We do not have written contracts with a number of these vendors.
 
Gasoline Operations.    In fiscal 2002, our gasoline revenues were 59.0% of total revenues. The following table highlights certain information regarding our gasoline operations for the last five fiscal years:
 
    
Fiscal Year Ending
  
    
Sept. 26, 2002
     
Sept. 27, 2001
     
Sept. 28, 2000
     
Sept. 30, 1999
     
Sept. 24, 1998
  
Gasoline sales (in millions)
   
$
1,470.7
 
   
$
1,652.7
 
   
$
1,497.7
 
   
$
923.8
 
   
$
510.0
 
Gasoline gallons sold (in millions)
   
 
1,171.9
 
   
 
1,142.4
 
   
 
1,062.4
 
   
 
855.7
 
   
 
466.8
 
Average gallons sold per store (in thousands)
   
 
924.2
 
   
 
890.4
 
   
 
856.9
 
   
 
834.8
 
   
 
603.9
 
Comparable store gallon growth
   
 
1.5
%
   
 
(3.8
)%
   
 
(2.4
)%
   
 
5.9
%
   
 
4.8
%
Average retail price per gallon
   
$
1.25
 
   
$
1.45
 
   
$
1.41
 
   
$
1.08
 
   
$
1.09
 
Average gross profit per gallon
   
$
0.104
 
   
$
0.125
 
   
$
0.132
 
   
$
0.123
 
   
$
0.134
 
Locations selling gasoline
   
 
1,253
 
   
 
1,286
 
   
 
1,267
 
   
 
1,152
 
   
 
884
 
Company-operated branded locations
   
 
950
 
   
 
997
 
   
 
997
 
   
 
851
 
   
 
667
 
Company-operated unbranded locations
   
 
291
 
   
 
277
 
   
 
253
 
   
 
279
 
   
 
192
 
Third-party locations (branded & unbranded)
   
 
12
 
   
 
12
 
   
 
17
 
   
 
22
 
   
 
25
 
Locations with pay-at-pump credit card readers
   
 
1,008
 
   
 
1,009
 
   
 
945
 
   
 
682
 
   
 
379
 
Locations with multi-product dispensers
   
 
1,119
 
   
 
1,129
 
   
 
1,085
 
   
 
945
 
   
 
697
 
 
The increase in average gallons sold per store in fiscal 2002 is primarily due to the 1.5% increase in comparable store gallon growth, the closure of 38 under performing stores and our continued efforts to remodel and upgrade our gasoline facilities. In fiscal 2002, the gasoline markets were volatile with domestic crude oil hitting a low in November 2001 of approximately $17 per barrel and highs in September 2002 of approximately $31 per barrel. Generally, we attempt to pass along wholesale gasoline cost changes to our customers through retail price changes. However, our ability to pass along wholesale cost changes is influenced by gasoline market conditions and the retail prices offered by our competitors. We make no assurances that significant volatility in gasoline wholesale prices will not negatively affect gasoline gross margins or demand for gasoline within our markets.
 
We purchase our gasoline from major oil companies and independent refiners. We operate a mix of branded and unbranded locations and we evaluate our gasoline offering on a local market level. Of the 1,253 stores that sold gasoline as of September 26, 2002, 959 (including third-party locations selling under these brands) or 76.5% were branded under the Amoco®, BP®, Chevron®, Citgo®, Shell®, Mobil® or Texaco® brand names. We purchase our branded gasoline and diesel fuel from major oil companies under supply agreements. The fuel is purchased at the stated rack price, or market price, quoted at each terminal. The initial terms of these supply agreements range from three to thirteen years and generally contain minimum annual purchase requirements as well as provisions for various payments to us based on volume of purchases and vendor allowances. We purchase the balance of our gasoline from a variety of independent fuel distributors. There are approximately 25 gasoline

2

Table of Contents
terminals in our operating areas, allowing us to choose from more than one distribution point for most of our stores. Our inventories of gasoline (both branded and unbranded) turn approximately every six days.
 
As of September 26, 2002, we owned the gasoline operations at 1,241 locations and at 12 locations had gasoline operations that were operated under third-party arrangements. At company-operated locations, we own the gasoline storage tanks, pumping equipment and canopies, and retain 100% of the gross profit received from gasoline sales. In fiscal 2002, these locations accounted for approximately 99% of total gallons sold. Under third-party arrangements, an independent gasoline distributor owns and maintains the gasoline storage tanks and pumping equipment at the site, prices the gasoline and pays us approximately 50% of the gross profit. In fiscal 2002, third-party locations accounted for approximately 1% of the total gallons we sold. We are phasing out third-party arrangements because our company-operated locations are more profitable.
 
Commission Revenue.    In fiscal 2002, our commission revenues represented 1.0% of our total revenue. Our commission revenue is derived from lottery ticket sales, money orders, car wash, public telephones, amusement and video gaming and other ancillary product and service offerings. This category is an important aspect of our merchandise operations because we believe it attracts new customers as well as provides additional services for existing customers. The following table highlights certain information regarding commissions and the sources of commissions from services for the last five fiscal years:
 
    
Fiscal Year Ending
  
    
Sept. 26, 2002
     
Sept. 27, 2001
     
Sept. 28, 2000
     
Sept. 30, 1999
     
Sept. 24, 1998
  
Commission revenue (in millions)
   
$
24.7
 
   
$
21.7
 
   
$
25.9
 
   
$
23.4
 
   
$
14.1
 
Average commission revenue per store (in thousands)
   
$
19.2
 
   
$
16.9
 
   
$
21.2
 
   
$
21.3
 
   
$
16.4
 
Commission revenue by category (as a percentage of total commission revenue):
                                             
Lottery ticket sales
   
 
37.2
%
   
 
32.0
%
   
 
29.1
%
   
 
26.9
%
   
 
39.3
%
Money orders
   
 
14.0
 
   
 
15.5
 
   
 
12.6
 
   
 
13.6
 
   
 
14.9
 
Car wash
   
 
11.6
 
   
 
14.5
 
   
 
10.2
 
   
 
8.0
 
   
 
1.7
 
Public telephones
   
 
8.5
 
   
 
11.0
 
   
 
11.1
 
   
 
12.3
 
   
 
13.3
 
Amusement and video gaming