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 JUNE 27, 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 AUGUST 12, 1996)
<PAGE>
THE PANTRY, INC.
FORM 10-Q
JUNE 27, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited).......................................................2
Consolidated Statements of Operations (Unaudited).............................................4
Consolidated Statements of Cash Flows (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 6. Exhibits and Reports on Form 8-K.............................................................14
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 28, June 27,
1995 1996
<S> <C> <C>
ASSETS
Current assets:
Cash $ 10,999 $ 5,728
Receivables 2,851 3,100
Inventories 12,286 13,134
Prepaid expenses 795 791
Income taxes receivable -- 392
Property held for sale 2,047 3,527
Deferred income taxes 1,304 1,304
-------- --------
Total current assets 30,282 27,976
-------- --------
Property and equipment, net 67,119 65,841
-------- --------
Other assets:
Goodwill, net 20,167 19,645
Deferred lease cost, net 416 378
Deferred financing cost, net 4,241 6,279
Environmental receivables, net 4,695 4,695
Other 800 449
-------- --------
Total other assets 30,319 31,446
-------- --------
$127,720 $125,263
======== ========
</TABLE>
2
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THE PANTRY, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 28, June 27,
1995 1996
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ 15 $ 15
Current maturities of capital lease obligations 327 327
Line of credit -- 2,585
Accounts payable:
Trade 12,779 18,224
Money orders 1,882 2,660
Accrued interest 5,143 1,502
Accrued compensation and related taxes 2,691 3,084
Income taxes payable 657 --
Other accrued taxes 3,424 1,739
Accrued insurance 3,300 3,642
Other accrued liabilities 825 769
--------- ---------
Total current liabilities 31,043 34,547
--------- ---------
Long-term debt 100,169 100,153
--------- ---------
Other non-current liabilities:
Environmental reserve 5,720 5,793
Deferred income taxes 1,193 1,193
Capital lease obligations 1,287 1,017
Employment obligations 2,294 2,223
Accrued dividends on preferred stock -- 1,820
Other 2,346 3,276
--------- ---------
Total other non-current liabilities 12,840 15,322
--------- ---------
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 June 27, 1996 -- --
Common stock, $.01 par value, 300,000 shares authorized;
100,000 issued and outstanding at September 28, 1994;
114,029 issued and outstanding at June 27, 1996 1 1
Additional paid in capital (10,110) (10,395)
Accumulated deficit (6,223) (14,365)
--------- ---------
(16,332) (24,759)
--------- ---------
$ 127,720 $ 125,263
========= =========
</TABLE>
3
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THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 29, June 27, June 29, June 27,
1995 1996 1995 1996
(13 weeks) (13 weeks) (39 weeks) (39 weeks)
<S> <C> <C> <C> <C>
Revenues:
Merchandise sales $ 49,410 $50,351 $137,464 $ 135,611
Gasoline sales 49,390 52,301 136,553 139,975
Commissions 1,078 998 3,465 3,019
--------- --------- --------- ---------
Total revenues 99,878 103,650 277,482 278,605
--------- --------- --------- ---------
Cost of sales:
Merchandise 32,077 34,196 89,896 91,007
Gasoline 43,757 45,617 118,590 121,886
--------- --------- --------- ---------
Total cost of sales 75,834 79,813 208,486 212,893
--------- --------- --------- ---------
Gross profit 24,044 23,837 68,996 65,712
--------- --------- --------- ---------
Operating expenses:
Store expenses 14,384 14,002 41,226 42,893
General and administrative expenses 4,432 5,363 13,406 14,615
Depreciation and amortization 2,353 2,333 7,090 6,874
--------- --------- --------- ---------
Total operating expenses 21,169 21,698 61,722 64,382
--------- --------- --------- ---------
Income from operations 2,875 2,139 7,274 1,330
--------- --------- --------- ---------
Other income (expense):
Interest (3,179) (2,604) (9,445) (8,906)
Miscellaneous 312 (347) 822 (138)
Acquisition due diligence cost (1,043) -- (1,043) --
--------- --------- --------- ---------
Total other expense (3,910) (2,951) (9,666) (9,044)
--------- --------- --------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change (1,035) (812) (2,392) (7,714)
Income tax benefit (expense) 210 (286) 549 1,392
--------- --------- --------- ---------
Net income (loss) before cumulative
effect of accounting change (825) (1,098) (1,843) (6,322)
Cumulative effect of change in accounting for
post-employment benefits (net of income
