10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q/A

(Amendment No. 1)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 27, 2001

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

27330-1410

(Address of principal executive offices)

Registrant’s telephone number, including area code: (919) 774-6700

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	18,107,597 SHARES
(Class)	(Outstanding at February 4, 2002)

THE PANTRY, INC.

FORM 10-Q/A

(Amendment No. 1)

DECEMBER 27, 2001

TABLE OF CONTENTS

Subsequent to the issuance of its unaudited consolidated financial statements for the quarter ended December 27, 2001, the Company determined that its cash and cash equivalents and accounts payable balances were overstated. As a result, the Company has restated its balance sheet as of December 27, 2001 to appropriately reflect these balances. The principal effects of the restatement are discussed in Note 10.

	Page
Part I—Financial Information
Item 1.    Financial Statements
Consolidated Balance Sheets (As Restated)	3
Consolidated Statements of Operations	4
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	6
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.    Quantitative and Qualitative Disclosures About Market Risk	21
Part II—Other Information
Item 6.    Exhibits and Reports on Form 8-K	23

2

PART I-FINANCIAL INFORMATION.

Item 1.    Financial Statements.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

	September 27, 2001			December 27, 2001 (As Restated, See Note 10)
ASSETS
Current assets:
Cash and cash equivalents	$	50,611		$	13,851
Receivables (net of allowances for doubtful accounts of $146 at September 27, 2001 and $105 at December 27, 2001)		30,424			29,099
Inventories (Note 2)		81,687			74,149
Prepaid expenses		3,521			4,213
Property held for sale		1,644			1,584
Deferred income taxes		2,591			2,497
Total current assets		170,478			125,393
Property and equipment, net		470,678			459,556
Other assets:
Goodwill (Note 3)		277,665			277,658
Deferred financing cost (net of accumulated amortization of $6,584 at September 27, 2001 and $7,125 at December 27, 2001)		10,299			10,650
Environmental receivables (Note 4)		10,428			10,602
Other noncurrent assets		10,444			10,226
Total other assets		308,836			309,136
Total assets	$	949,992		$	894,085
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt (Note 5)	$	40,000		$	31,501
Current maturities of capital lease obligations		1,363			1,363
Accounts payable		94,169			80,007
Accrued interest		11,163			5,809
Accrued compensation and related taxes		12,514			10,034
Other accrued taxes		14,515			6,995
Accrued insurance		6,161			6,386
Other accrued liabilities (Note 6)		20,423			13,936
Total current liabilities		200,308			156,031
Long-term debt (Note 5)		504,175			493,998
Other liabilities:
Environmental reserves (Note 4)		12,207			12,348
Deferred income taxes		33,488			33,872
Deferred revenue		57,560			55,311
Capital lease obligations		14,020			13,781
Other noncurrent liabilities		17,093			16,622
Total other liabilities		134,368			131,934
Commitments and contingencies (Notes 4 and 5)
Shareholders’ equity (Notes 6 and 9):
Common stock, $.01 par value, 50,000,000 shares authorized; 18,114,737 issued and outstanding at September 27, 2001 and 18,107,597 at December 27, 2001		182			182
Additional paid-in capital		128,043			128,043
Shareholder loans		(837	)		(827	)
Accumulated other comprehensive deficit (net of deferred taxes of $2,781 at September 27, 2001 and $2,470 at December 27, 2001)		(4,283	)		(3,787	)
Accumulated deficit		(11,964	)		(11,489	)
Total shareholders’ equity		111,141			112,122
Total liabilities and shareholders’ equity	$	949,992		$	894,085

See Notes to Consolidated Financial Statements.

3

THE PANTRY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended
	December 28, 2000			December 27, 2001
	(13 weeks)			(13 weeks)
Revenues:
Merchandise sales	$	228,470		$	237,238
Gasoline sales		400,207			334,313
Commissions		5,566			5,822
Total revenues		634,243			577,373
Cost of sales:
Merchandise (Note 2)		150,908			159,925
Gasoline (Note 2)		364,390			301,969
Total cost of sales		515,298			461,894
Gross profit		118,945			115,479
Operating expenses:
Operating, general and administrative expenses		87,170			88,976
Depreciation and amortization (Note 3)		15,378			13,392
Total operating expenses		102,548			102,368
Income from operations		16,397			13,111
Other income (expense):
Interest expense (Notes 6 and 8)		(14,027	)		(12,343	)
Miscellaneous		1,004			25
Total other expense		(13,023	)		(12,318	)
Income before income taxes		3,374			793
Income tax expense		(1,467	)		(318	)
Net income	$	1,907		$	475
Earnings per share (Note 9):
Basic	$	0.11		$	0.03
Diluted	$	0.10		$	0.03

See Notes to Consolidated Financial Statements.

4

THE PANTRY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Three Months Ended
	December 28, 2000			December 27, 2001 (As Restated, See Note 10)
		(13 weeks)			(13 weeks)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,907		$	475
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		15,378			13,392
Provision for deferred income taxes		1,113			317
Loss on sale of property and equipment		275			92
Provision for closed stores		210			40
Fair market value change in non-qualifying derivatives		(29	)		(235	)
Changes in operating assets and liabilities, net of effects of acquisitions:
Receivables		1,619			1,151
Inventories		8,281			7,538
Prepaid expenses		(2,307	)		(757	)
Other noncurrent assets		590			40
Accounts payable		(11,862	)		(14,162	)
Other current liabilities and accrued expenses		(16,548	)		(20,509	)
Reserves for environmental expenses		(138	)		141
Other noncurrent liabilities		(490	)		(2,184	)
Net cash used in operating activities		(2,001	)		(14,661	)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property held for sale		(235	)		(230	)
Additions to property and equipment		(6,839	)		(2,802	)
Proceeds from sale of property held for sale		2,804			—
Proceeds from sale of property and equipment		424			729
Acquisitions of related businesses, net of cash acquired		(33,205	)		—
Net cash used in investing activities		(37,051	)		(2,303	)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments under capital leases		(237	)		(239	)
Principal repayments of long-term debt		(4,171	)		(18,676	)
Proceeds from issuance of long-term debt		26,000			—
Repayments of shareholder loans		—			10
Net proceeds from equity issues		(22	)		—
Other financing costs		—			(891	)
Net cash provided by (used in) financing activities		21,570			(19,796	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(17,482	)		(36,760	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		53,354			50,611
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	35,872		$	13,851
Cash paid (received) during the period:
Interest	$	19,093		$	17,932
Taxes	$	744		$	(66	)

See Notes to Consolidated Financial Statements.

5

THE PANTRY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—THE COMPANY AND RECENT DEVELOPMENTS

Unaudited Consolidated Financial Statements

The accompanying consolidated financial statements include the accounts of The Pantry, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. Transactions and balances of each of these wholly owned subsidiaries are immaterial to the consolidated financial statements.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated financial statements have been prepared from the accounting records of The Pantry, Inc. and its subsidiaries and all amounts at September 27, 2001 and December 27, 2001 and for the three months ended December 27, 2001 and December 28, 2000 are unaudited. References herein to “The Pantry” or “the Company” include all subsidiaries. Pursuant to Regulation S-X, certain information and note disclosures normally included in annual financial statements 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.

We suggest that these interim financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 27, 2001.

Our results of operations for the three months ended December 27, 2001 and December 28, 2000 are not necessarily indicative of results to be expected for the full fiscal year. Our results of operations and comparisons with prior and subsequent quarters are materially impacted by the results of operations of businesses acquired since September 28, 2000. These acquisitions have been accounted for under the purchase method. Furthermore, the convenience store industry in our marketing areas generally experiences higher levels of revenues and profit margins during the summer months than during the winter months. Also, we have historically achieved higher revenues and earnings in our third and fourth quarters.

We operate on a 52-53 week fiscal year ending on the last Thursday in September. Our 2002 fiscal year ends on September 26, 2002 and is a 52-week year. Fiscal 2001 was also a 52-week year.

The Pantry

As of December 27, 2001, we operated 1,318 convenience stores located in Florida (503), North Carolina (339), South Carolina (255), Georgia (57), Mississippi (56), Kentucky (40), Virginia (31), Indiana (15), Tennessee (14) and Louisiana (8). Our stores offer a broad selection of products and services designed to appeal to the convenience needs of our customers, including gasoline, car care products and services, tobacco products, beer, soft drinks, self-service fast food and beverages, publications, dairy products, groceries, health and beauty aids, money orders and other ancillary services. In our Florida, Georgia, Kentucky, Virginia, Louisiana and Indiana stores, we also sell lottery products. On January 9, 2002, South Carolina introduced a state-wide lottery; as of that date, we began selling lottery products in South Carolina. Self-service gasoline is sold at 1,280 locations, 1,001 of which sell gasoline under major oil company brand names including Amoco^®, BP^®, Chevron^®, Citgo^®, Mobil^®, Exxon^®, Shell^®, and Texaco^®.

6

THE PANTRY, INC.

