SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 28, 1996
Commission File Number 33-72574
THE PANTRY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1574463
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1801 DOUGLAS DRIVE, SANFORD, NORTH CAROLINA
(Address of principal executive offices)
27330
(Zip Code)
(919) 774-6700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 Par Value 114,029 shares
(Class) (Outstanding at May 10, 1996)
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THE PANTRY, INC.
Form 10-Q
March 28, 1996
Table of Contents
Part I - Financial Information
<TABLE>
<CAPTION>
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet................................................2
Consolidated Statement of Operations (Unaudited)..........................4
Consolidated Statement of Cashflow (Unaudited)............................5
Notes to Unaudited Consolidated Financial Statements......................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................8
Part II - Other Information
Item 1. Legal Proceedings........................................................14
Item 4. Result of Votes of Security Holders......................................14
Item 6. Exhibits and Reports on Form 8-K.........................................14
</TABLE>
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
September 28, March 28,
1995 1996
------------- -----------
(Audited) (Unaudited)
ASSETS
Current assets:
Cash $ 10,999 $ 5,626
Receivables 2,851 3,271
Inventories 12,286 12,085
Prepaid expenses 795 1,099
Income taxes receivable -- 654
Property held for sale 2,047 4,743
Deferred income taxes 1,304 1,304
------------- -----------
Total current assets 30,282 28,782
------------- -----------
Property and equipment, net 67,119 66,651
------------- -----------
Other assets:
Goodwill, net 20,167 19,819
Deferred lease cost, net 416 391
Deferred financing cost, net 4,241 6,605
Environmental receivables, net 4,695 4,695
Other 800 553
------------- -----------
Total other assets 30,319 32,063
------------- -----------
$127,720 $127,496
============ ============
2
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THE PANTRY, INC
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
<TABLE>
<CAPTION>
September 28, March 28,
1995 1996
------------- -----------
(Audited) (Unaudited)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 15 $ 15
Current maturities of capital lease obligations 327 327
Line of credit -- 5,640
Accounts payable:
Trade 12,779 14,317
Money orders 1,882 2,461
Accrued interest 5,143 5,111
Accrued compensation and related taxes 2,691 2,254
Income taxes payable 657 --
Other accrued taxes 3,424 1,493
Accrued insurance 3,300 3,607
Other accrued liabilities 825 570
------------- -----------
Total current liabilities 31,043 35,795
------------- -----------
Long-term debt 100,169 100,157
------------- -----------
Other non-current liabilities:
Environmental reserve 5,720 5,759
Deferred income taxes 1,193 1,193
Capital lease obligations 1,287 1,107
Employment obligations 2,294 2,295
Accrued dividends on preferred stock -- 1,040
Other 2,346 2,788
------------- -----------
Total other non-current liabilities 12,840 14,182
------------- -----------
Shareholders' deficit:
Preferred stock, $.01 par value, 150,000 shares authorized; none issued and
outstanding at September 28, 1995;
25,999 issued and outstanding at March 28, 1996 -- --
Common stock, $.01 par value, 300,000 shares authorized;
100,000 issued and outstanding at September 28, 1994;
214,029 issued, 114,029 outstanding at March 28, 1996 1 1
Additional paid in capital (10,110) (10,152)
Accumulated deficit (6,223) (12,487)
------------- -----------
(16,332) (22,638)
------------- -----------
$127,720 $127,496
============= ===========
</TABLE>
3
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THE PANTRY, INC
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ----------------------
March 30, March 28, March 30, March 28,
1995 1996 1995 1996
----------- ---------- ---------- ----------
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
<S> <C> <C> <C> <C>
Revenues:
Merchandise sales $ 42,583 $ 41,311 $ 88,054 $ 85,260
Gasoline sales 41,540 41,975 87,163 87,674
Commissions 1,157 992 2,387 2,021
----------- ---------- ---------- ----------
Total revenues 85,280 84,278 177,604 174,955
----------- ---------- ---------- ----------
Cost of sales:
Merchandise 27,874 27,892 57,819 56,811
Gasoline 36,349 36,695 74,833 76,269
----------- ---------- ---------- ----------
Total cost of sales 64,223 64,587 132,652 133,080
----------- ---------- ---------- ----------
Gross profit 21,057 19,691 44,952 41,875
----------- ---------- ---------- ----------
Operating expenses:
Store expenses 13,055 14,113 26,842 28,891
General and administrative expenses 4,613 4,562 8,974 9,252
Depreciation and amortization 2,372 2,375 4,737 4,541