tax benefit of $640) -- -- (960) --
--------- --------- --------- ---------
Net income (loss) $ (825) $ (1,098) $ (2,803) $ (6,322)
========= ========= ========= =========
</TABLE>
4
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THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 29, June 27,
1995 1996
(39 weeks) (39 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (2,803) $(6,322)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Cumulative effect of accounting change 1,600 --
Depreciation and amortization 7,090 6,874
Change in deferred income taxes -- --
(Gain) loss on sale of property and equipment (57) 268
Reserves for environmental issues 4,206 73
Reserves for closed stores 140 285
Write-off of property held for sale -- 125
Amortization of deferred revenues (330) (1,011)
(Increase) decrease in:
Receivables (905) (249)
Inventories 775 (848)
Prepaid expenses (5) 4
Income taxes receivable (1,971) (392)
Environmental receivables (4,488) --
Other assets (195) 262
Increase (decrease) in:
Accounts payable - trade 2,515 3,756
Accounts payable - money orders 153 778
Accrued interest (2,551) (3,451)
Accrued compensation and related taxes (492) 393
Income taxes payable (407) (657)
Other accrued taxes (38) 4
Accrued insurance 361 342
Employment obligations (119) (71)
Other accrued liabilities (177) (246)
Other liabilities 1,435 1,831
------- -------
Net cash provided by (used in) operating activities 3,737 1,748
------- -------
</TABLE>
5
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THE PANTRY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 29, June 27,
1995 1996
(39 weeks) (39 weeks)
CASH FLOWS FROM INVESTING ACTIVITIES:
<S> <C> <C>
Additions to property held for sale (6,387) (3,362)
Additions to property and equipment (9,995) (5,447)
Proceeds from sale of property held for sale 6,642 1,385
Proceeds from sale of property and equipment 434 1,421
-------- --------
Net cash provided by (used in) investing activities (9,306) (6,003)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations (309) (270)
Principal payments on long-term debt (10) (16)
Proceeds from issuance of long-term debt -- --
Proceeds from line of credit, net -- 2,585
Net payments related to equity issue -- (285)
Other financing costs (290) (3,030)
-------- --------
Net cash provided by (used in) financing activities (609) (1,016)
-------- --------
Net increase (decrease) in cash (6,178) (5,271)
CASH AT BEGINNING OF PERIOD 15,327 10,999
-------- --------
CASH AT END OF PERIOD $ 9,149 $ 5,728
======== ========
</TABLE>
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
June 27, 1996 and for the comparative three month and nine 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.
Certain amounts in the fiscal 1995 consolidated financial statements have
been reclassified to conform to the current year presentation.
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, June 27,
1995 1996
Inventories at FIFO cost
Merchandise $ 13,779 $ 13,970
Gasoline 2,970 3,871
-------------- ------------
16,749 17,841
Less adjustment to LIFO cost
Merchandise (4,152) (4,231)
Gasoline (311) (476)
------------- -------------
Inventories at LIFO cost $ 12,286 $ 13,134
============== ============
3. The June 27, 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
$1,820,000 of preferred stock dividends in the nine months ended June 27,
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 June 27, 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 nine-month periods
ended June 27, 1996 (the fiscal 1996 third quarter and fiscal 1996 year to date
results) included 13 and 39 weeks, respectively, as did the three-month and
nine-month periods ended June 29, 1995 (the fiscal 1995 third 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 Nine Months Ended
June 29, June 27, Incr June 29, June 27, Incr
1995 1996 (Decr) 1995 1996 (Decr)
<S> <C> <C> <C> <C> <C> <C>
Total revenue $ 99,878 $103,650 3.8% $277,482 $278,605 0.4%
Total gross profit $ 24,044 $ 23,837 -0.9% $ 68,996 $ 65,712 -4.8%
Overall gross margin 24.1% 23.0% 24.9% 23.6%
MERCHANDISE OPERATIONS
Average store count 402 390 -3.0% 403 392 -2.7%
Sales $ 49,410 $ 50,351 1.9% $137,464 $135,611 -1.3%
Gross profit $ 17,333 $ 16,155 -6.8% $ 47,568 $ 44,604 -6.2%
Gross margin 35.1% 32.1% 34.6% 32.9%
Average sales per store $122,910 $129,105 5.0% $341,102 $345,946 1.4%
Average gross profit per store $ 43,117 $ 41,423 -3.9% $118,035 $113,786 -3.6%
Same store sales comparison -1.7% 4.2% -0.6% 0.9%
GASOLINE OPERATIONS
Average store count:
In-house gasoline stores 289 292 1.0% 289 292 1.0%