NOTES TO FINANCIAL CONSOLIDATED STATEMENTS—(Continued)

Recently Adopted Accounting Standards

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, Business Combinations (“SFAS No. 141”) which establishes accounting and reporting standards for all business combinations initiated after June 30, 2001 and establishes specific criteria for the recognition of intangible assets separately from goodwill. SFAS No. 141 eliminates the pooling-of-interest method of accounting and requires all acquisitions consummated subsequent to June 30, 2001 to be accounted for under the purchase method. The adoption of SFAS No. 141 did not have a material impact on our results of operations and financial condition.

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, (“SFAS No. 142”) which addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 eliminates amortization of goodwill and other intangible assets that are determined to have an indefinite useful life and instead requires an impairment only approach. At adoption, any goodwill impairment loss will be recognized as the cumulative effect of a change in accounting principle. Subsequently, any impairment losses will be recognized as a component of income from operations. As of September 27, 2001, we had net goodwill of $277.7 million and incurred $9.7 million in goodwill amortization in the statement of operations for the year then ended.

As permitted we early adopted SFAS No. 142 effective September 28, 2001, which has resulted in the discontinuance of goodwill amortization during the first quarter of fiscal 2002. We will complete our initial assessment of the impairment using the requirements of SFAS No. 142 by the end of the second quarter of fiscal 2002. We do not believe a material impairment will be recognized upon completion of this initial assessment.

Recently Issued Accounting Standards

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, (“SFAS No. 143”) which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Adoption of SFAS No. 143 is required for fiscal years beginning after June 15, 2002, which would be our first quarter of fiscal 2003. We have not yet determined the impact, if any, on our results of operations and financial condition.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. (“SFAS No. 144”) This statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of and Accounting Principles Board No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and how the results of a discontinued operation are to be measured and presented. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, with earlier adoption encouraged. We do not anticipate that the adoption of SFAS No. 144 will have a material impact on our results of operations and financial condition.

7

THE PANTRY, INC.

NOTES TO FINANCIAL CONSOLIDATED STATEMENTS—(Continued)

NOTE 2—INVENTORIES

Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out method, except for gasoline inventories for which cost is determined using the weighted average cost method. Inventories consisted of the following (amounts in thousands):

	September 27, 2001			December 27, 2001
Inventories at FIFO cost:
Merchandise	$	73,861		$	72,567
Gasoline		21,765			16,202
		95,626			88,769
Less adjustment to LIFO cost:
Merchandise		(13,939	)		(14,620	)
Inventories at LIFO cost	$	81,687		$	74,149

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS—ADOPTION OF SFAS No. 142

Effective September 28, 2001, we adopted the provisions of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). As a result, our goodwill asset is no longer amortized but reviewed at least annually for impairment. Other intangible assets will continue to be amortized over their useful lives. We will complete our initial assessment of impairment using the requirements of SFAS No. 142 by the end of the second quarter of fiscal 2002. We do not believe a material impairment will be recognized upon completion of this initial assessment.

Other intangible assets consist of noncompete agreements with a carrying value of $7.7 million and $7.9 million at December 27, 2001 and September 27, 2001, respectively (net of accumulated amortization of $1.3 million and $1.1 million, respectively). Amortization expenses was $178 thousand and $130 thousand for the three months ended December 27, 2001 and December 28, 2000, respectively. The weighted average amortization period of all noncompete agreements is 27.8 years. Estimated amortization expense for each of the five years following September 27, 2001 and thereafter is: $725 thousand in 2002; $626 thousand in 2003; $428 thousand in 2004; $351 thousand in 2005; $305 thousand in 2006; and $5.5 million thereafter. Noncompete agreements are classified in other noncurrent assets in the accompanying unaudited consolidated balance sheets.

The following pro forma information presents a summary of consolidated results of operations as if we adopted the provisions of SFAS No. 142 at the beginning of the fiscal year for each of the periods presented (amounts in thousands, except per share data).

	Three Months Ended
	December 28, 2000		December 27, 2001
Net income	$	1,907	$	475
Goodwill amortization, net of tax effect of $771		1,451		—
Pro forma net income	$	3,358	$	475
Earnings per share—basic:
Net income	$	0.11	$	0.03
Goodwill amortization, net		0.08		—
Net income per share—basic	$	0.19	$	0.03

8

THE PANTRY, INC.

NOTES TO FINANCIAL CONSOLIDATED STATEMENTS—(Continued)

	Three Months Ended
	December 28, 2000		December 27, 2001
Earnings per share—diluted:
Net income	$	0.10	$	0.03
Goodwill amortization, net		0.08		—
Net income per share—diluted	$	0.18	$	0.03

NOTE 4—ENVIRONMENTAL LIABILITIES AND OTHER CONTINGENCIES

As of December 27, 2001, we were contingently liable for outstanding letters of credit in the amount of $14.4 million primarily related to several self-insured programs, regulatory requirements, and vendor contract terms. The letters of credit are not to be drawn against unless we default on the timely payment of related liabilities.

We are involved in certain legal actions arising in the normal course of business. In the opinion of management, based on a review of such legal proceedings, we believe the ultimate outcome of these actions will not have a material effect on the consolidated financial statements.

Environmental Liabilities and Contingencies

We are subject to various federal, state and local environmental laws. We make financial expenditures in order to comply with regulations governing underground storage tanks adopted by federal, state and local regulatory agencies. In particular, at the federal level, the Resource Conservation and Recovery Act of 1976, as amended, requires the EPA to establish a comprehensive regulatory program for the detection, prevention and cleanup of leaking underground storage tanks.

Federal and state regulations require us to provide and maintain evidence that we are taking financial responsibility for corrective action and compensating third parties in the event of a release from our underground storage tank systems. In order to comply with the applicable requirements, we maintain surety bonds in the aggregate amount of approximately $2.0 million in favor of state environmental agencies in the states of North Carolina, South Carolina, Georgia, Virginia, Tennessee, Indiana, Kentucky and Louisiana. We also rely upon the reimbursement provisions of applicable state trust funds. In Florida, we meet our financial responsibility requirements by state trust fund coverage through December 31, 1998, and meet such requirements thereafter through private commercial liability insurance. In Georgia, we meet our financial responsibility requirements by state trust fund coverage through December 29, 1999, and meet such requirements thereafter through private commercial liability insurance and a surety bond. In Mississippi, we meet our financial responsibility requirements through coverage under the state trust fund.

Regulations enacted by the EPA in 1988 established requirements for:

• installing underground storage tank systems;

• upgrading underground storage tank systems;

• taking corrective action in response to releases;

• closing underground storage tank systems;

• keeping appropriate records; and

• maintaining evidence of financial responsibility for taking corrective action and compensating third parties for bodily injury and property damage resulting from releases.

9

THE PANTRY, INC.

NOTES TO FINANCIAL CONSOLIDATED STATEMENTS—(Continued)

These regulations permit states to develop, administer and enforce their own regulatory programs, incorporating requirements which are at least as stringent as the federal standards. The Florida rules for 1998 upgrades are more stringent than the 1988 EPA regulations. We believe our facilities in Florida meet or exceed such rules. We believe all company-owned underground storage tank systems are in material compliance with these 1988 EPA regulations and all applicable state environmental regulations.

State Trust Funds.    All states in which we operate or have operated underground storage tank systems have established trust funds for the sharing, recovering and reimbursing of certain cleanup costs and liabilities incurred as a result of releases from underground storage tank systems. These trust funds, which essentially provide insurance coverage for the cleanup of environmental damages caused by the operation of underground storage tank systems, are funded by an underground storage tank registration fee and a tax on the wholesale purchase of motor fuels within each state. We have paid underground storage tank registration fees and gasoline taxes to each state where we operate to participate in these trust fund programs. We have filed claims and received reimbursement in North Carolina, South Carolina, Kentucky, Indiana, Georgia, Florida and Tennessee. We also have filed claims and received credit against our trust fund deductibles in Virginia. The coverage afforded by each state fund varies but generally provides up to $1.0 million per site or occurrence for the cleanup of environmental contamination, and most provide coverage for third-party liabilities. Costs for which we do not receive reimbursement include:

• the per-site deductible;

• costs incurred in connection with releases occurring or reported to trust funds prior to their inception;

• removal and disposal of underground storage tank systems; and

• costs incurred in connection with sites otherwise ineligible for reimbursement from the trust funds.

The trust funds generally require us to pay deductibles ranging from $5 thousand to $150 thousand per occurrence depending on the upgrade status of our underground storage tank system, the date the release is discovered/reported and the type of cost for which reimbursement is sought. The Florida trust fund will not cover releases first reported after December 31, 1998. We obtained private insurance coverage for remediation and third party claims arising out of releases reported after December 31, 1998. We believe that this coverage exceeds federal and Florida financial responsibility regulations. In Georgia, we opted not to participate in the state trust fund effective December 30, 1999. We obtained private insurance coverage for remediation and third party claims arising out of releases reported after December 29, 1999. We believe that this coverage exceeds federal and Georgia financial responsibility regulations. During the next five years, we may spend up to $1.7 million for remediation. In addition, we estimate that state trust funds established in our operating areas or other responsible third parties (including insurers) may spend up to $10.6 million on our behalf. To the extent those third parties do not pay for remediation as we anticipate, we will be obligated to make such payments. This could materially adversely affect our financial condition, results of operations and cash flows. Reimbursements from state trust funds will be dependent upon the continued maintenance and continued solvency of the various funds.

