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  • 1. 1999 Annual ReportT H E PA N T R Y, I N C . THE RIGHT SELECTION FOR GROWTH

2. Region of Operations The Pantry, Inc. operates 1,274 stores throughout the Southeastern United States. Through its aggressive growth strategy, the Company is rapidly expanding its presence in its principal markets and moving into growing contiguous markets.SELECTED Highlights Fiscal Year Fiscal Year Fiscal Year199919981997 (dollars in thousands, except for per share information)Total revenues$1,678,870$984,884$427,393 Gross profit 370,828 233,35197,279 Depreciation and amortization 42,79827,642 9,504 Income from operations65,17831,84310,771 Interest expense41,28028,94613,039 Net income (loss)(1)14,000 4,673(975) Earnings per share(1): Basic $0.71 $ (0.18)$ (1.08) Diluted0.65 (0.16)(1.08) Comparable store sales growth: Merchandise 9.6%5.3% 8.5% Gasoline gallons5.9%4.8% 7.2% EBITDA(2) $ 107,976 $ 60,501$ 20,275 Store count, end of year1,215954 390 (1) Before extraordinary losses of $3,584 in 1999 and $7,998 in 1998. (2) Before merger integration costs of $1,016 in 1998. 3. OURCompany Total Revenues(in millions) $1,700 THE PANTRY, INC. IS THE LEADING CONVENIENCE STORE OPERATOR IN THE SOUTHEASTERN UNITED STATES AND1,360 THE SECOND LARGEST INDEPENDENTLY OPERATED CONVE- NIENCE STORE CHAIN IN THE COUNTRY. THE COMPANY1,020 CURRENTLY OPERATES 1,274 STORES IN SUBURBAN AREAS OF RAPIDLY GROWING MARKETS, COASTAL /RESORT AREAS 680 AND SMALLER TOWNS LOCATED IN FLORIDA, NORTH CAROLINA, SOUTH CAROLINA, GEORGIA, KENTUCKY, 340 INDIANA, TENNESSEE AND VIRGINIA. THE PANTRYS STORES OFFER A BROAD SELECTION OF0 MERCHANDISE, GASOLINE AND ANCILLARY SERVICES 96 97 98 99 DESIGNED TO APPEAL TO THE CONVENIENCE NEEDS OF ITS CUSTOMERS. Net Income (Loss)(in millions) HEADQUARTERED IN SANFORD, NORTH CAROLINA, THE $16 PANTRY, INC. BECAME A PUBLICLY TRADED COMPANY IN JUNE OF 1999. ITS COMMON STOCK TRADES ON THE12 NASDAQ STOCK MARKET UNDER THE SYMBOL PTRY.840-4-8 96 97 98 99 TABLE OF CONTENTS(before extraordinary losses) 1Our Company EBITDA(in millions)2Letter to Shareholders$1104Review of Operations 9Selected Financial Data90 11Managements Discussion and Analysis22Consolidated Balance Sheets70 24Consolidated Statements of Operations 50 25Consolidated Statements of Shareholders Equity (Deficit)26Consolidated Statements of Cash Flows30 27Notes to Consolidated Financial Statements44Independent Auditors Report10 44Market Data 96 97 98 99(before merger integration costs)T H E PA N T R Y, I N C . 1 4. LETTER TO Shareholders interest, taxes, depreciation and amortization (EBITDA) increased by 78.5% to $108.0 million, representing 6.4% of sales, versus $60.5 million, representing 6.1% of sales in 1998.Net income for the year, ended September 30, 1999, was $10.4 million compared to a net loss of $3.3 million last year. Earnings per dilutedSTRATEGIC GROWTH THROUGHTHE COMPANY ACHIEVED share, before extraordinary items, on a pro forma basis, were $0.72 in 1999 versus $0.27 in 1998.Our outstanding financial performance was a direct result of our focused growth strategy and initiatives to increase merchandise and gasoline sales. Merchandise sales rose 58.8% to $731.7 million, with merchandise same-store sales up 9.6% for the year. Gasoline sales increased by 81.1% to $923.8 million on a 5.9% gain in gasoline gallon same-store sales. There was a slight decrease in gross profit margins, from 34.0% in 1998 to 33.1% in 1999. The decline was a direct result of significant increases in the price of cigarettes this year. Peter J. Sodini President, Chief Executive Officer Executing the Strategy and Director Our IPO significantly improved our position in 1999 and enabled us to move forward withNineteen ninety-nine was an exceptional year promised growth. As a result of a strengthenedfor The Pantry. We achieved strategic growth bybalance sheet, the Company took advantagecompleting a series of major acquisitions andof industry fragmentation, completing thedelivered record financial results. In concludingacquisition of 297 stores, well over original plansour first fiscal year as a public company, weto acquire 150 stores.welcome you, our new shareholders, and We believe our selective acquisition strategy isproudly report that our performance, across-the- the right one for several reasons. It has allowedboard, exceeded the goals we had established at us to achieve rapid growth with minimal risk. Wethe time of our Initial Public Offering in June of have been able to acquire stores with a proven1999. Our financial successes and the expansion track record of high-volume sales and integrateof our operations reflect our ability to implement them into our profitable network of stores. ByThe Right Selection for Growth, which is both applying strengthened merchandising and man-a strategy for our business and the theme for agement techniques to newly acquired locations,this years annual report. we have been able to establish a solid base of revenue and cash flow within 60 days of takingStrong Financial Performance charge of new stores. Growth through acquisi-Total revenues for 1999 increased by 70.5% to $1.7 tion has also proven to be a low cost alternativebillion from $984.9 million in 1998. Earnings before to new store development. 