Third-party gasoline stores 71 67 -5.6% 72 68 -5.6%
Sales $49,390 $ 52,301 5.9% $136,553 $139,975 2.5%
Gallon sales 40,721 40,418 -0.7% 117,431 118,135 0.6%
Gross profit $ 5,633 $ 6,684 18.7% $ 17,963 $ 18,089 0.7%
Average retail price per gallon $ 1.21 $ 1.29 6.7% $ 1.16 $ 1.18 1.9%
Average gross profit per gallon $0.1383 $ 0.1654 19.5% $ 0.153 $ 0.1531 0.1%
Average gallons sold per store 113,429 112,585 -0.7% 324,395 328,153 1.2%
Average gross profit per store $15.691 $ 18,618 18.7% $ 49,622 $ 50,247 1.3%
Same store sales comparison -1.9% -5.0% 0.1% -4.1%
Commission income $ 1,078 $ 998 -7.4% $ 3,465 $ 3,019 -12.9%
Average commission income per store $ 2,682 $ 2,559 -4.6% $ 8,598 $ 7,702 -10.4%
Store expenses $14,384 $ 14,002 -2.7% $ 41,226 $ 42,893 4.0%
Store expenses as % of merchandise sales 29.1% 27.8% 30.0% 31.6%
General and administrative expenses $ 4,432 $ 5,363 21.0% $ 13,406 $ 14,615 9.0%
G&A expenses as % of merchandise sales 9.0% 10.7% 9.8% 10.8%
Income (loss) from operations $ 2,875 $ 2,139 -25.6% $ 7,274 $ 1,330 -81.7%
EBITDA $ 5,540 $ 4,125 -25.5% $ 15,186 $ 8,066 -46.9%
EBITDA Margin 5.5% 4.0% 5.5% 2.9%
Average EBITDA per store $13,781 $ 10,577 -23.3% $ 37,682 $ 20,577 -45.4%
Interest expense $ 3,179 $ 2,604 -18.1% $ 9,445 $ 8,906 -5.7%
EBITDA/Total interest 1.7x 1.6x -9.1% 1.6x 0.9x -43.7%
Net income (loss) $ (825) $ (1,098) -33.1% $ (2,803) $ (6,322) -125.5%
</TABLE>
8
<PAGE>
General
As of June 27, 1996, The Pantry, Inc. (the "Company") operated 390
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 359 Pantry stores, of which 285 in-house locations and 27 third-party
locations offer leading national brands including Amoco, British Petroleum (BP),
Citgo, Exxon and Texaco.
At the beginning of fiscal 1996, the Company began implementing a
comprehensive merchandising and marketing plan focusing on more aggressive
off-shelf merchandise displays, improved store appearance and customer service,
enhanced food and beverage programs and better inventory management. Components
of this plan included, among other things, lowering everyday retail cigarette
prices and changing its wholesale grocer. While the Company's new cigarette
pricing strategy resulted in first and second quarter decreases in cigarette
revenues and gross profits, management believes that this new pricing strategy
along with other components of the plan have begun to generate increases in
overall sales and customer count.
Results of Operations
REVENUES. Third quarter merchandise sales increased due to several
factors including (i) increases in cigarette sales volume and soft drink sales,
(ii) incremental sales from new merchandise programs and (iii) more favorable
weather in June 1996 than in June 1995, which was unusually rainy. These factors
more than offset sales declines due to the reduction in the Company's everyday
retail cigarette prices, the closure of all remaining branded fast food
operations during the first quarter of fiscal 1996 and lower store counts. Third
quarter merchandise same store sales increased 4.2%, the highest quarterly
increase since the first quarter of fiscal 1994. Year to date merchandise sales
decreased due to a combination of (i) lower store counts, (ii) the closure of
all remaining branded fast food operations during the first quarter of fiscal
1996, (iii) unfavorable weather (snow and ice) in the second quarter and (iv)
the impact of lower everyday retail cigarette prices, which was only partially
offset by volume increases in the first six months. Gasoline sales increased for
the third quarter as an increase in the average retail price per gallon more
than offset the decrease in the volume of gasoline sold. The higher average
retail price was reflective of the increased cost of gasoline and resulted in a
decrease in total sales volume and a decrease in same store gasoline sales
volume. Year to date gasoline sales increased due to increases in both the
average retail price and the volume of gasoline sold. The Company raised its
retail prices in response to increases in the Company's cost of gasoline. The
retail gasoline price increases along with the impact of unfavorable weather in
the second quarter led to the decrease in year to date same store sales volumes.
Year to date sales volume increased as the sales volume generated from the
fourteen new higher volume stores opened since the end of fiscal 1994 more than
offset the same store sales volume decrease and the volume lost from closing or
selling thirty underperforming stores during the same period (fifteen of which
sold gasoline).