----------- ---------- ---------- ----------
Total operating expenses 20,040 21,050 40,553 42,684
----------- ---------- ---------- ----------
Income from operations 1,017 (1,359) 4,399 (809)
----------- ---------- ---------- ----------
Other income (expense):
Interest (3,154) (3,238) (6,266) (6,302)
Miscellaneous 279 56 510 209
----------- ---------- ---------- ----------
Total other expense (2,875) (3,182) (5,756) (6,093)
----------- ---------- ---------- ----------
Income (loss) before income taxes and
cumulative effect of accounting change (1,858) (4,541) (1,357) (6,902)
Income tax benefit (expense) 468 1,144 339 1,678
----------- ---------- ---------- ----------
Net income (loss) before cumulative
effect of accounting change (1,390) (3,397) (1,018) (5,224)
Cumulative effect of change in accounting for
post-employment benefits (net of income
tax benefit of $640) -- -- (960) --
----------- ---------- ---------- ----------
Net income (loss) $ (1,390) $ (3,397) $ (1,978) $ (5,224)
=========== =========== =========== ==========
</TABLE>
4
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THE PANTRY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
---------------------
March 30, March 28,
1995 1996
---------- ----------
(26 weeks) (26 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $(1,978) $(5,224)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Cumulative effect of accounting change 1,600 --
Depreciation and amortization 4,737 4,541
Change in deferred income taxes -- --
(Gain) loss on sale of property and equipment (69) 303
Reserves for environmental issues 4,311 39
Reserves for closed stores 20 12
Amortization of deferred revenues (125) (819)
(Increase) decrease in:
Receivables (855) (420)
Inventories 731 201
Prepaid expenses (85) (304)
Income taxes receivable (1,703) (654)
Environmental receivables (4,608) --
Other assets (1,075) 239
Increase (decrease) in:
Accounts payable - trade 2,127 1,538
Accounts payable - money orders 12 579
Accrued interest 184 114
Accrued compensation and related taxes (641) (437)
Income taxes payable (407) (657)
Other accrued taxes (594) (1,931)
Accrued insurance 11 307
Employment obligations (106) 1
Other accrued liabilities (160) (401)
Other liabilities 1,384 1,328
---------- ----------
Net cash provided by (used in) operating activities 2,711 (1,645)
---------- ----------
</TABLE>
5
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THE PANTRY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
March 30, March 28,
1995 1996
-------------- -------------
(26 weeks) (26 weeks)
CASH FLOWS FROM INVESTING ACTIVITIES:
<S> <C> <C>
Additions to property held for sale (2,413) (2,996)
Additions to property and equipment (8,148) (4,620)
Proceeds from sale of property held for sale 960 300
Proceeds from sale of property and equipment 237 1,174
-------------- -------------
Net cash provided by (used in) investing activities (9,364) (6,142)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations (207) (180)
Principal payments on long-term debt (7) (12)
Proceeds from issuance of long-term debt -- --
Proceeds from line of credit, net -- 5,640
Net proceeds from equity issue -- (42)
Other financing costs (155) (2,992)
-------------- -------------
Net cash provided by (used in) financing activities (369) 2,414
-------------- ------------
Net increase (decrease) in cash (7,022) (5,373)
CASH AT BEGINNING OF PERIOD 15,327 10,999
-------------- ------------
CASH AT END OF PERIOD $ 8,305 $ 5,626
============== ============
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6
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THE PANTRY, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. The interim consolidated financial statements have been prepared from the
accounting records of The Pantry, Inc. (the Company) and all amounts at
March 28, 1996 and for the comparative three month and six month periods
are unaudited. Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. The
information furnished reflects all adjustments which are, in the opinion
of management, necessary for a fair statement of the results for the
interim periods presented, and which are of a normal, recurring nature.
2. Inventories are stated at the lower of last-in, first-out (LIFO) cost or
market. Inventories consisted of the following (in thousands):
September 28, March 28,
1995 1996
-------------- -----------
Inventories at FIFO cost
Merchandise $ 13,779 $ 13,065
Gasoline 2,970 3,483
-------------- -----------
16,749 16,548
Less adjustment to LIFO cost
Merchandise (4,152) (4,152)
Gasoline (311) (311)
-------------- -----------
Inventories at LIFO cost $ 12,286 $ 12,085
============== ===========
3. The March 28, 1996 environmental reserve of $5.8 million represents
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. These anticipated reimbursements of $4.7 million are recorded
as long-term environmental receivables.