5. With 1,274 stores now operating throughout theindex over the last ten years. ThisSoutheast, we have become the industry leader growth reflects a trend among cus-in our principal markets and the second largest tomers to place greater value onindependently owned convenience store chain convenience, as their lifestylesin the country. Rapid growth through acquisitionbecome increasingly fast-paced.has allowed us to gain greater market share inOur accomplishments over theFlorida, North Carolina, South Carolina andpast several years have uniquelyVirginia. It has also enabled us to expand intopositioned us to capitalize onfast growing contiguous markets such as Georgia.these positive industry dynamics.The Pantry also drove growth internally byGoing forward, we will continue to pursue anlaunching initiatives to increase sales and profit- aggressive growth strategy based on acquisition.ability. A key component of our strategy over We have already acquired over 60 stores during SUCCESSFUL ACQUISITIONS AND DELIVERED RECORD FINANCIAL RESULTSthe past few years has been to increase product the first quarter of 2000 and feel we are in aselection in all stores. In 1999, we offered astrong competitive position to take advantage ofgreater variety of merchandise, including a moreattractive opportunities in the future. There areextensive line of high-demand branded productsover 26,000 convenience stores operating in ourand high-margin impulse items. The introduc-principal markets and nearly 4,400 others in twotion of these goods positively impacted sales target, contiguous markets that we have identi-and is expected to enhance gross margins as fied. Our acquisition pipeline looks very prom-we go forward. We also increased gasoline sales ising and we have already identified strongby offering a wider variety of branded andpotential candidates. We expect to acquire aunbranded fuel. Our strategy of introducing total of 150 stores during fiscal 2000 as well asunbranded gasoline to market areas where lowbuild an additional ten stores.cost alternatives were underrepresented hasWe will also continue to emphasize the rightincreased sales and secured market share. Weselection of merchandise and gasoline thatbelieve one of our greatest strengths is our abil-has become a proven method for increasingity to identify consumer demands and prefer-customer traffic and raising sales. As we grow,ences across all of our markets.we anticipate even greater savings in our operat-Our progress in 1999 was made possible in parting expenses by leveraging our ever increasingby lowering overhead expenses. For the thirdsize, sales volumes and dominant market posi-consecutive year, we eliminated unnecessary tion to capture favorable purchasing agreementsexpenses, consolidated accounts and renegotiatedwith suppliers.purchase and service contracts, reducing costs byWe would like to acknowledge the contributionsnearly 200 basis points when measured as a per-and hard work of our dedicated employees andcentage of total revenues. We continued to investthank our customers and shareholders for theirin technology in terms of upgrading fueling loca-support throughout the year. With the righttions to Multiple Product Dispensers (MPD) andselection of acquisitions and the right selectionimproving in-store systems and communicationsof merchandise and gasoline, we are confidentnetwork capabilities. We intend to invest overthat our company will grow and continue to$12 million, to be used over a two year periodprovide value to our customers and shareholders.for these new management information systems,We anticipate another successful year and lookwhich will come on-line in fiscal 2000 and helpforward to reporting to you on our progress inus to achieve greater accuracy in our reportingthe future.and monitoring of inventory, sales and profits. Outlook for 2000We believe the opportunity for growth within theindustry remains strong. The convenience storeindustry is a $164 billion industry with a rate ofPeter J. Sodinigrowth nearly twice that of the consumer pricePresident, Chief Executive Officer and DirectorT H E PA N T R Y, I N C . 2-3 6. REVIEW OFOperationsAnother important aspect of The Pantrys same-The Right Selection of Merchandisestore growth strategy was in maintaining fullyWe believe today, the key to growth in thestocked stores. The Company filled its stores withcompetitive convenience store industry is in pre-nearly 25% more merchandise, on average, thansenting customers with the right selection ofits competitors.merchandise, which is a balance of a variety of ENHANCED MERCHANDISING STRATEGIES AND IMPROVEDproducts, staple brands and impulse purchaseSales growth was also driven through enhanceditems.