Several of the locations identified as contaminated are being remediated by third parties who have indemnified us as to responsibility for cleanup matters. Additionally, we are awaiting closure notices on several other locations that will release us from responsibility related to known contamination at those sites. These sites continue to be included in our environmental reserve until a final closure notice is received.

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THE PANTRY, INC.

NOTES TO FINANCIAL CONSOLIDATED STATEMENTS—(Continued)

NOTE 5—LONG-TERM DEBT

At September 27, 2001 and December 27, 2001, long-term debt consisted of the following (amounts in thousands):

	September 27, 2001			December 27, 2001
Senior subordinated notes payable; due October 15, 2007; interest payable semi-annually at 10.25%	$	200,000		$	200,000
Tranche A term loan; interest payable monthly at LIBOR plus 3.5%; principal due in quarterly installments through January 31, 2004		45,906			41,406
Tranche B term loan; interest payable monthly at LIBOR plus 4.0%; principal due in quarterly installments through January 31, 2006		178,079			177,605
Tranche C term loan; interest payable monthly at LIBOR plus 4.25%; principal due in quarterly installments through July 31, 2006		73,875			73,688
Acquisition term loan; interest payable monthly at LIBOR plus 3.5%; principal due in quarterly installments through January 31, 2004		45,500			32,000
Notes payable to McLane Company, Inc.; zero (0.0%) interest, with principal due in annual installments through February 26, 2003		593			593
Other notes payable; various interest rates and maturity dates		222			207
Total long-term debt		544,175			525,499
Less—current maturities		(40,000	)		(31,501	)
Long-term debt, net of current maturities	$	504,175		$	493,998

At December 27, 2001, our senior credit facility consists of a $45.0 million revolving credit facility available for working capital financing, general corporate purposes and issuing commercial and standby letters of credit and $390 million in term loans. The LIBOR associated with our senior credit facility resets monthly and as of December 27, 2001, was 2.08%.

As of December 27, 2001, there were outstanding letters of credit of $14.4 million issued under the revolving credit facility.

On November 7, 2001, we entered into an amendment to our senior credit facility that, among other things, modified financial covenants and increased the floating interest rate spread by 50 basis points as long as our consolidated pro forma leverage ratio is greater than 4.5:1. The floating interest rate spread will be reduced 25 basis points when the debt ratio is less than 4.5:1.

The remaining annual maturities of notes payable are as follows (amounts in thousands):

Year Ended September:
2002		21,324
2003		43,255
2004		52,912
2005		88,654
2006		119,354
Thereafter		200,000
	$	525,499

As of December 27, 2001, we were in compliance with all covenants and restrictions relating to all outstanding borrowings and substantially all of our net assets are restricted as to payment of dividends and other distributions.

11

THE PANTRY, INC.

NOTES TO FINANCIAL CONSOLIDATED STATEMENTS—(Continued)

NOTE 6—DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER COMPREHENSIVE INCOME

The Company enters into interest rate swap and collar agreements to modify the interest characteristics of its outstanding long-term debt and has designated each qualifying instrument as a cash flow hedge. The Company formally documents its hedge relationships, including identifying the hedge instruments and hedged items, as well as its risk management objectives and strategies for entering into the hedge transaction. At hedge inception, and at least quarterly thereafter, the Company assesses whether derivatives used to hedge transactions are highly effective in offsetting changes in the cash flow of the hedged item. The Company measures effectiveness by the ability of the interest rate swaps to offset cash flows associated with changes in the variable LIBOR rate associated with its term loan facilities using the hypothetical derivative method. To the extent the instruments are considered to be effective, changes in fair value are recorded as a component of other comprehensive income (loss). To the extent the instruments are considered ineffective, any changes in fair value relating to the ineffective portion are immediately recognized in earnings (interest expense). When it is determined that a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting, and any gains or losses on the derivative instrument are recognized in earnings. A reduction in interest expense of $235 thousand was recorded in the first quarter of fiscal 2002 for the mark-to-market adjustment of those instruments that do not qualify for hedge accounting.

The fair values of the Company’s interest rate swaps and collars are obtained from dealer quotes. These values represent the estimated amount the Company would receive or pay to terminate the agreement taking into consideration the difference between the contract rate of interest and rates currently quoted for agreements of similar terms and maturities. At December 27, 2001, other accrued liabilities and other noncurrent liabilities include derivative liabilities of $3.7 million and $6.5 million, respectively. At September 27, 2001, other accrued liabilities and other noncurrent liabilities include derivative liabilities of $4.8 million and $6.5 million, respectively.

The components of accumulated other comprehensive deficit, net of related taxes, are as follows (amounts in thousands):

	September 27, 2001			December 27, 2001
Cumulative effect of adoption of SFAS No. 133, net of taxes	$	(461	)	$	(461	)
Amortization reclassified into other comprehensive deficit, net of taxes		98			150
Unrealized losses on qualifying cash flow hedges, net of taxes		(3,920	)		(3,476	)
Accumulated other comprehensive deficit	$	(4,283	)	$	(3,787	)

The components of comprehensive income, net of related taxes, are as follows (amounts in thousands):

	Three Months Ended
	December 28, 2000		December 27, 2001
Net income	$	1,907	$	475
Amortization of cumulative effect		29		52
Unrealized gains on qualifying cash flow hedges		—		443
Comprehensive income	$	1,936	$	970

12

THE PANTRY, INC.

NOTES TO FINANCIAL CONSOLIDATED STATEMENTS—(Continued)

NOTE 7—RESTRUCTURING RESERVE

During fiscal 2001, we completed a plan designed to strengthen our organizational structure and reduce operating costs by centralizing corporate administrative functions. The plan included closing an administrative facility located in Jacksonville, Florida, and integrating key marketing, finance and administrative activities into our corporate headquarters located in Sanford, North Carolina.

As a result of these actions, the Company recorded pre-tax restructuring and other non-recurring charges of $4.8 million during fiscal 2001. At the beginning of fiscal 2002, the restructuring reserve included amounts related to employee termination benefits lease obligations and legal and other professional consultant fees. Employee termination benefits represent severance and outplacement benefits for 100 employees, 49 of which are in administrative positions and 51 are in managerial positions. Lease obligations represent remaining lease payments in excess of estimated sublease rental income for the Jacksonville facility. Substantially all remaining obligations as of December 27, 2001 will be expended by the end of fiscal 2003 (except for lease obligations which expire in fiscal 2005). Fiscal 2002 activity related to the remaining restructuring reserve was as follows (amounts in thousands):

	Restructuring reserve
	September 27, 2001		Cash Outlays		Non-cash Write-offs		December 27, 2001
Employee termination benefits	$	793	$	90	$	—	$	703
Lease buyout costs		603		143		—		460
Legal and other professional costs		149		95		—		54
Total restructuring reserve	$	1,545	$	328	$	—	$	1,217

NOTE 8—INTEREST EXPENSE

The components of interest expense are as follows (amounts in thousands):

	Three Months Ended
	December 28, 2000			December 27, 2001
Interest on long-term debt	$	13,471		$	10,255
Interest on capital lease obligations		431			484
Interest rate swap settlements		(44	)		1,859
Fair market value change in non-qualifying derivatives		161			(235	)
Miscellaneous		8			(20	)
	$	14,027		$	12,343

NOTE 9—EARNINGS PER SHARE

We compute earnings per share data in accordance with the requirements of SFAS No. 128, Earnings Per Share. Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding warrants and stock options using the ‘‘treasury stock’’ method.

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THE PANTRY, INC.

NOTES TO FINANCIAL CONSOLIDATED STATEMENTS—(Continued)

The following table reflects the calculation of basic and diluted earnings per share (amounts in thousands, except per share data):

	Three Months Ended
	December 28, 2000		December 27, 2001
Net income	$	1,907	$	475
Earnings per share—basic:
Weighted-average shares outstanding		18,111		18,109
Net income per share—basic	$	0.11	$	0.03
Earnings per share—diluted:
Weighted-average shares outstanding		18,111		18,109
Dilutive impact of options and warrants outstanding		800		10
Weighted-average shares and potential dilutive shares outstanding		18,911		18,119
Net income per share—diluted	$	0.10	$	0.03

Options and warrants to purchase shares of common stock that were not included in the computation of diluted earnings per share, because their inclusion would have been antidilutive, were 3.4 million and 369 thousand for the three months ended December 27, 2001 and December 28, 2000, respectively.