GROSS PROFIT. Gross profit for the quarter and year to date decreased
from the comparable periods in fiscal 1995, as decreases in merchandise gross
profit for both periods more than offset increases in gasoline gross profit for
both periods. The decreases in merchandise gross profit resulted from decreases
in gross margin, primarily due to the decrease in the Company's everyday retail
price of cigarettes. Gasoline gross profit in the third quarter increased due to
an increase in the gross profit per gallon, which more than offset the slight
decrease in gasoline gallons sold. Year to date gasoline gross profit increased
due to the increase in gasoline gallons sold. Increases in gross profit per
gallon in the latter half of the second quarter and the entire third quarter
offset sharp and unusual declines in the gross profit per gallon in December
1995 and January 1996, when margins were 6.9 and 3.1 cents per gallon lower,
respectively, than in the comparable prior year periods.
STORE OPERATING EXPENSES. Store operating expenses for the quarter
decreased both in total dollars and as a percentage of merchandise sales due to
improved cost controls. Store operating expenses year to date increased both in
total dollars and as a percentage of merchandise sales. The increases in year to
date 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 1996, and (iii)
increased advertising costs in connection with the Company's new merchandising
and marketing programs.
9
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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased for the quarter and year to date both in total dollars and as
a percentage of merchandise sales. The increases were due primarily to charges
of $0.3 million and $0.9 million recorded in the second quarter and third
quarter, respectively, for severance benefits related to certain senior level
management changes. In addition, the Company experienced an increase in its
self-insured medical benefits expense in the third quarter due to more severe
claims.
INCOME FROM OPERATIONS. Income from operations for the three and nine
month periods ended June 27, 1996 decreased from the three and nine month
periods ended June 29, 1995 due principally to the decrease in gross profit
discussed above and the year to date increase in store operating expense and
quarterly and year to date increase in general and administrative expense noted
above.
INTEREST EXPENSE. Interest expense for the fiscal 1996 third quarter
and year to date decreased due to the reversal of accrued interest related to a
prior year federal income tax matter that was resolved in favor of the Company
during the third quarter. This non-recurring expense reduction was partially
offset by interest charges related to the increased use of the Company's line of
credit.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit for the third quarter
decreased due to lower pre-tax losses than for the comparable period in fiscal
1995 while the year to date income tax benefit increased due to higher pre-tax
losses than for the comparable period 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 third quarter
from $5.5 million to $4.1 million primarily as a result of the impact of the
$0.9 million of severance benefits discussed above. The year to date decrease in
EBITDA from $15.2 million to $8.1 million reflects the reduced gross profit and
higher store operating and general and administrative expenses 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 the Company's net cash flow from operations. Cash
provided by operating activities in the nine months ended June 27, 1996
decreased $2.0 million (53.2%) from the nine months ended June 29, 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 June 27, 1996, there were borrowings of $2.6
million outstanding under the $12.5 million working capital line of credit and
approximately $10.8 million of letters of credit were issued under the standby
letter of credit facility.
CAPITAL EXPENDITURES. Year to date 1996 capital expenditures total $8.8
million, comprised of $1.1 million for new store equipment, $4.3 million for
existing store improvements and another $3.4 million for new store land and
buildings (expected to be sold and leased back).
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 four stores in the
first nine months of fiscal 1996 and has another store under construction.
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
10
<PAGE>
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
Manhattan Capital Corporation ("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 (Pantry) ("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 45,172 shares of common stock and 10,299 shares of preferred stock
from MVF and 319 newly-issued shares of common stock and 75 shares of preferred
stock from the Company. 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.
SHAREHOLDERS' DEFICIT. The Company's shareholders' deficit was $24.8
million as of June 27, 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 subsequent 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 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 75% or the Company's USTs have been protected from
corrosion either through the
11
<PAGE>
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 79% 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 June 27, 1996, the Company is responsible for the remediation of
contamination at 55 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.
---------------------------------------
As previously reported, on November 30, 1995, the Company entered into
certain stock purchase and related agreements with FS Equity Partners III, L.P.,
a Delaware limited partnership ("FSEP III"), FS Equity Partners International,
L.P., a Delaware limited partnership ("FSEP International") (collectively with
FSEP III the "FS Group"), Chase Manhattan Capital Corporation ("Chase"),
Montrose Value Fund Limited Partnership ("MVF"), controlled by W. Clay Hamner
("Hamner"), Chairman of the Company's Board of Directors, and Wayne M. Rogers
("Rogers"), a member of the Company's Board of Directors, and Montrose Financial
No. 6 Limited Partnership (Pantry) ("MF No. 6") (collectively with MVF the
"Montrose Group"), controlled by Hamner, as a result of which the FS Group and
Chase acquired 39.9% and 12%, respectively, of the Company's stock, and the
Montrose Group retained 48.1 % of the Company's stock (the "Initial
Transaction"). On November 30 and December 1, 1995, the FS Group, Chase, the
Company, and the Montrose Group entered into related agreements, which called
for the FS Group and Chase to acquire substantially all of the remaining shares
of the Company's stock held by the Montrose Group, subject to certain
conditions, prior to May 1, 1996 (the "Subsequent Transaction").