4. Under the terms of the preferred stock, holders of the outstanding shares
are entitled to receive cumulative dividends in an amount equal to sixty
dollars ($60) per share per semi-annual calendar period plus an amount
determined by applying a 12% annual rate compounded semi-annually to any
accrued but unpaid dividend amount from the last day of the semi-annual
calendar period when such dividend accrues to the actual date of payment
of such dividend. In accordance with these terms, the Company has accrued
$1,040,000 of preferred stock dividends in the six months ended March 28,
1996.
5. During fiscal 1995, the Company adopted, retroactive to the beginning of
the fiscal year, Statement of Financial Accounting Standards No. 112
(SFAS No. 112), "Employer's Accounting for Postemployment Benefits" and
restated its first quarter results to reflect the adoption. SFAS No. 112
requires that employers expense the costs of postemployment benefits over
the service lives of employees if certain conditions are met. The
cumulative effect of adopting SFAS No. 112 as of the beginning of fiscal
1995 was an after tax charge of $1.0 million in the quarter ended
December 29, 1994.
6. The results of operations for the quarter ended March 28, 1996 are not
necessarily indicative of results to be expected for the full fiscal
year. The convenience store industry in the Company's marketing areas
generally experiences higher levels of revenues and profit margins during
the summer months than during the winter months. Historically, the
Company has achieved higher earnings in its third and, especially, fourth
quarters.
7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company's operations for the three-month and six-month periods
ended March 28, 1996 (the fiscal 1996 second quarter and fiscal 1996 year to
date results) included 13 and 26 weeks, respectively, as did the three-month and
six-month periods ended March 30, 1995 (the fiscal 1995 second quarter and
fiscal 1995 year to date results). Set forth below are selected unaudited
financial and operating data of the Company for the periods indicated (dollars
and gallons are in thousands, except per store and per gallon data):
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
March 30, March 28, Incr March 30, March 28, Incr
1995 1996 (Decr) 1995 1996 (Decr)
<S> <C> <C> <C> <C> <C> <C>
Total revenue $ 85,280 $ 84,278 -1.2% $ 177,604 $ 174,955 -1.5%
Total gross profit $ 21,057 $ 19,691 -6.5% $ 44,952 $ 41,875 -6.8%
Overall gross margin 24.7% 23.4% 25.3% 23.9%
MERCHANDISE OPERATIONS
Average store count 404 390 -3.5% 405 393 -3.0%
Sales $ 42,583 $ 41,311 -3.0% $ 88,054 $ 85,260 -3.2%
Gross profit $ 14,709 $ 13,419 -8.8% $ 30,235 $ 28,449 -5.9%
Gross margin 34.5% 32.5% 34.3% 33.4%
Average sales per store $ 105,403 $105,926 0.5% $ 217,417 $ 216,947 -0.2%
Average gross profit per store $ 36,408 $ 34,408 -5.5% $ 74,654 $ 72,389 -3.0%
Same store sales comparison -1.3% 0.0% -0.1% -1.0%
GASOLINE OPERATIONS
Average store count:
In-house gasoline stores 288 293 1.7% 288 292 1.4%
Third-party gasoline stores 71 67 -5.6% 72 68 -5.6%
Sales $ 41,540 $ 41,975 1.0% $ 87,163 $ 87,674 0.6%
Gallon sales 37,134 36,398 -2.0% 76,710 77,717 1.3%
Gross profit $ 5,191 $ 5,280 1.7% $ 12,330 $ 11,405 -7.5%
Average retail price per gallon $ 1.12 $ 1.15 3.1% $ 1.14 $ 1.13 -0.7%
Average gross profit per gallon $ 0.1398 $ 0.1451 3.8% $ 0.1607 $ 0.1468 -8.7%
Average gallons sold per store 103,437 101,387 -2.0% 211,906 215,881 1.9%
Average gross profit per store $ 14,460 $ 14,708 1.7% $ 34,061 $ 31,681 -7.0%
Same store sales comparison 0.5% -7.5% 1.2% -3.7%
Commission income $ 1,157 $ 992 -14.3% $ 2,387 $ 2,021 -15.3%
Average commission income per store $ 2,864 $ 2,544 -11.2% $ 5,894 $ 5,142 -12.7%
Store expenses $ 13,055 $ 14,113 8.1% $ 26,842 $ 28,891 7.6%
Store expenses as % of merchandise sales 30.7% 34.2% 30.5% 33.99%
General and administrative expenses $ 4,613 $ 4,562 -1.1% $ 8,974 $ 9,252 3.1%
G&A expenses as % of merchandise sales 10.8% 11.0% 10.2% 10.9%
Income (loss) from operations $ 1,017 $ (1,359) -233.6% $ 4,399 $ (809) -118.4%
EBITDA $ 3,668 $ 1,072 -70.8% $ 9,646 $ 3,941 -59.1%
EBITDA Margin 4.3% 1.3% 5.4% 2.3%
Average EBITDA per store $ 9,079 $ 2,749 -69.7% $ 23,817 $ 10,028 -57.9%