NOTE 10—RESTATEMENT

Subsequent to the issuance of its financial statements for the quarter ended December 27, 2001, the Company determined that its cash and cash equivalents and accounts payable balances were overstated by $8.0 million. As a result, the Company has restated its balance sheet as of December 27, 2001 to appropriately reflect these balances. A summary of the principal effects of the restatement is as follows (amounts in thousands):

	December 27, 2001
	As Previously Reported		As Restated
Unaudited Consolidated Balance Sheet:
Cash and cash equivalents	$	21,839	$	13,851
Total current assets		133,381		125,393
Total assets		902,073		894,085
Accounts payable		87,995		80,007
Total current liabilities		164,019		156,031
Total liabilities and shareholders’ equity		902,073		894,085

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Subsequent to the issuance of its unaudited consolidated financial statements for the quarter ended December 27, 2001, the Company determined that its cash and cash equivalents and accounts payable balances were overstated. As a result, the Company has restated its balance sheet as of December 27, 2001 to appropriately reflect these balances. The principle effects of the restatement are discussed in Note 10. The following discussion and analysis gives effect to the restatement.

The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, the Consolidated Financial Statements and accompanying notes. Additional discussion and analysis related to the Company is contained in our Annual Report on Form 10-K for the fiscal year ended September 27, 2001.

Introduction

The Pantry is the leading convenience store operator in the southeastern United States and the second largest independently operated convenience store chain in the United States. As of December 27, 2001, we operate 1,318 stores in 10 southeastern states under approximately two dozen banners including The Pantry®, Handy Way, Lil' Champ Food Store®, Quick Stop®, Zip Mart^®, Kangaroo^®, Fast Lane^®, Depot and Big K. We currently operate in selected markets in Florida (503), North Carolina (339), South Carolina (255), Georgia (57), Mississippi (56), Kentucky (40), Virginia (31), Indiana (15), Tennessee (14) and Louisiana (8). Our network of retail locations offers a broad selection of merchandise, gasoline and ancillary services designed to appeal to the convenience needs of our customers.

Total revenues for the first quarter of fiscal 2002 were $577.4 million compared to $634.2 million in the first quarter of fiscal 2001, a decrease of 9.0%. The revenue decline is primarily attributable to a 21.1% decrease in our average gasoline retail price per gallon. Merchandise revenue and gasoline gallon volume actually increased 3.8% and 6.0%, respectively.

Comparable store merchandise sales improved 1.4% and comparable store gasoline gallon volume improved 0.8%. We believe the comparable store volume improvements are primarily attributable to our efforts to remain competitively priced on key products and increased promotional activity to drive customer traffic. These improvements were realized despite a challenging economic environment and a significant drop in resort and coastal area traffic associated with changes in consumer behavior after the September 11, 2001 terrorists' attacks.

Our first quarter fiscal 2002 EBITDA was $26.5 million and net income was $475 thousand, or 3 cents per diluted share, compared to 10 cents per diluted share in the first quarter of fiscal 2001. Our earnings shortfall to the first quarter of fiscal 2001 is largely due to lower merchandise and gasoline margins. In the quarter, our margins and gross profit continued to be influenced by several factors, including a general economic recession, wholesale gasoline cost volatility and competitive pressures in selected markets. Throughout the current economic downturn and volatility in crude markets, we have focused our attention on those aspects of our business we can influence in an effort to position us for improved results as the business climate in the Southeast improves.

We continue to focus our attention on several key operating principles:

• the consistent execution of our core strategies, including focused attention on leveraging the quality of our growing retail network in terms of revenues, product costs and operating expenses;

• our research and investment in updating existing merchandise programs and introducing new ones;

• our continuous effort to sensibly apply technology in all areas of our business; and

• sensible store growth in existing and contiguous markets.

We believe our growing retail network, merchandise programs, purchasing leverage and in-store execution will allow us to improve comparable store sales and control store operating expenses as the economy improves. Regarding our fiscal year 2001 restructuring plan, the savings we are realizing from those cost reduction initiatives are in line with our expectations.

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In the current recessionary environment, we have continued to promote key merchandise categories, placing downward pressure on merchandise margins compared to the first quarter of fiscal 2001. We continue to maintain a fresh approach to convenience retailing and over the next several months, we plan to implement further refinements to our in-store merchandising and product selection. Over time, we believe these refinements coupled with our efforts to remain competitively priced on key product categories will positively impact comparable store merchandise sales and gross profit.

On the technology front, now that we have the core of our retail automation systems in place, we plan to roll out a checkout scanning system across our retail network in the later part of this fiscal year. We believe the benefits of scanning include enhanced store merchandising and more effective in-store promotions to improved inventory controls. We will continue to evaluate and invest in strategic technology-based initiatives designed to improve operating efficiencies, strengthen internal controls and promote our long-term financial objectives.

Given current market conditions, we have substantially reduced the pace of our acquisitions and expect to acquire only a few stores in fiscal 2002. However, this does not represent a change in our long-term strategic direction. When the environment is once again favorable, we plan to continue to sensibly acquire premium chains located in our existing and contiguous markets.

During the first quarter of fiscal 2002, we closed seven stores and opened one. Historically, the stores we close are under performing in terms of volume and profitability and, generally, we benefit from closing the locations by reducing direct overhead expenses and eliminating certain fixed costs.

Over the next twelve months, we plan to focus primarily on the operations side of our business with a renewed effort to enhance in-store merchandising. In this twelve month period, we anticipate reducing our average outstanding borrowings through scheduled principal payments and we plan to continue to seek ways to improve top-line growth and enhance long-term profitability.

Results of Operations

Three Months Ended December 27, 2001 Compared to the Three Months Ended December 28, 2000

Total Revenue.    Total revenue for the first quarter of fiscal 2002 was $577.4 million compared to $634.2 million for the first quarter of fiscal 2001, a decrease of $56.9 million or 9.0%. The decrease in total revenue is primarily attributable to a 31 cents per gallon or 21.1% decrease in our average gasoline retail price per gallon. This decrease was partially offset by comparable store increases in merchandise revenue and gasoline gallons of 1.4% and 0.8%, respectively, as well as the revenue from stores acquired or opened since December 28, 2000 of $16.5 million.

Merchandise Revenue.    Merchandise revenue for the first quarter of fiscal 2002 was $237.2 million compared to $228.5 million during the first quarter of fiscal 2001, an increase of $8.8 million or 3.8%. The increase is primarily attributable to the merchandise revenue from stores acquired or opened since December 28, 2000 of $3.7 million as well as a 1.4% increase in comparable store merchandise revenue compared to the three months ended December 28, 2000. The increase in comparable store merchandise revenue is primarily attributable to increased promotional activity and more aggressive pricing as well as an increase in our seasonal merchandise offerings.

Gasoline Revenue and Gallons.    Gasoline revenue for the first quarter of fiscal 2002 was $334.3 million compared to $400.2 million during the first quarter of fiscal 2001, a decrease of $65.9 million or 16.5%. The decrease in gasoline revenue is primarily attributable to the 31 cents per gallon, or 21.1% decrease in the average gasoline retail price per gallon. This decrease was partially offset by the gasoline revenue from stores acquired or opened since December 28, 2000 of $12.7 million and an 0.8% increase in comparable store gasoline gallon sales.

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In the first quarter of fiscal 2002, gasoline gallons sold were 287.9 million compared to 271.7 million during the first quarter of fiscal 2001, an increase of 16.2 million gallons or 6.0%. The increase is primarily attributable to the gasoline gallons sold by stores acquired or opened since December 28, 2000 of 11.1 million gallons and the comparable store gasoline gallon sales increase of 0.8% during the period.

Commission Revenue.    Commission revenue for the first quarter of fiscal 2002 was $5.8 million compared to $5.6 million during the first quarter of fiscal 2001, an increase of $256 thousand or 4.6%. The increase is primarily attributable to improvements in car wash, ATM and vending revenue.

Total Gross Profit.    Total gross profit for the first quarter of fiscal 2002 was $115.5 million compared to $118.9 million during the first quarter of fiscal 2001, a decrease of $3.5 million or 2.9%. The decrease in gross profit is primarily attributable to declines in gasoline gross profit per gallon and merchandise margin, partially offset by the profits from stores acquired or opened since December 28, 2000 of $2.5 million and the comparable store merchandise revenue and gasoline volume increases.

Merchandise Gross Profit and Margin.    Merchandise gross profit was $77.3 million for the first quarter of fiscal 2002 compared to $77.6 million for the first quarter of fiscal 2001, a decrease of $249 thousand or 0.3%. This decrease is primarily attributable to a 130 basis points decline in our merchandise margin to 32.6% for the first quarter of fiscal 2002 compared to 33.9% reported for the first quarter of fiscal 2001. The margin decrease is primarily due to heightened promotional activity and more aggressive retail pricing. Our first quarter merchandise margin of 32.6% was in line with the 32.5% margin we reported in the fourth quarter of fiscal 2001. The impact of the margin decline was partially offset by the profits from stores acquired or opened since December 28, 2000 of $1.3 million and the comparable store revenue increase.