In March, 1996, each of the FS Group and Chase advised the Montrose
Group, that they believed, among other things, that all the conditions to the
Subsequent Transaction had not been met and that each of the FS Group, certain
of its related entities, and Chase was therefore relieved of its obligations to
proceed with the purchase contemplated thereby. In April, 1996, the Montrose
Group brought suit against the FS Group, certain of its related
12
<PAGE>
entities, and Chase seeking to require their performance of the Subsequent
Transaction (the "Litigation"). In the Litigation, the Company was named a
nominal defendant. All of these matters have been more fully reported in the
Company's 8-K dated December 15, 1995, 10-K dated December 21, 1995, 10-Q dated
May 10, 1996, and 8-K dated July 16, 1996.
On July 16, 1996, the Montrose Group, Hamner and Rogers and the FS
Group, certain of its related entities, Chase and the Company entered into a
Settlement Agreement to resolve these disputes. Pursuant to the terms of that
agreement, at closing: (i) the FS Group and Chase will purchase all the Montrose
Group's stock in the Company; (ii) Hamner and Rogers will resign from the
Company's Board of Directors; (iii) Hamner's employment agreement with the
Company, which extended to December 31, 2000, at a current annual base salary of
$367,000, and all benefits thereunder, will be terminated in exchange for a
payment of $750,000 and Hamner's agreement, subject to certain exceptions, not
to compete with the Company for a period of three years; (iv) the parties,
including the Company, will exchange mutual releases and dismiss with prejudice
the Litigation. The Settlement Agreement also provides for a closing of the
purchases contemplated thereby no later than September 10, 1996 subject to
certain rights to extend that date to September 20, 1996. In the event the
closing does not occur as contemplated, the Settlement Agreement also provides
that the Montrose Group will have the option, for a period of 90 days, to
acquire the stock of the Company previously purchased by the FS Group and Chase
in the Initial Transaction.
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. As previously reported in the Company's 10-Q
dated May 10, 1996, and 8-K dated July 16, 1996, on April 12, 1996, Montrose
Value Fund Limited Partnership and Montrose Financial No. 6 Limited Partnership
(Pantry) (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 Manhattan Capital Corporation ("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 and,
among other things, seeks to enforce the terms of the Commitment to require
their performance of the Subsequent Transaction.
On July 16, 1996, the Montrose Group, Hamner and Rogers and the FS
Group, certain of its related entities, Chase and the Company entered into a
Settlement Agreement to resolve these disputes. Pursuant to the terms of that
agreement, at closing: (i) the FS Group and Chase will purchase all the Montrose
Group's stock in the Company; (ii) Hamner and Rogers will resign from the
Company's Board of Directors; (iii) Hamner's employment agreement with the
Company, which extended to December 31, 2000, at a current annual base salary of
$367,000, and all benefits thereunder, will be terminated in exchange for a
payment of $750,000 and Hamner's agreement, subject to certain exceptions, not
to compete with the Company for a period of three years; (iv) the parties,
including the Company, will exchange mutual releases and dismiss with prejudice
the Litigation. The Settlement Agreement also provides for a closing of the
purchases contemplated thereby no later than September 10, 1996 subject to
certain rights to extend that date to September 20, 1996. In the event the
closing does not occur as contemplated, the Settlement Agreement also provides
that the Montrose Group will have the option, for a period of 90 days, to
acquire the stock of the Company previously purchased by the FS Group and Chase
in the Initial Transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Settlement Agreement dated as of July 16, 1996 among
the Montrose Group, Hamner and Rogers, the FS Group,
Chase and the Company (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission
on July 19, 1996).
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
A Form 8-K Report, dated June 19, 1996, relating to "Item 4
- Changes in Registrant's Certifying Accountant" was filed
by the Company on June 25, 1996.
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: August 12, 1996 By:/s/ Mark C. King
----------------
Mark C. King
Senior Vice President,
Chief Financial Officer and Secretary
(Authorized Officer and Principal
Financial Officer)
15
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