Interest expense $ 3,154 $ 3,238 2.7% $ 6,266 $ 6,302 0.6%
EBITDA/Total interest 1.2x 0.3x -71.5% 1.5x 0.6x -59.4%
Net income (loss) $ (1,390) $ (3,397) -144.4% $ (1,978) $ (5,224) -164.1%
</TABLE>
8
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General
As of March 28, 1996, The Pantry, Inc. (the "Company") operated 391
convenience stores under the name "The Pantry" throughout North and South
Carolina, western Kentucky, Tennessee 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. The Company
sells lottery products in its Kentucky and Indiana stores. Self-service gasoline
is sold at 360 Pantry stores, of which 313 offer leading national brands
including Amoco, British Petroleum (BP), Citgo, Exxon and Texaco.
During fiscal 1995, the Company developed a comprehensive marketing
plan focusing on improved store appearance and customer service, enhanced food
and beverage programs and better inventory management. The Company began
implementing this plan at the end of fiscal 1995 with the introduction of Bean
Street Coffee Company(TM), its new proprietary coffee program featuring freshly
ground and flavored coffees, in all of the Company's stores. Another component
of this plan, which was implemented in October 1995, involved offering more
competitive prices on cigarettes to respond to cigarette sales volume decreases
experienced in fiscal 1995. During the remainder of fiscal 1996 the Company
expects to introduce an expanded hot dog program featuring Oscar Mayer hot dogs
to enhance its midday food offerings and Parrot Ice brand frozen beverages to
enhance its beverage offerings. In addition, the Company changed its wholesale
grocer to McLane Company, Inc., which is the largest supplier to convenience
stores in the United States. Management believes that this change will enable
the Company to offer a broader selection of products.
Results of Operations
Revenues. Merchandise sales decreased for the quarter and year to date
due to a combination of the reduction in the Company's everyday retail cigarette
prices effective on the first day of fiscal 1996 and lower store counts. Second
quarter merchandise sales were also impacted by the closure of all remaining
branded fast food operations during the first quarter of fiscal 1996 and
unfavorable weather (snow and ice) in the second quarter. While the Company's
new cigarette pricing strategy, implemented in early October, has resulted in
decreases in cigarette revenues and gross profits, management believes that this
new pricing strategy will benefit the Company over the long run by generating an
increase in overall sales through increased cigarette sales volume and customer
count. In addition, the Company has taken advantage of available supplier
funding this fiscal year to further discount leading brands of cigarettes which
further reduced retail sales but without a corresponding decrease in gross
profit. Management believes the Company has made progress in this area as the
quarterly merchandise same store sales did not show a decline for the first time
since the fiscal 1995 first quarter. The sales decrease attributable to the new
cigarette pricing strategy was offset by sales increases in other categories
including coffee that resulted from the Company's new coffee program. Gasoline
sales increased for the second quarter as an increase in the average retail
price per gallon more than offset the decrease in the volume of gasoline sold.
During the second quarter, the Company's cost of gasoline rose by nine cents per
gallon. The consequential retail price increases along with the impact of
unfavorable weather in the period led to a decrease in same store gasoline sales
volume. Year to date gasoline sales increased slightly as an increase in the
volume of gasoline sold more than offset a one cent per gallon decrease in the
average retail price. Year to date sales volume increased as the sales volume
generated from the thirteen new higher volume stores opened since the end of
fiscal 1994 more than offset the volume lost from closing or selling
twenty-eight underperforming stores during the same period (ten of which sold
gasoline) and the year to date same store sales volume decrease.