Gasoline Gross Profit and Per Gallon Margin.    Gasoline gross profit was $32.3 million for the first quarter of fiscal 2002 compared to $35.8 million for the first quarter of fiscal 2001, a decrease of $3.5 million or 9.7%. This decrease is primarily attributable to a two cents per gallon decline in gasoline margin, partially offset by the profits from stores acquired or opened since December 28, 2000 of $1.2 million and the comparable store gallon increase. Gasoline gross profit per gallon was 11.2 cents in the first quarter of fiscal 2002 compared to 13.2 cents for the first quarter of fiscal 2001.

Operating, General and Administrative Expenses.    Operating, general and administrative expenses for the first quarter of fiscal 2002 totaled $89.0 million compared to $87.2 million for the first quarter of fiscal 2001, an increase of $1.8 million or 2.1%. The increase in operating, general and administrative expenses is primarily attributable to the operating and lease expenses associated with stores acquired or opened since December 28, 2000 of $1.8 million and increased insurance premiums. Despite these increases, we realized significant cost savings associated with our fiscal 2001 restructuring plan and other cost savings initiatives.

Income from Operations.    Income from operations totaled $13.1 million for the first quarter of fiscal 2002 compared to $16.4 million for the first quarter of fiscal 2001, a decrease of $3.3 million or 20.0%. The decrease is primarily attributable to the variances discussed above, partially offset by a $2.0 million decrease in depreciation and amortization primarily as a result of the adoption of SFAS No. 142. Pro forma 2001 first quarter income from operations, adjusted to exclude goodwill amortization, would have been $18.6 million.

EBITDA.    EBITDA represents income from operations before depreciation and amortization. EBITDA for the first quarter of fiscal 2002 totaled $26.5 million compared to EBITDA of $31.8 million during the first quarter of fiscal 2001, a decrease of $5.3 million or 16.6%. The decrease is attributable to the items discussed above.

EBITDA is not a measure of performance under accounting principles generally accepted in the United States of America, and should not be considered as a substitute for net income, cash flows from operating activities and other income or cash flow statement data, or as a measure of profitability or liquidity. We have included information concerning EBITDA as one measure of our cash flow and historical ability to service debt and thus we believe investors find this information useful. EBITDA as defined may not be comparable to similarly titled measures reported by other companies.

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Interest Expense.    Interest expense is primarily interest on the borrowings under our senior credit facility and senior subordinated notes. Interest expense for the first quarter of fiscal 2002 totaled $12.3 million compared to $14.0 million for the first quarter of fiscal 2001, a decrease of $1.7 million or 12.0%. The decrease in interest expense is primarily attributable to a general decline in interest rates.

Income Tax Expense.    We recorded income tax expense totaling $318 thousand for the first quarter of fiscal 2002 compared to income tax expense of $1.5 million for the first quarter of fiscal 2001. The decrease in income tax expense was primarily attributable to the decrease in income before income taxes and a lower effective tax rate. Due to the adoption of SFAS No. 142 and the elimination of nondeductible goodwill amortization expense, our effective tax rate was 40.0% for the first quarter of fiscal 2002 compared to 43.5% for the first quarter of fiscal 2001.

Net Income.    Net income for the first quarter of fiscal 2002 was $475 thousand compared to net income of $1.9 million for the first quarter of fiscal 2001. The net income decrease is attributable to the items discussed above.

Liquidity and Capital Resources

Cash Flows from Operations.    Due to the nature of our business, substantially all sales are for cash, and cash provided by operations is our primary source of liquidity. We rely primarily upon cash provided by operating activities, supplemented as necessary from time to time by borrowings under our senior credit facility, sale-leaseback transactions, asset dispositions and equity investments, to finance our operations, pay interest and debt amortization, and fund capital expenditures. Cash used by operating activities increased from $2.0 million for the first quarter of fiscal 2001 to $14.7 million for first quarter of fiscal 2002. We had $13.9 million of cash and cash equivalents on hand at December 27, 2001.

Capital Expenditures.    Capital expenditures (excluding all acquisitions) were approximately $3.0 million for the first quarter of fiscal 2002. Capital expenditures are primarily expenditures for existing store improvements, store equipment, new store development, information systems and expenditures to comply with regulatory statutes, including those related to environmental matters.

We finance substantially all capital expenditures and new store development through cash flow from operations, a sale-leaseback program or similar lease activity, vendor reimbursements and asset dispositions. Our sale-leaseback program includes the packaging of our owned convenience store real estate, both land and buildings, for sale to investors in return for their agreement to lease the property back to us under long-term leases. Generally, the leases are operating leases at market rates with terms of twenty years with four five-year renewal options. The lease payment is based on market rates applied to the cost of each respective property. We retain ownership of all personal property and gasoline marketing equipment. Our senior credit facility limits or caps the proceeds of sale-leasebacks that we can use to fund our operations or capital expenditures. We did not complete any sale-leasebacks under our sale-leaseback program during the first quarter of fiscal 2002. Vendor reimbursements primarily relate to oil-company payments to either enter into long-term supply agreements or to upgrade gasoline marketing equipment including canopies, gasoline dispensers and signs.

For the three months ended December 27, 2001, we received approximately $2.0 million from asset dispositions and reimbursements for capital improvements. Net capital expenditures for the first quarter of fiscal 2002 were $1.0 million. We anticipate that net capital expenditures for fiscal 2002 will be in the range of $25.0 to $27.5 million.

Long-Term Debt.    Our long-term debt consisted primarily of $200.0 million of senior subordinated notes and $324.7 million outstanding under our senior credit facility.

We have outstanding $200.0 million of 10 ¹/4% senior subordinated notes due 2007. Interest on the senior subordinated notes is due on October 15 and April 15 of each year.

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As of December 27, 2001, our senior credit facility consisted of a $45.0 million revolving credit facility for working capital financing, general corporate purposes and issuing commercial and standby letters of credit and $324.7 million in outstanding borrowings under term loans. As of February 4, 2002, we had $22.9 million available for borrowing or additional letters of credit under the credit facility.

During the first quarter of fiscal 2002, we executed an amendment to our senior credit facility that, among other things, modified financial covenants and increased the floating interest rate spread by 50 basis points as long as our consolidated pro forma leverage ratio is greater than 4.5:1. The floating interest rate spread will be reduced 25 basis points when the debt ratio is less than 4.5:1. The changes to financial covenants, among other things, relaxed our coverage and debt ratios but imposed tighter limits on capital expenditures and expenditures to acquire related businesses. Our net capital expenditures are limited to $27.5 million in fiscal 2002, $30.0 million in fiscal 2003, $32.5 million in fiscal 2004 and $35.0 million annually thereafter. In addition, the amendment limits acquisition expenditures to $3.0 million in fiscal 2002 and $15.0 million in fiscal 2003.

Cash Flows from Financing Activities.    For the first quarter of fiscal 2002, we used cash on hand to make principal repayments of $18.7 million and pay fees and expenses of $891 thousand related to our senior credit facility amendment.

Cash Requirements.    We believe that cash on hand, together with cash flow anticipated to be generated from operations, short-term borrowings for seasonal working capital needs and permitted borrowings under our credit facilities will be sufficient to enable us to satisfy anticipated cash requirements for operating, investing and financing activities, including debt service, for the next twelve months.

Shareholders’ Equity.    As of December 27, 2001, our shareholders’ equity totaled $112.1 million. The $981 thousand increase from September 27, 2001 is attributable to the net income for the period and the accumulated other comprehensive income related to our derivative instruments.

Environmental Considerations

We are required by federal and state regulations to maintain evidence of financial responsibility for taking corrective action and compensating third parties in the event of a release from our underground storage tank systems. In order to comply with this requirement, as of February 4, 2002, we maintain surety bonds in the aggregate amount of approximately $2.0 million in favor of state environmental agencies in the states of North Carolina, South Carolina, Georgia, Virginia, Tennessee, Indiana, Kentucky and Louisiana. We also rely on reimbursements from applicable state trust funds. In Florida and Georgia, we also meet such financial responsibility requirements through private commercial liability insurance. In Mississippi, we meet our financial responsibility requirements through coverage under the state trust fund.

All states in which we operate or have operated underground storage tank systems have established trust funds for the sharing, recovering, and reimbursing of certain cleanup costs and liabilities incurred as a result of releases from underground storage tank systems. These trust funds, which essentially provide insurance coverage for the cleanup of environmental damages caused by the operation of underground storage tank systems, are funded by an underground storage tank registration fee and a tax on the wholesale purchase of motor fuels within each state. We have paid underground storage tank registration fees and gasoline taxes to each state where we operate to participate in these programs and have filed claims and received reimbursement in North Carolina, South Carolina, Kentucky, Indiana, Georgia, Florida and Tennessee. We also have filed claims and received credit toward our trust fund deductibles in Virginia. The coverage afforded by each state fund varies but generally provides from up to $1.0 million per site or occurrence for the cleanup of environmental contamination, and most provide coverage for third party liabilities.

Costs for which we do not receive reimbursement include but are not limited to (i) the per-site deductible; (ii) costs incurred in connection with releases occurring or reported to trust funds prior to their inception; (iii) removal and disposal of underground storage tank systems; and (iv) costs incurred in connection with sites

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otherwise ineligible for reimbursement from the trust funds. The trust funds generally require us to pay deductibles ranging from $5 thousand to $150 thousand per occurrence depending on the upgrade status of our underground storage tank system, the date the release is discovered/reported and the type of cost for which reimbursement is sought. The Florida trust fund will not cover releases first reported after December 31, 1998. We meet Florida financial responsibility requirements for remediation and third party claims arising out of releases reported after December 31, 1998 through private commercial liability insurance. In Georgia, we meet our financial responsibility requirements by state trust fund coverage through December 29, 1999, and meet such requirements thereafter through private commercial liability insurance and a surety bond.

Environmental reserves of $12.3 million as of December 27, 2001 represent estimates for future expenditures for remediation, tank removal and litigation associated with 583 known contaminated sites as a result of releases and are based on current regulations, historical results and other factors. Although we can make no assurances, we anticipate that we will be reimbursed for a portion of these expenditures from state trust funds and private insurance.

As of December 27, 2001, amounts that are probable of reimbursement (based on our experience) from those sources total $10.6 million and are recorded as long-term environmental receivables. These receivables are expected to be collected within a period of twelve to eighteen months after the reimbursement claim has been submitted. In Florida, remediation of such contamination reported before January 1, 1999 will be performed by the state and we expect that substantially all of the costs will be paid by the state trust fund. We do have locations where the applicable trust fund does not cover a deductible or has a co-pay which may be less than the cost of such remediation. To the extent such third parties do not pay for remediation as we anticipate, we will be obligated to make such payments, which could materially adversely affect our financial condition and results of operations. Reimbursement from state trust funds will be dependent upon the maintenance and continued solvency of the various funds. Although we are not aware of releases or contamination at other locations where we currently operate or have operated stores, any such releases or contamination could require substantial remediation expenditures, some or all of which may not be eligible for reimbursement from state trust funds.

Several of our locations identified as contaminated are being cleaned up by third parties who have assumed responsibility for such clean up matters. Additionally, we are awaiting closure notices on several other locations which will release us from responsibility related to known contamination at those sites. These sites continue to be included in our environmental reserve until a final closure notice is received.

Recently Adopted Accounting Standards

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, Business Combinations (“SFAS No. 141”) which establishes accounting and reporting standards for all business combinations initiated after June 30, 2001 and establishes specific criteria for the recognition of intangible assets separately from goodwill. SFAS No. 141 eliminates the pooling-of-interest method of accounting and requires all acquisitions consummated subsequent to June 30, 2001 to be accounted for under the purchase method. The adoption of SFAS No. 141 did not have a material impact on our results of operations and financial condition.

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, (“SFAS No. 142”) which addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 eliminates amortization of goodwill and other intangible assets that are determined to have an indefinite useful life and instead requires an impairment only approach. At adoption, any goodwill impairment loss will be recognized as the cumulative effect of a change in accounting principle. Subsequently, any impairment losses will be recognized as a component of income from operations. As of September 27, 2001, we had net goodwill of $277.7 million and incurred $9.7 million in goodwill amortization in the statement of operations for the year then ended.

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As permitted we early adopted SFAS No. 142 effective September 28, 2001, which has resulted in the discontinuance of goodwill amortization during the first quarter of fiscal 2002. We will complete our initial assessment of the impairment using the requirements of SFAS No. 142 by the end of the second quarter of fiscal 2002. We do not believe a material impairment will be recognized upon completion of this initial assessment.

Recently Issued Accounting Standards

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, (“SFAS No. 143”) which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Adoption of SFAS No. 143 is required for fiscal years beginning after June 15, 2002, which would be our first quarter of fiscal 2003. We have not yet determined the impact, if any, on our results of operations and financial condition.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. (“SFAS No. 144”) This statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of and Accounting Principles Board No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and how the results of a discontinued operation are to be measured and presented. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, with earlier adoption encouraged. We do not anticipate that the adoption of SFAS No. 144 will have a material impact on our results of operations and financial condition.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Quantitative Disclosures.    We are exposed to market risks inherent in our financial instruments. These instruments arise from transactions entered into in the normal course of business and, in some cases, relate to our acquisitions of related businesses. We are subject to interest rate risk on our existing long-term debt and any future financing requirements. Our fixed rate debt consists primarily of outstanding balances on our senior subordinated notes and our variable rate debt relates to borrowings under our senior credit facility.

The following table presents the future principal cash flows and weighted-average interest rates based on rates in effect at December 27, 2001, on our existing long-term debt instruments. Fair values have been determined based on quoted market prices or discounted future cash flows based on our current incremental borrowing rates as of February 4, 2002.

Expected Maturity Date

as of December 27, 2001

(Dollars in thousands)

	Fiscal 2002			Fiscal 2003			Fiscal 2004			Fiscal 2005			Fiscal 2006			Thereafter			Total			Fair Value
Long-term debt	$	21,324		$	43,255		$	52,912		$	88,654		$	119,354		$	200,000		$	525,499		$	513,421
Weighted-average interest rate		9.09	%		8.82	%		8.14	%		8.42	%		9.34	%		10.25	%		8.86	%

In order to reduce our exposure to interest rate fluctuations, we have entered into interest rate swap arrangements in which we agree to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional amount. The interest rate differential is reflected as an adjustment to interest expense over the life of the swaps. Fixed rate swaps are used to reduce our risk of increased interest costs during periods of rising interest rates. At December 27, 2001, the interest rate on 72.5% of our debt was fixed by either the nature of the obligation or through the interest rate swap arrangements compared to 70.6% at December 28, 2000.

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The following table presents the notional principal amount, weighted average pay rate, weighted average receive rate and weighted average years to maturity on our interest rate swap contracts:

Interest Rate Swap Contracts

(Dollars in thousands)

	December 28, 2000			December 27, 2001
Notional principal amount	$	170,000		$	180,000
Weighted average pay rate		6.41	%		6.12	%
Weighted average receive rate		6.67	%		2.00	%
Weighted average years to maturity		1.86			1.62

Effective February 1, 2001, the Company entered into an interest rate collar arrangement covering a notional amount of $55.0 million. The interest rate collar agreement expires in February 2003, and has a cap rate of 5.70% and a floor rate of 5.03%. As of December 27, 2001, the fair value of our swap and collar agreements represented a liability of $10.1 million.

Qualitative Disclosures.    Our primary exposure relates to:

• interest rate risk on long-term and short-term borrowings;

• our ability to pay or refinance long-term borrowings at maturity at market rates;

• the impact of interest rate movements on our ability to meet interest expense requirements and exceed financial covenants; and

Ÿ the impact of interest rate movements on our ability to obtain adequate financing to fund future acquisitions.

We manage interest rate risk on our outstanding long-term and short-term debt through our use of fixed and variable rate debt. We expect the interest rate swaps mentioned above will reduce our exposure to short-term interest rate fluctuations. While we cannot predict or manage our ability to refinance existing debt or the impact interest rate movements will have on our existing debt, management evaluates our financial position on an ongoing basis.

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THE PANTRY, INC.

PART II-OTHER INFORMATION.

Item 6.    Exhibits and Reports on Form 8-K.

(a) Exhibits

99.1 Risk Factors

(b) Reports on Form 8-K

None

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to be signed on its behalf by the undersigned thereunto duly authorized.

THE PANTRY, INC.
By:	/s/    JOSEPH J. DUNCAN
	Joseph J. Duncan Vice President Corporate Controller and Assistant Secretary (Authorized Officer and Principal Financial Officer)
Date:  August 12, 2002

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EXHIBIT INDEX

Exhibit No.	Description of Document
99.1	Risk Factors.

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EX-99.1

EXHIBIT 99.1

RISK FACTORS

You should carefully consider the risks described below before making a decision to invest in our common stock and our senior subordinated notes. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our common stock and our senior subordinated notes could decline, and you may lose all or part of your investment.

Because Gasoline Sales Comprise A Substantial Portion of Our Revenues, Interruptions in The Supply of Gasoline or Increases in The Cost of Gasoline Could Adversely Affect Our Business

Gasoline profit margins have a significant impact on our earnings because gasoline revenue has averaged 60.3% of our total revenue over the past three fiscal years. Several factors beyond our control affect the volume of gasoline we sell and the gasoline profit margins we achieve:

• the supply and demand for gasoline

• geo-political factors that may disrupt supply or impact demand in world crude oil markets

• any volatility in the wholesale gasoline market

• the pricing policies of competitors in local markets

In addition, volatility in the cost of gasoline could adversely affect the demand for gasoline and our business, financial condition or results of operations if gasoline sales volume is reduced as a result. We face this particular risk because:

• higher gasoline retail prices may impact customer demand and gasoline gallon volume

• we typically have no more than a seven-day supply of gasoline

• our gasoline contracts do not guarantee an uninterrupted, unlimited supply of gasoline in the event of a shortage

• the supply of gasoline for our unbranded locations could be adversely impacted in the event of a shortage

Reductions in volume of gasoline sold or our gasoline profit margins could have a material adverse effect on our results of operations. In addition, because gasoline sales generate customer traffic to our stores, decreases in gasoline sales could impact merchandise sales.