Gross Profit. Gross profit for the quarter and six months ended March
28, 1996 decreased from the comparable periods in fiscal 1995, reflecting
decreases in merchandise gross profit for both periods and a year to date
decrease in gasoline gross profit. The decreases in merchandise gross profit
resulted from decreases both in sales, as discussed above, and gross margin,
primarily due to the decrease in the Company's everyday retail price of
cigarettes. Gasoline gross profit in the second quarter increased due to an
increase in the gross profit per gallon, which more than offset the decrease in
gasoline gallons sold. The increase in gross profit per gallon resulted from the
Company's effort to pass along cost increases. The resulting gross profit per
gallon in the second quarter of fiscal 1996 was higher than the gross profit per
gallon in the second quarter of fiscal 1995 with the positive variance over the
prior year's quarter concentrated in February and March. Year to date gasoline
gross profit decreased due to a decrease in the gross profit per gallon, which
more than offset the increase in gasoline gallons sold. The primary reason for
the decrease in the year to date gross profit were sharp and unusual declines in
the gross profit per gallon in December 1995 and January 1996,
9
<PAGE>
when margins were 6.9 and 3.1 cents per gallon lower, respectively, than in the
prior year. Management believes this decrease was experienced throughout the
industry.
Store Operating Expenses. Store operating expenses for the quarter and
year to date increased over the same periods in fiscal 1995, both in total
dollars and as a percentage of merchandise sales. The increases in store
operating expenses were attributable primarily to (i) higher environmental
clean-up expense than in the comparable fiscal 1995 period (which reflected a
non-recurring reduction of $0.7 million recognized in the second quarter of
fiscal 1995), (ii) higher real estate lease expense, which reflects the leases
associated with new stores opened in fiscal 1995, and (iii) increased
advertising costs to promote the introduction of the Company's new coffee
program and to increase in-store point of sale advertising. The Company has
experienced an increase in its average hourly wage for store employees of
approximately twenty-five cents per hour, the effect of which has been offset by
the decrease in store count and the closure of its branded fast food operations.
General and Administrative Expenses. General and administrative
expenses decreased for the quarter in total dollars but increased as a
percentage of merchandise sales. The total dollar decrease was due primarily to
a decrease in medical benefits expense. The Company also experienced a decrease
in incentive-based compensation which was offset by a $0.3 million charge
recorded in March for severance benefits related to certain senior level
management changes. Year to date general and administrative expenses increased
both in total dollars and as a percentage of merchandise sales. The increase was
due primarily to an increase in employment expense, primarily employee moving
expense and expenses related to the Company's annual convention, which was held
in November 1995.
Income from Operations. Income from operations for the three and six
month periods ended March 28, 1996 decreased from the three and six month
periods ended March 30, 1995 due principally to the decrease in gross profit
discussed and the increases in store operating and general and administrative
expenses noted above.
Interest Expense. Interest expense for the fiscal 1996 second quarter
and year to date increased due to increased use of the Company's line of credit.
Income Tax Expense (Benefit). Income tax benefit for the second quarter
and year to date increased due to higher pre-tax losses than for the comparable
periods in fiscal 1995.
Cumulative Effect of Accounting Change. During fiscal 1995, the Company
adopted, retroactive to the beginning of the fiscal year SFAS No. 112 and
restated its first quarter results to reflect the adoption. The cumulative
effect of adopting SFAS No. 112 as of the beginning of fiscal 1995 was an after
tax charge of $1.0 million in the quarter ended December 29, 1994.
Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA"). EBITDA represents net income (loss) before interest expense, income
tax (expense) benefit, depreciation and amortization, cumulative effect of
accounting change and extraordinary item. EBITDA decreased for the second
quarter and year to date primarily as a result of the decrease in income from
operations 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. Currently, capital expenditures
represent the primary use of Company funds. Cash provided by operating
activities in the six months ended March 28, 1996 decreased $4.4 million
(160.7%) from the six months ended March 30, 1995. The primary reason for the
decrease was the increase in the Company's net loss due to the factors
previously discussed.