Our Growth and Operating Results Could Suffer If We are Unable to Identify and Acquire Suitable Companies, Obtain Financing or Integrate Acquired Stores or If We Discover Previously Undisclosed Liabilities Associated With Our Acquired Stores

An important part of our historical growth strategy has been to acquire other convenience stores that complement our existing stores or broaden our geographic presence. From April 1997 through December 2001, we acquired 1,159 convenience stores in more than 40 transactions. Given overall market conditions, currently we have substantially reduced the pace of our acquisitions and expect to acquire only a few stores in fiscal 2002. However, this does not represent a change in our long-term strategic direction. When the environment is once again favorable, we plan to continue to sensibly acquire premium chains located in our existing and contiguous markets.

While our acquisition pace may have slowed, we expect to continue our growth strategy through acquisitions which, by their nature, involve risks that could cause our actual growth or operating results to differ compared to our expectations or the expectations of security analysts. For example:

• Our senior credit facility limits our expenditures to acquire stores to $3.0 million in fiscal 2002 and $15.0 million in 2003.

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• We may not be able to identify suitable acquisition candidates or acquire additional convenience stores on favorable terms.

• Competition for suitable acquisition candidates may increase and could result in decreased availability or increased price for suitable acquisition candidates. In addition, it is difficult to anticipate the timing and availability of acquisition candidates.

• During the acquisition process we may fail or be unable to discover some of the liabilities of companies or businesses which we acquire.

• We may not be able to obtain the capital necessary, on favorable terms or at all, to finance our potential acquisitions.

• We may fail to successfully integrate or manage acquired convenience stores.

• Acquired convenience stores may not perform as we expect or we may not be able to obtain the cost savings and financial improvements we anticipate.

The Large Amount of Our Total Outstanding Debt and Our Obligation to Service That Debt and Meet The Related Financial Covenants Could Divert Necessary Funds from Operations, Limit Our Ability to Obtain Financing For Future Needs, Expose Us to Interest Rate Risks and Expose Us to Liquidity Risks With The Potential of Accelerated Principal Amortization

We are highly leveraged, which means that the amount of our outstanding debt is large compared to the net book value of our assets, and have substantial repayment obligations under our outstanding debt. As of December 27, 2001 we had:

• Total consolidated debt including capital lease obligations of approximately $540.6 million

• Shareholders’ equity of approximately $112.1 million

As of December 27, 2001, our availability under our senior credit facility for borrowing or issuing additional letters of credit was approximately $30.6 million.

Our senior credit facility contains numerous financial and operating covenants that limit our ability, and the ability of most of our subsidiaries, to engage in activities such as acquiring or disposing of assets, engaging in mergers or reorganizations, making investments or capital expenditures and paying dividends. These covenants require that we meet interest coverage, net worth and leverage tests. The indenture governing our senior subordinated notes and our senior credit facility permit us and our subsidiaries to incur or guarantee additional debt, subject to limitations.

Our level of debt and the limitations imposed on us by our debt agreements could have other important consequences to our stockholders, including the following:

• We will have to use a portion of our cash flow from operations for debt service, rather than for our operations or to implement our growth strategy

• We may not be able to obtain additional debt financing for future working capital, capital expenditures, acquisitions or other corporate purposes

• We are vulnerable to increases in interest rates because the debt under our bank credit facility is at a variable interest rate and although in the past we have on occasion entered into certain hedging instruments in an effort to manage our interest rate risk, we cannot assure you that we will continue to do so, on favorable terms or at all, in the future

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Restrictive Covenants in Our Debt Agreements May Restrict Our Ability to Implement Our Growth Strategy, Respond to Changes in Industry Conditions, Secure Additional Financing or Engage in Acquisitions

Restrictive covenants contained in our existing senior credit facility and indenture could limit our ability to finance future acquisitions, new locations and other expansion of our operations. Credit facilities entered into in the future likely will contain similar restrictive covenants. These covenants may require us to achieve specific financial ratios and to obtain lender consent prior to completing acquisitions. Any of these covenants could become more restrictive in the future. Our ability to respond to changing business conditions and to secure additional financing may be restricted by these covenants. We also may be prevented from engaging in transactions, including acquisitions which are important to our growth strategy. Any breach of these covenants could cause a default under our debt obligations and result in our debt becoming immediately due and payable which would adversely affect our business, financial condition and results of operations. For the twelve-month period ending September 27, 2001, we did not satisfy two financial covenants required by our senior credit facility. During the first quarter of fiscal 2002, we received a waiver from our senior credit group and executed an amendment to the senior credit facility that includes, among other things, a modification to financial covenants and certain increases in the floating interest rate.

If Our History of Losses Continues, We May be Unable to Complete Our Growth Strategy and Financing Plans

We have experienced losses during two out of our most recent four fiscal years. Our net losses were $3.3 million in fiscal 1998 and $2.7 million in fiscal 2001. In fiscal 1999, we had net income of $10.4 million and in fiscal 2000 we had net income of $14.0 million. We incurred interest expense of $41.3 million in fiscal 1999, $52.3 million in fiscal 2000 and $58.7 million in fiscal 2001. In fiscal 2001, we incurred unusual charges $9.0 million related to our fiscal 2001 restructuring plan ($4.8 million) and non-cash charges related to the change in fair value ($4.2 million) of certain interest rate derivative instruments. We also incurred an extraordinary loss of $3.6 million (net of taxes) in fiscal 1999, related to the early extinguishment of debt.

If we incur net losses in future periods, we may not be able to implement our growth strategy in accordance with our present plans. Continuation of our net losses may also require us to secure additional financing sooner than anticipated. Such financing may not be available in sufficient amounts, or on terms acceptable to us, and may dilute existing stockholders. If we do achieve profitability, we may not sustain or increase profitability in the future. This may, in turn, cause our stock price to decline.

We Have Grown Rapidly and Our Failure to Effectively Manage Our Growth and Realize Anticipated Efficiencies as A Result of Our Restructuring Plans and Acquisition Plans May Adversely Affect Our Business

We have grown from total revenue of $384.8 million in fiscal 1996 to $2.6 billion in fiscal 2001. Our ability to manage the growth of our operations will require us to continue to improve our operational, financial and human resource management information systems and our other internal systems and controls. We have recently completed our plan designed to strengthen our organizational structure and reduce our operating costs by centralizing corporate administrative functions. As part of this plan we closed an administrative facility located in Jacksonville, Florida, and integrated key marketing, finance and administrative activities into our corporate headquarters located in Sanford, North Carolina. In addition, during fiscal 2001 we achieved more efficient and streamlined operations through the merger of Lil’ Champ Food Stores, Inc. into The Pantry.

Failure to make adequate improvements to our systems and controls or to achieve the expected efficiencies of our recently completed plan may adversely affect our business, financial condition and results of operations.

In addition, our growth will increase our need to attract, develop, motivate and retain both our management and professional employees. The inability of our management to manage our growth effectively, or the inability of our employees to achieve anticipated performance or utilization levels, could have an adverse effect on our business, financial condition and results of operations.

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If We Are Unable to Pass Along Price Increases of Tobacco Products to Our Customers, Our Business Could Be Adversely Affected Because Tobacco Sales Comprise A Substantial Portion of Our Revenues

Sales of tobacco products have averaged approximately 13.9% of our total revenue over the past three fiscal years. National and local campaigns to discourage smoking in the United States, as well as increases in taxes on cigarettes and other tobacco products, may have an adverse effect on our sales of, and margins for, tobacco products. The consumer price index on tobacco products increased approximately 9% in fiscal 2001. In general, we have passed price increases on to our customers. However due to competitive pricing in our markets, we were unable to pass along all the cost increases we encountered in fiscal 2001.

Major cigarette manufacturers periodically offer monthly rebates to retailers and historically we have passed along these rebates to our customers. We cannot assure you that major cigarette manufacturers will continue to offer these rebates or that any resulting increase in prices to our customers will not have a material adverse effect on our cigarette sales and gross profit dollars. A reduction in the amount of cigarettes we are able to sell could adversely affect our business, financial condition and results of operations.

Violations of, or Changes to, Regulations Governing The Sale of Tobacco and Alcohol Could Adversely Affect Our Business

State laws regulate the sale of alcohol and tobacco products. A violation or change of these laws could adversely affect our business, financial condition and results of operations because state and local regulatory agencies have the power to approve, revoke, suspend or deny applications for, and renewals of, permits and licenses relating to the sale of these products or to seek other remedies.