Line and Letter of Credit Facility. To supplement cash on hand and cash
provided by operating activities, the Company has a $25 million credit facility,
which will expire on January 31, 1997 consisting of a $12.5 million working
capital line of credit and a $12.5 million line of credit for issuance of
standby letters of credit to vendors, insurance companies, federal and state
regulatory agencies for self insurance of workers compensation and for other
letter of credit needs. As of March 28, 1996, there were borrowings of $5.6
million outstanding under the $12.5 million working capital line of credit and
approximately $7.7 million of letters of credit were issued under the standby
letter of credit facility.
Capital Expenditures. Year to date 1996 capital expenditures total $7.6
million, comprised of $0.8 million for new store equipment, $3.8 million for
existing store improvements and another $3.0 million for new store land and
buildings (expected to be sold and leased back).
10
<PAGE>
Store Expansion. Currently, the Company is funding its new store
expansion program from two sources. New store equipment is being funded
primarily from cash provided by operations while new store real estate is being
funded through a sale leaseback program. The Company opened three stores in the
first six months of fiscal 1996 and has another two stores under construction.
The estimated cost of building and opening a new store is approximately $1.3
million, including land, building, site improvements, exterior gasoline
equipment and interior fixtures and equipment. The average inventory investment
in a new store is approximately $50,000, including initial merchandise and
gasoline inventories. Historically, newly opened stores have become profitable
during the first four to nine months of operations. The Company may also expand
its store base by acquiring selected groups of convenience stores from other
operators.
Long-Term Debt. The Company's long-term debt consists primarily of $100
million of the Company's 12% Senior Notes due 2000 (the "Notes"). The interest
payments on the Notes are due May 15 and November 15. The Indenture, which
governs the Notes, contains restrictive covenants that affect the ability of the
Company to expand its business.
In connection with the transactions involving FS Equity Partners III,
L.P. and FS Equity International, L.P. (collectively, the "FS Funds") and Chase
Capital Partners ("Chase") (see below), a Supplemental Indenture was executed on
December 4, 1995 by the Company and IBJ Schroder Bank & Trust Company, as
Trustee under the Indenture. The Supplemental Indenture makes certain
conditional changes in the Indenture, including the following: (i) permitted
borrowings under Section 4.10(b) of the Indenture are increased from $25.0
million to $35.0 million and the purposes for which such borrowings can be used
is expanded; (ii) borrowings permitted under Section 4.10(d) of the Indenture
are increased from $5.0 million to $10.0 million, the purposes for which such
borrowings can be used are expanded to include capital expenditures generally
(rather than furniture, fixtures and equipment) and the restriction that all
such borrowings be non-recourse to the Company is removed; (iii) the time period
in which proceeds of Asset Sales (as defined in the Indenture) can be reinvested
is increased and the amount of Asset Sales for which no prepayment of the Notes
is required under Section 4.13 of the Indenture is increased to facilitate
potential sale/leaseback transactions; (iv) the limitations on Restricted
Payments (as defined in the Indenture) are modified to allow the Company to make
loans to employees to purchase Company stock and to allow the Company to
repurchase stock from employees when their employment with the Company
terminates; (v) the Company is required to own a minimum of 112 convenience
store properties at all times; and (vi) the interest rate payable on the Notes
will increase if a specified Consolidated Fixed Charge Coverage Ratio (as
defined in the Indenture) is not maintained until the required Consolidated
Fixed Charge Coverage Ratio is achieved. These modifications in the terms of the
Indenture do not become operative unless, on or before December 31, 1996, the
Company has issued Qualified Capital Stock (as defined in the Indenture) for at
least $22.6 million in cash, net of any payments to existing stockholders for
the purchase of capital stock of the Company.
Preferred and Common Stock. On November 30, 1995, Montrose Value Fund
Limited Partnership ("MVF") purchased all 45,172 shares of common stock formerly
owned by Truby G. Proctor, Jr., Frank E. Proctor and Lee-Moore Oil Company
(collectively, the "Proctor Group"). Montrose Financial No. 6 Limited
Partnership ("MF#6") and MVF then exchanged their 100,000 shares of common stock
for 100,000 new shares of common stock and 22,800 shares of preferred stock.
Chase then purchased from the Company 13,700 newly-issued shares of common stock
and 3,124 shares of preferred stock. The FS Funds then purchased from MVF 45,172
shares of common stock and 10,299 shares of preferred stock. As a result of
these transactions, the Company has now issued (i) 114,029 shares of common
stock, all of which are outstanding, and (ii) 25,999 shares of preferred stock,
all of which are outstanding. After fees, these transactions resulted in no net
proceeds to the Company.
Shareholders' Deficit. The Company's shareholders' deficit was $22.6
million as of March 28, 1996. This deficit is due to the accounting treatment
applied to a 1987 leveraged buyout of the Company's outstanding common stock,
which resulted in a debit to additional paid in capital of $17.1 million, along
with current year losses and dividend accruals related to the Company's
outstanding preferred stock.
Environmental Considerations. The United States Environmental
Protection Agency ("EPA"), state, and local regulatory agencies have adopted
various regulations governing underground petroleum storage tanks ("USTs") that
require the Company to make certain expenditures for compliance. 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
11
<PAGE>
damage resulting from releases. UST systems upgrading consists of: installing
and employing leak detection equipment and systems, upgrading UST systems for
corrosion protection and installing overfill/spill prevention devices.
Leak detection - The Company believes it is in full or substantial
compliance with the leak detection requirements applicable to its USTs.
Corrosion Protection - Corrosion protection equipment is required to be
installed by December 22, 1998. The Company began installing
non-corrosive fiberglass tanks and piping in 1982. The Company has a
comprehensive plan to replace or upgrade all its steel tanks by 1998.
In the Company's locations in coastal areas, which are more
environmentally sensitive, fiberglass tanks and piping will be
installed. In other areas, internal tank lining and cathodic protection
will be utilized to upgrade UST systems to 1998 standards.
Approximately 73% or 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.
Overfill/Spill Prevention - The 1988 EPA regulations require that all
UST sites have overfill/spill prevention devices by December 22, 1998.
The Company is systematically installing these devices on all
Company-owned UST systems to meet the regulations. The Company has
installed spill/overfill equipment for approximately 77% of its USTs.
The Company anticipates that it will meet the 1998 deadline for
installing corrosion protection and spill/overfill equipment for all of
its USTs and has budgeted approximately $2.5 million to $3.5 million of
capital expenditures for these purposes over the next three years.
Additional regulations or amendments to the existing UST regulations
could result in future revisions to the estimated upgrade compliance
and remediation costs outlined above.
All states in which the Company 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 essentially provide insurance coverage for the
cleanup of environmental damages caused by the operation of UST systems. The
coverage afforded by each state fund varies but generally provides up to $1
million for the cleanup of environmental contamination and most provide coverage
for third party liability. 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.
As of March 28, 1996, the Company is responsible for the remediation of
contamination at 58 sites. Other third parties are responsible for remediation
of contamination at another 13 sites. The Company has accrued $5.8 million for
estimated total future remediation costs at the sites for which it is
responsible. The Company anticipates that approximately $1.1 million of these
future remediation costs will not be reimbursed by state trust funds or covered
by private insurance. Of the remaining $4.7 million, the Company believes that
(i) approximately $4.5 million will be reimbursed from state trust funds based
on prior acceptance of sites for reimbursement or anticipated acceptance based
on date of discovery of the contamination and (ii) approximately $0.2 million
will be covered by insurance based on the prior acceptance of sites for such
coverage. The total expected reimbursement of $4.7 million is reflected in the
Company's long-term environmental receivables. Reimbursements from state trust
funds will be dependent upon the continued solvency of the various funds. These
estimates are based on consultants' and management's estimates of the cost of
remediation, tank removal, and litigation associated with all known contaminated
sites as a result of releases (e.g., overfills, spills and UST system leaks).
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 additional remediation costs, some or
all of which may not be eligible for reimbursement from state trust funds.
---------------------------------------
On November 30, 1995, the FS Funds and Chase acquired 39.9% and 12.0%,
respectively, of the Company's capital stock through a series of fundings
(collectively, the "Initial Funding") that included the purchase of common stock
from certain stockholders and the purchase of newly-issued common stock and
preferred stock from the Company. The FS Funds are private equity investment
partnerships with offices in Los Angeles and New York. Chase
12
<PAGE>
is a New York-based investment firm that is wholly-owned and funded by Chase
Capital Corporation. In conjunction with the Initial Funding, certain covenants
of the Indenture were amended.