We Are Subject to Extensive Environmental Regulation, and Increased Regulation or Our Failure to Comply With Existing Regulations Could Require Substantial Capital Expenditures or Adversely Affect Our Business

Our business is subject to extensive environmental requirements, particularly environmental laws regulating underground storage tanks. Compliance with these regulations may require significant capital expenditures.

Federal, state and local regulations governing underground storage tanks were phased in over a period ending in December 1998. These regulations required us to make expenditures for compliance with corrosion protection and leak detection requirements and required spill/overfill equipment by December 1998. We believe we are in compliance with the December 1998 upgrade requirements. Failure to comply with any environmental regulations or an increase in regulations could affect our business, financial condition and results of operations.

We May Incur Substantial Liabilities For Remediation of Environmental Contamination at Our Locations

Under various federal, state and local laws, ordinances and regulations, we may, as the owner or operator of our locations, be liable for the costs of removal or remediation of contamination at these or our former locations, whether or not we knew of, or were responsible for, the presence of such contamination. The failure to properly remediate such contamination may subject us to liability to third parties and may adversely affect our ability to sell or rent such property or to borrow money using such property as collateral. Additionally, persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at sites where they are located, whether or not such site is owned or operated by such person. Although we do not typically arrange for the treatment or disposal of hazardous substances, we may be deemed to have arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may be liable for removal or remediation costs, as well as other related costs, including governmental fines, and injuries to persons, property and natural resources.

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We estimate that our future expenditures for remediation of current locations net of reimbursements will be approximately $1.7 million for which reserves have been established on our financial statements. In addition, The Pantry estimates that up to $10.6 million may be expended for remediation on our behalf by state trust funds established in our operating areas or other responsible third parties including insurers. To the extent third parties do not pay for remediation as we anticipate, we will be obligated to make these payments, which could materially adversely affect our financial condition and results of operations. Reimbursements from state trust funds will be dependent on the continued viability of these funds.

We may incur additional substantial expenditures for remediation of contamination that has not been discovered at existing locations or locations which we may acquire in the future. We cannot assure you that we have identified all environmental liabilities at all of our current and former locations; that material environmental conditions not known to us do not exist; that future laws, ordinances or regulations will not impose material environmental liability on us; or that a material environmental condition does not otherwise exist as to any one or more of our locations.

Changes in Traffic Patterns and The Type, Number and Location of Competing Stores Could Result in The Loss of Customers and A Corresponding Decrease in Revenues for Affected Stores

The convenience store and retail gasoline industries are highly competitive and we may not be able to compete successfully. Changes in traffic patterns and the type, number and location of competing stores could result in the loss of customers and a corresponding decrease in revenues for affected stores. Major competitive factors include, among others, location, ease of access, gasoline brands, pricing, product and service selections, customer service, store appearance, cleanliness and safety. In addition, inflation, increased labor and benefit costs and the lack of availability of experienced management and hourly employees may adversely affect the profitability of the convenience store industry. Any or all of these factors could create heavy competitive pressures and have an adverse affect on our business, financial condition and results of operations.

We compete with numerous retail formats including other convenience stores, gasoline service stations, supermarket chains, super stores and warehouse stores, drug stores, fast food operations and other similar retail outlets. In some of our markets our competitors have been in existence longer and have greater financial, marketing and other resources than us. As a result, our competitors may be able to respond better to changes in the economy and new opportunities in our industry.

We Depend on One Principal Supplier for The Majority of Our Merchandise and Loss of This Supplier Could Have an Adverse Impact on Our Cost of Goods and Our Business

We purchase over 50% of our general merchandise, including most tobacco products and grocery items, from a single wholesale grocer, McLane Company, Inc., a wholly owned subsidiary of Wal-Mart. In addition, McLane supplies health and beauty aids, toys and seasonal items to all of our stores. We have a contract with McLane until 2003, but we may not be able to renew the contract upon expiration. We believe that our arrangements with vendors, including McLane, have enabled us to decrease the operating expenses of acquired companies after we complete an acquisition. Therefore, a change of suppliers could have a material adverse effect on our business, cost of goods, financial condition and results of operations.

Increases in Federal Minimum Wage Rates Could Adversely Affect Our Business

Any appreciable increase in the statutory minimum wage rate would result in an increase in our labor costs and such cost increase, or the penalties for failing to comply with such statutory minimums, could adversely affect our business, financial condition and results of operations.

Proposed Regulations, if Adopted, Could Adversely Affect Our Business

From time to time, regulations are proposed which, if adopted, could have an adverse effect on our business, financial condition or results of operations. One example is the possibility of the introduction of a mandated system of health insurance. If such a system were adopted and applied to us, our labor costs could increase significantly and any violations of such regulation could result in fines or other penalties, which could also adversely affect our business, financial condition and results of operations.

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Because Substantially all of Our Stores are Located in the Southeastern United States, Our Revenues Could Suffer if The Economy of that Region Deteriorates

Substantially all of our stores are located in the Southeast region of the United States. As a result, our results of operations are subject to general economic conditions in that region. In the event of an economic downturn in the Southeast, our business, financial condition and results of operations could be adversely impacted.

Unfavorable Weather Conditions Could Adversely Affect Our Business

Weather conditions in our operating area impact our business, financial condition and results of operations. During the spring and summer vacation season, customers are more likely to purchase higher profit margin items at our stores, such as fast foods, fountain drinks and other beverages, and more gasoline at our gasoline locations. As a result, we typically generate higher revenues and gross margins during warmer weather months in the Southeast, which fall within our third and fourth quarters. If weather conditions are not favorable during these periods, our operating results and cash flow from operations could be adversely affected.

In addition, approximately 37% of our stores are concentrated in coastal areas in the southeastern United States, and are therefore exposed to damage associated with hurricanes, tropical storms and other weather conditions in these areas.

The Interests of Freeman Spogli & Co., Our Controlling Stockholder, May Conflict With Our Interests and The Interests of Our Other Stockholders

As a result of its stock ownership and board representation, Freeman Spogli will be in a position to affect our corporate actions such as mergers or takeover attempts in a manner that could conflict with the interests of our other stockholders. As of February 4, 2002, Freeman Spogli owned 10,329,524 shares of common stock and warrants to purchase 2,346,000 shares of common stock, or approximately 62.0% of our common stock on a fully diluted basis. In addition, four of the eight members of our board of directors are representatives of Freeman Spogli.

Because We Depend on Our Senior Management’s Experience and Knowledge of Our Industry, We Would be Adversely Affected if Senior Management Left the Pantry

We are dependent on the continued efforts of our senior management team, including our President and Chief Executive Officer, Peter Sodini. Mr. Sodini’s employment contract terminates in September 2004. If, for any reason, our senior executives do not continue to be active in management, our business, financial condition or results of operations could be adversely affected. We cannot assure you that we will be able to attract and retain additional qualified senior personnel as needed in the future. In addition, we do not maintain key personnel life insurance on our senior executives and other key employees.

Future Sales of Additional Shares into The Market May Depress The Market Price of The Common Stock

If our existing stockholders sell shares of common stock in the public market, including shares issued upon the exercise of outstanding options and warrants, or if the market perceives such sales could occur, the market price of our common stock could decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate or to use equity as consideration for future acquisitions.

As of February 4, 2002, there are 18,107,597 outstanding shares of our common stock outstanding. Of these shares, 6,250,000 shares are freely tradable. 12,538,951 shares are held by affiliate investment funds of Freeman Spogli and affiliates of J.P. Morgan Partners L.L.C. (‘‘J.P. Morgan’’), who may be deemed to be affiliates of The Pantry. Pursuant to Rule 144 under the Securities Act of 1993, as amended, affiliates of The Pantry can resell up to 1% of the aggregate outstanding common stock during any three month period. In addition, Freeman Spogli and J.P. Morgan have registration rights allowing them to require us to register the resale of their shares. If Freeman Spogli and J.P. Morgan exercise their registration rights and sell shares of common stock in the public market, the market price of our common stock could decline.

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Our Charter Includes Provisions Which May Have The Effect of Preventing or Hindering A Change in Control and Adversely Affecting The Market Price of Our Common Stock

Our certificate of incorporation gives our board of directors the authority to issue up to five million shares of preferred stock and to determine the rights and preferences of the preferred stock, without obtaining shareholder approval. The existence of this preferred stock could make more difficult or discourage an attempt to obtain control of The Pantry by means of a tender offer, merger, proxy contest or otherwise. Furthermore, this preferred stock could be issued with other rights, including economic rights, senior to our common stock, and, therefore, issuance of the preferred stock could have an adverse affect on the market price of our common stock. We have no present plans to issue any shares of our preferred stock.

Other provisions of our certificate of incorporation and bylaws and of Delaware law could make it more difficult for a third party to acquire us or hinder a change in management even if doing so would be beneficial to our stockholders. These governance provisions could affect the market price of our common stock.

We may, in the future, adopt other measures that may have the effect of delaying, deferring or preventing an unsolicited takeover, even if such a change in control were at a premium price or favored by a majority of unaffiliated stockholders. These measures may be adopted without any further vote or action by our stockholders.

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