The Initial Funding contemplated a further series of transactions
(collectively, the "Subsequent Funding") that, subject to the satisfaction of
certain conditions, called for the acquisition by certain investors of
additional shares of the capital stock of the Company. On December 1, 1995, the
FS Funds and Chase delivered a commitment (the "Commitment") to MVF and MF#6
(collectively, "The Montrose Group") which, among other things, called for the
FS Funds and Chase to acquire all shares of the Company's common stock and
preferred stock held by The Montrose Group at a price of $152.00 per share of
common stock and $1,000.00 per share of preferred stock or, alternatively, to
acquire shares of common stock and preferred stock from the Company to allow the
Company to repurchase shares of the Company's capital stock held by The Montrose
Group pursuant to an option to purchase all such shares granted by The Montrose
Group in favor of the Company. In addition. the Commitment called for the
purchase by the FS Funds and Chase of certain newly-issued shares of common
stock and preferred stock from the Company. The obligations of the FS Funds and
Chase under the Commitment were subject to the satisfaction of certain
conditions to the Subsequent Funding, including conditions set forth in the
Commitment, which included without limitation, the absence of a material adverse
change in the business, properties, prospects, financial condition and results
of operations of the Company and its subsidiaries prior to February 28, 1996 (a
"Material Adverse Change"). In March 1996, The Montrose Group was advised that,
among other things, as a result of a Material Adverse Change, all conditions to
the Subsequent Funding and to the Commitment had not been met and that each of
the FS Funds and Chase was therefore relieved of its obligations under the
Commitment. In April 1996, The Montrose Group brought suit against the FS Funds
and Chase, seeking, among other things, to enforce the terms of the Commitment.
In addition, the Company was named as a defendant in such action. For a
description of such litigation, see Item 1 - "Legal Proceedings" below. As of
May 1, 1996, no additional shares of the capital stock of the Company have been
acquired by either the FS Funds or Chase.
While no assurances can be given in this regard, management believes
that cash on hand, together with cash flow anticipated to be generated from
operations, short-term borrowing for seasonal working capital needs, sale and
leaseback programs, permitted borrowings by its Unrestricted Subsidiary and
proceeds from the issuance of additional equity will be adequate to fund the
Company's proposed store expansion program, its store facilities and upgrading
programs, its debt service requirements and the other operating requirements of
the Company in the foreseeable future.
13
<PAGE>
Part II - Other Information.
Item 1. Legal Proceedings. On April 12, 1996, Montrose Value Fund
Limited Partnership and Montrose Financial No. 6 Limited Partnership
(collectively, "The Montrose Group") filed a complaint (the "Complaint") in the
Superior Court in Durham County, North Carolina, against FS Equity Partners III,
L.P., FS Equity International, L.P. and certain of their affiliates (the "FS
Funds"), Chase Capital Partners ("Chase") and the Company. The Complaint
references the Commitment dated December 1, 1996 (the "Commitment") delivered by
the FS Funds and Chase to The Montrose Group. Among other things, the Commitment
called for the FS Funds and Chase to acquire all shares of the Company's common
stock and preferred stock held by The Montrose Group at a price of $152.00 per
share of common stock and $1,000.00 per share of preferred stock or,
alternatively, to acquire shares of common stock and preferred stock from the
Company to allow the Company to repurchase shares of the Company's capital stock
held by The Montrose Group pursuant to an option to purchase all such shares
granted by The Montrose Group in favor of the Company. In addition. the
Commitment called for the purchase by the FS Funds and Chase of certain
newly-issued shares of common stock and preferred stock from the Company. The
obligations of the FS Funds and Chase under the Commitment were subject to the
satisfaction of certain conditions to the Subsequent Funding, including
conditions set forth in the Commitment, which included without limitation, the
absence of a material adverse change in the business, properties, prospects,
financial condition and results of operations of the Company and its
subsidiaries prior to February 28, 1996 (a "Material Adverse Change"). In March
1996, The Montrose Group was advised that, among other things, as a result of a
Material Adverse Change, all conditions to the Subsequent Funding and to the
Commitment had not been met and that each of the FS Funds and Chase was
therefore relieved of its obligations under the Commitment
Item 4. Result of Votes of Security Holders.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE PANTRY, INC.
Date: May 10 1996 By:/s/ Mark C. King
Mark C. King
Senior Vice President,
Chief Financial Officer and Secretary
(Authorized Officer and Principal
Financial Officer)
15
<PAGE>
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